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OTHER | 9 Months Ended
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Sep. 25, 2016
OTHER | NOTE 10 – 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 and, accordingly is 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 margin 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. 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 from continuing operations by approximately $405 million and $1.1 billion in the quarter and nine months ended September 25, 2016 and $390 million and $1.3 billion in the quarter and nine months ended September 27, 2015. These adjustments increased net earnings by approximately $265 million ($0.88 per share) and $730 million ($2.39 per share) in the quarter and nine months ended September 25, 2016 and $255 million ($0.82 per share) and $865 million ($2.73 per share) in the quarter and nine months ended September 27, 2015. Revolving Credit Facility Extension In October 2016, our $2.5 billion revolving credit facility (the 5-year Facility) was amended to extend its expiration date by one year from October 9, 2020 to October 9, 2021. Long-Term Debt In September 2016, we repaid $500 million of long-term notes with a fixed interest rate of 2.13% according to their scheduled maturities. In May 2016, we repaid $452 million of long-term notes with a fixed interest rate of 7.65% according to their scheduled maturities. We also had related variable interest rate swaps with a notional amount of $450 million mature, which did not have a significant impact on net earnings or comprehensive income. On February 20, 2015, we issued $2.25 billion of notes (the February 2015 Notes) in a registered public offering. The February 2015 Notes consist 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%. Restructuring Charges 2016 Actions During the first quarter of 2016, we recorded severance charges totaling approximately $80 million related to our Aeronautics business segment. 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 the end of 2016. As of September 25, 2016, we have paid $56 million in severance payments associated with these actions, of which $31 million was paid in the quarter ended September 25, 2016. During the first quarter of 2016, we also recorded severance charges totaling $19 million related to our former IS&GS business segment which are recorded in net earnings from discontinued operations in our consolidated statement of earnings. 2015 Actions During the third and fourth quarters of 2015, we recorded severance charges totaling $82 million, of which $67 million related to our RMS business segment and $15 million related to businesses that were reported in our former IS&GS business segment prior to our fourth quarter 2015 program realignment. 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 over the next several quarters. As of September 25, 2016, we have paid $45 million in severance payments associated with these actions, of which $25 million was paid in the quarter ended September 25, 2016. Additionally during the third and fourth quarters of 2015, we recorded severance charges totaling $20 million related to our former IS&GS business segment which are recorded in net earnings from discontinued operations in our consolidated statements of earnings. In connection with the Sikorsky acquisition, we assumed obligations related to certain restructuring actions committed to by Sikorsky in June 2015. Net of amounts we anticipate to recover through the pricing of our products and services to our customers, we also expect to incur an additional $40 million of costs in 2016 related to these actions. During the nine months ended September 25, 2016, we incurred about $35 million of costs and the remaining $5 million are expected to be incurred during the fourth quarter of 2016. 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 in future periods, with the impact included in the respective business segment’s results of operations. Income Taxes Our effective income tax rates for earnings from continuing operations were 23.7% and 23.1% for the quarter and nine months ended September 25, 2016, and 30.6% and 30.4% for the quarter and nine months ended September 27, 2015. The rates for both periods benefited from tax deductions for U.S. manufacturing activities and for dividends paid to our defined contribution plans with an employee stock ownership plan feature. The rates in the quarter and nine months ended September 25, 2016 also benefited from the research and development tax credit, which was permanently extended and reinstated in the fourth quarter of 2015 and from the nontaxable gain recorded in connection with the increase in AWE ownership. The rate in the quarter and nine months ended September 25, 2016 also benefited from additional tax benefits related to employee share-based payment awards, which are now recorded as income tax benefit or expense in earnings effective with the adoption of an accounting standard update during the quarter ended June 26, 2016. We early adopted the accounting standard update during the second quarter of 2016 and are therefore required to report the impacts as though the accounting standard update had been adopted on January 1, 2016. Accordingly, we recognized additional income tax benefits of $22 million and $137 million during the quarter and nine months ended September 25, 2016. The adjustments for the third quarter included only the quarterly impacts, whereas the adjustments for the first nine months of 2016 include the second and third quarter impacts and the reclassification of income tax benefits of $104 million originally recognized in additional paid-in capital and cash flows from financing activities in the first quarter of 2016. Stockholders’ Equity Exchange and Retirement of Common Stock Related to Divestiture of IS&GS Business Segment On August 16, 2016, as part of the previously announced divestiture of the IS&GS business segment and merger of this business with Leidos in a Reverse Morris Trust transaction, we completed an exchange offer that resulted in a reduction of our common stock outstanding by approximately 9.4 million shares (approximately three percent). Repurchases of Common Stock During the nine months ended September 25, 2016, we repurchased 5.7 million shares of our common stock for $1.3 billion. On September 22, 2016, we increased our share repurchase program by $2.0 billion. Inclusive of this increase, the total remaining authorization for future common share repurchases under our share repurchase program was $4.3 billion as of September 25, 2016. 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 $537 million ($1.82 per share) and $2.0 billion ($6.77 per share) during the quarter and nine months ended September 25, 2016. The 2016 dividend amounts include the declaration of our 2016 fourth quarter dividend of $1.82 per share, which totaled $537 million. On September 22, 2016 we increased our quarterly dividend rate by 10% or $0.17 per share to $1.82 per share. 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. The 2015 dividend amounts include the declaration of our 2015 fourth quarter dividend of ($1.65 per share), which totaled $507 million. Restricted Stock Unit Grants During the quarter ended September 25, 2016, there were no significant grants of restricted stock units (RSUs). During the nine months ended September 25, 2016, we granted certain employees approximately 0.7 million RSUs with a grant-date fair value of $206.69 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 AOCL, net of tax, consisted of the following (in millions):
|  | Postretirement Benefit Plans |  |  | Other, net |  |  | AOCL |
Balance at December 31, 2015 |  | $ | (11,314 | ) |  | $ | (130 | ) |  | $ | (11,444) |
Other comprehensive loss before reclassifications |  |  | — |  |  |  | (46 | ) |  |  | (46) |
Amounts reclassified from AOCL |  |  |  |  |  |  |  |  |  |  |  |
Recognition of net actuarial losses (a) |  |  | 703 |  |  |  | — |  |  |  | 703 |
Amortization of net prior service credits (a) |  |  | (182 | ) |  |  | — |  |  |  | (182) |
Recognition of net prior service credits from divestiture of IS&GS segment (b) |  |  | (134 | ) |  |  | — |  |  |  | (134) |
Other (b) |  |  | — |  |  |  | 112 |  |  |  | 112 |
Total reclassified from AOCL |  |  | 387 |  |  |  | 112 |  |  |  | 499 |
Total other comprehensive income (loss) |  |  | 387 |  |  |  | 66 |  |  |  | 453 |
Balance at September 25, 2016 |  | $ | (10,927 | ) |  | $ | (64 | ) |  | $ | (10,991) |
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) |
(a) | Reclassifications from AOCL, net of tax, related to our postretirement benefit plans were recorded as a component of net periodic benefit cost for each period presented (Note 7). These amounts include $175 million and $212 million for the quarters ended September 25, 2016 and September 27, 2015, which are composed of the recognition of net actuarial losses of $234 million and $277 million for the quarters ended September 25, 2016 and September 27, 2015 and the amortization of net prior service (credits) costs of $(59) million and $(65) million for the quarters ended September 25, 2016 and September 27, 2015.
(b) | Associated with the divestiture of the IS&GS business segment and included in net gain on divestiture of discontinued operations.
Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended (Topic 606): that will change the way we recognize revenue and significantly expand the disclosure requirements for revenue arrangