NOTE 8 – OTHER

Changes in Estimates

Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks, estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance), and making assumptions for schedule and technical issues. Due to the number of years it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and costs at completion is complicated and subject to many variables.

Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule, and cost aspects of the contract, and assess the effects of those risks on our estimates of 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, and overhead). 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 costs at completion. 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. Conversely, our profit booking rates may decrease if the estimated costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.

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 sales, segment operating profit, and segment operating margins may be affected. Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit, net of state income taxes, by $585 million and $1.1 billion for the quarter and six months ended June 30, 2013 and $595 million and $1.1 billion for the quarter and six months ended June 24, 2012. These adjustments increased net earnings by $380 million ($1.17 per share) and $685 million ($2.10 per share) for the quarter and six months ended June 30, 2013 and $385 million ($1.17 per share) and $700 million ($2.13 per share) for the quarter and six months ended June 24, 2012.

Stockholders’ Equity

Repurchases of Common Stock

Pursuant to a share repurchase program (the Program) approved by our Board of Directors, we are authorized to repurchase up to $6.5 billion of our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. During the six months ended June 30, 2013, we paid $926 million to repurchase 9.6 million shares of our common stock, which includes a portion committed to in December 2012 that settled in cash during the quarter ended March 31, 2013. We reduced stockholders’ equity by $914 million, which represents the 9.5 million shares of common stock repurchases we committed to during the six months ended June 30, 2013. As of June 30, 2013, we had repurchased a total of 63.8 million shares of our common stock under the Program for $5.1 billion, and had remaining authorization of $1.4 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.

Restricted Stock Unit and Performance Stock Unit Grants

In January 2013, we granted certain employees 1.4 million restricted stock units (RSUs) with a grant-date fair value of $89.24 per RSU. The grant-date fair value of these 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. Substantially all of these RSUs vest at the end of three years from the date of grant. We recognize the grant-date fair value of these RSUs, less estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting period if the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the vesting period.

In January 2013, we also granted certain employees 0.3 million performance stock units (PSUs), which vest at the end of three years from the date of grant based on continuous service and whether we achieve certain financial and performance targets measured over the period from January 1, 2013 through December 31, 2015. About half of these awards were valued at $89.24 per PSU in a manner similar to the RSUs discussed above as the financial targets are based on our operations. We recognize the grant-date fair value of these PSUs, less estimated forfeitures, as compensation expense ratably over the vesting period based on the number of awards expected to vest at each reporting date and, therefore, the associated compensation expense recognized could vary from period to period. The remaining PSUs were valued at $61.13 per PSU using a Monte Carlo model as the performance target is related to total shareholder return relative to our peer group. We recognize the grant-date fair value of these awards, less estimated forfeitures, as compensation expense ratably over the vesting period regardless as to whether or not the performance target is achieved.

Dividends

During the quarter and six months ended June 30, 2013, we declared cash dividends totaling $754 million ($2.30 per share) and $1.1 billion ($3.45 per share). The 2013 dividend amounts include the declaration of our 2013 third quarter dividend of $1.15 per share, which totaled $375 million. During the quarter and six months ended June 24, 2012, we declared cash dividends totaling $331 million ($1.00 per share) and $659 million ($2.00 per share).

Accumulated Other Comprehensive Loss

Changes in the balance of accumulated other comprehensive loss (AOCL), net of income taxes, consisted of the following (in millions):

Postretirement
Benefit Plans

Other, net

AOCL

Balance at December 31, 2011

(11,186)

(71)

(11,257)

Other comprehensive income before reclassifications

—

(14)

Amounts reclassified from AOCL

Net actuarial losses ^(a)

386

—

386

Prior service cost ^(a)

—

Other

—

Total reclassified from AOCL

406

407

Total other comprehensive income

406

(13)

393

Balance at June 24, 2012

(10,780)

(84)

(10,864)

Balance at December 31, 2012

(13,532)

(13,493)

Other comprehensive income before reclassifications

—

(52)

Amounts reclassified from AOCL

Net actuarial losses ^(a)

487

—

487

Prior service cost ^(a)

—

Other

—

(3)

Total reclassified from AOCL

507

(3)

504

Total other comprehensive income

507

(55)

452

Balance at June 30, 2013

(13,025)

(16)

(13,041)

^(a)

Amounts related to our postretirement benefit plans that were reclassified from AOCL were recorded as a component of net periodic benefit cost for each period presented (Note 5). These amounts include the amortization of net actuarial losses of $243 million and $193 million for the quarters ended June 30, 2013 and June 24, 2012 and prior service cost of $10 million for each of the quarters ended June 30, 2013 and June 24, 2012.

Income Taxes

Our effective income tax rates were 29.1% and 27.5% for the quarter and six months ended June 30, 2013, and 30.1% and 29.9% for the quarter and six months ended June 24, 2012. The rates for all periods benefited from tax deductions for U.S. manufacturing activities and tax deductions for dividends paid to our defined contribution plans with an employee stock ownership plan feature.

The effective tax rate for the quarter and six months ended June 30, 2013 also benefited from the impact of the U.S. research and development (R&D) tax credit. On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012, which retroactively reinstated the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. As the effects of tax law changes are recognized in the period in which new legislation is enacted, $37 million ($.11 per share) of tax benefit attributable to 2012 was recorded during the quarter ended March 31, 2013. In addition, a comparable amount of ongoing tax benefits from the R&D credit attributable to 2013 are being recognized ratably over each quarter of 2013.

We made net federal and foreign income tax payments of $140 million (net of a $550 million refund from the Internal Revenue Service primarily attributable to our tax-deductible pension contribution and debt exchange transaction during the fourth quarter of 2012) and $690 million during the six months ended June 30, 2013 and June 24, 2012.

Severance Activities

During the six months ended June 30, 2013, we recorded severance charges totaling $30 million, net of state tax benefits, which reduced our net earnings by $19 million ($.06 per share). These severance actions were recorded during the quarter ended March 31, 2013, and resulted from a strategic review of our IS&GS business segment to better align our cost structure with changing economic conditions and also reflect changes in program lifecycles. The charges 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. During the quarter ended June 30, 2013, we paid most of the severance payments associated with these actions, the remainder of which are expected to be paid in the second half of 2013.

During the six months ended June 30, 2013, we paid substantially all of the severance payments associated with severance actions initiated in 2012. The 2012 actions, for which we recorded charges in the third and fourth quarters of 2012 totaling $48 million, related to the elimination of certain positions at our Aeronautics business segment and our former Electronic Systems business segment.

Long-term Debt

In April 2013, we repaid $150 million of long-term notes with a fixed interest rate of 7.38% due to their scheduled maturities.