NOTE 9 – 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, estimating total sales and costs at completion is complicated and subject to many variables and, accordingly estimates are subject to change. When adjustments in estimated total contract sales or estimated total costs 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 estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

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, overhead and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset 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. Conversely, our profit booking rates may decrease if the estimated total 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.

Comparability of our segment sales, operating profit and operating margins may be impacted favorably or unfavorably by changes in profit booking rates on our 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 margins 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; asset impairments; and losses on sales of assets. Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by $435 million and $1.5 billion for the quarter and nine months ended September 27, 2015 and $400 million and $1.4 billion for the quarter and nine months ended September 28, 2014. These adjustments increased net earnings by $285 million ($0.91 per share) and $960 million ($3.03 per share) for the quarter and nine months ended September 27, 2015 and $260 million ($0.81 per share) and $885 million ($2.74 per share) for the quarter and nine months ended September 28, 2014.

Restructuring Charges

Third Quarter 2015 Action

During the quarter ended September 27, 2015, we recorded severance charges totaling $35 million related to our IS&GS business segment, which reduced our net earnings by $24 million ($0.08 per share). These severance actions resulted from a review of future workload projections and to reduce our overhead costs in order to improve the affordability of our products and services. 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, the majority of which are expected to be paid by mid-2016.

Fourth Quarter 2013 Action

In November 2013, we committed to a plan to close and consolidate certain facilities and reduce our total workforce by approximately 4,000 positions within our IS&GS, MST and Space Systems business segments. As of September 27, 2015, we have paid approximately $146 million of the total expected $171 million severance payments associated with this action, of which $39 million was paid during the nine months ended September 27, 2015.

In connection with our plan to consolidate facilities, during the quarter ended June 28, 2015, we sold two properties in California and received aggregate cash proceeds of approximately $70 million. Gains related to the sale of these facilities have been deferred and will be recognized in future periods once our continuing involvement associated with the properties has been completed, which we expect to occur in late 2016.

We continue to incur accelerated costs (e.g., accelerated depreciation expense related to long-lived assets at the sites to be closed) and incremental costs (e.g., relocation of equipment and other employee related costs), which we expect to total approximately $15 million, $50 million and $190 million at our IS&GS, MST and Space Systems business segments by the completion of the plan. As of September 27, 2015, we have incurred total accelerated and incremental costs of $204 million, inclusive of amounts incurred during the nine months ended September 27, 2015. The accelerated and incremental costs are recorded as incurred in cost of sales on our Statements of Earnings and included in the respective business segment’s results of operations.

The remaining payments associated with the severance and incremental costs are expected to be substantially completed by the end of 2015. We expect to recover a substantial amount of the restructuring charges through the pricing of our products and services to the U.S. Government and other customers, with the impact included in the respective business segment’s results of operations.

Income Taxes

Our effective income tax rates were 30.9% and 30.8% for the quarter and nine months ended September 27, 2015 and 32.3% for both the quarter and nine months ended September 28, 2014. The rates for all periods benefited from tax deductions for U.S. manufacturing activities and for dividends paid to our defined contribution benefit plans with an employee stock ownership plan feature. The effective tax rate for the nine months ended September 27, 2015 was lower than the prior year period primarily due to tax reserve adjustments recorded in the quarter ended June 29, 2014. The effective rates during all periods did not include a benefit from the U.S. research and development tax credit because the credit had expired.

We made net income tax payments of approximately $1.2 billion and $1.0 billion during the nine months ended September 27, 2015 and September 28, 2014. The 2014 payments are net of $200 million in tax refunds primarily attributable to our tax-deductible pension contributions made during the quarter ended December 31, 2013.

Stockholders’ Equity

Repurchases of Common Stock

During the nine months ended September 27, 2015, we repurchased 12.0 million shares of our common stock for $2.4 billion. On September 24, 2015, we increased our share repurchase program by $3.0 billion. Inclusive of this increase, the total remaining authorization for future common share repurchases under our program was $4.3 billion as of September 27, 2015. 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.

Dividends

We declared cash dividends totaling $507 million ($1.65 per share) and $1.9 billion ($6.15 per share) during the quarter and nine months ended September 27, 2015. Dividends declared in the quarter ended September 27, 2015 represent our 2015 fourth quarter dividend payment of $1.65 per share, an increase of 10% over our 2015 third quarter dividend payment of $1.50 per share, which we declared in the second quarter of 2015. We declared cash dividends totaling $479 million ($1.50 per share) and $1.8 billion ($5.49 per share) during the quarter and nine months ended September 28, 2014. The 2014 dividend amounts include the declaration of our 2014 fourth quarter dividend of $1.50 per share, which totaled $479 million.

Restricted Stock Unit Grants

In January 2015, we granted certain employees approximately 0.6 million restricted stock units (RSUs) with a grant-date fair value of $192.28 per RSU. The grant-date fair value of these RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting, which is generally three years from the grant date. We recognize the grant-date fair value of 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.

Accumulated Other Comprehensive Loss

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


	Postretirement Benefit Plans		Other, net		AOCL
Balance at December 31, 2014	$	(11,813)	$	(57)	$	(11,870)
Other comprehensive loss before reclassifications		—		(88)		(88)
Amounts reclassified from AOCL
Recognition of net actuarial losses ^(a)		831		—		831
Amortization of net prior service credits ^(a)		(194)		—		(194)
Total reclassified from AOCL		637		—		637
Total other comprehensive income (loss)		637		(88)		549
Balance at September 27, 2015	$	(11,176)	$	(145)	$	(11,321)

Balance at December 31, 2013	$	(9,649)	$	48	$	(9,601)
Other comprehensive loss (income) before reclassifications
Net actuarial losses ^(b)		(3,778)		—		(3,778)
Prior service credits ^(b)		3,043		—		3,043
Other		—		(48)		(48)
Total other comprehensive (loss) income before reclassifications		(735)		(48)		(783)
Amounts reclassified from AOCL
Recognition of net actuarial losses ^(a)		556		—		556
Amortization of net prior service credits ^(a)		(36)		—		(36)
Total reclassified from AOCL		520		—		520
Total other comprehensive loss		(215)		(48)		(263)
Balance at September 28, 2014	$	(9,864)	$	—	$	(9,864)

^(a)

Reclassifications from AOCL related to our postretirement benefit plans were recorded as a component of net periodic benefit cost for each period presented (Note 6). These amounts include $212 million and $186 million for the quarters ended September 27, 2015 and September 28, 2014, which are comprised of the recognition of net actuarial losses of $277 million and $250 million for the quarters ended September 27, 2015 and September 28, 2014 and the amortization of net prior service (credits) costs of $(65) million and $(64) million for the quarters ended September 27, 2015 and September 28, 2014.

^(b)

Changes in AOCL before reclassifications in 2014 related to our postretirement benefit plans include net actuarial losses from the re-measurement of substantially all our defined benefit pension plans in June 2014 and prior service credits from the June 2014 plan amendments to freeze future retirement benefits in certain of our qualified and non-qualified defined benefit pension plans for non-union employees.

Long-term Debt

At September 27, 2015, we had a $1.5 billion revolving credit facility with various banks, which was scheduled to expire in August 2019. There were no borrowings outstanding under the credit facility through September 27, 2015 and we were in compliance with all covenants contained in the credit facility and other debt agreements.

On October 9, 2015, we entered into a new $2.5 billion revolving credit facility (the 5-year Facility) with various banks and concurrently terminated our existing $1.5 billion revolving credit facility described in the preceding paragraph. The 5-year Facility, which expires on October 9, 2020, is available for general corporate purposes. The undrawn portion of the 5-year Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and the banks may grant, at their discretion, an increase in the borrowing capacity under the 5-year Facility of up to an additional $500 million.

As part of our pending acquisition of Sikorsky, on October 9, 2015, we also entered into a 364-day revolving credit facility (the 364-day Facility and together with the 5-year Facility the Facilities) with various banks that provides $7.0 billion of funding for general corporate purposes, including the acquisition of Sikorsky. Funding under the 364-day Facility for the Sikorsky acquisition would occur substantially concurrently with the consummation of the acquisition. Although the 364-day Facility matures on October 7, 2016, we have the option to cause outstanding loans to continue as one-year term loans. We plan to repay borrowings under the 364-day Facility with proceeds from future long-term debt issuances. We expect to fund the purchase price for Sikorsky in excess of any borrowings under the 364-day Facility through issuances of commercial paper supported by the 5-year Facility or with cash on hand.

Borrowings under the Facilities bear interest at rates based, at our option, on a Eurodollar Rate or a Base Rate, as defined in the Facilities agreements. Each bank’s obligation to make loans under the Facilities is subject to, among other things, our compliance with various representations, warranties, and covenants, including covenants limiting our ability and certain of our subsidiaries’ ability to encumber assets and a covenant not to exceed a maximum leverage ratio, as defined in the Facilities agreements. Subject to certain exceptions, net cash proceeds arising from certain equity or debt issuances will result in the mandatory reduction of the total borrowing capacity and mandatory repayment of any loans outstanding under the 364-day Facility.

On February 20, 2015, we issued $2.25 billion of notes in a registered public offering consisting of $750 million maturing in 2025 with a fixed interest rate of 2.90%, $500 million maturing in 2035 with a fixed interest rate of 3.60% and $1.0 billion maturing in 2045 with a fixed interest rate of 3.80%. We may, at our option, redeem some or all of the notes at any time by paying the principal amount of notes being redeemed plus any make-whole premium and accrued and unpaid interest to the date of redemption. Interest on the notes is payable on March 1 and September 1 of each year, beginning on September 1, 2015. These notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard that will change the way we recognize revenue and significantly expand the disclosure requirements for revenue arrangements. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the standard to 2018 for public companies, with an option that would permit companies to early adopt the standard in 2017. Early adoption prior to 2017 is not permitted. The new standard may be adopted either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance obligations. In addition, the FASB is contemplating making additional changes to certain elements of the new standard. We are currently evaluating the methods of adoption allowed by the new standard and the effect the standard is expected to have on our consolidated financial statements and related disclosures. As the new standard will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact revenue and cost recognition on thousands of contracts across all our business segments, in addition to our business processes and our information technology systems. As a result, our evaluation of the effect of the new standard will extend over future periods.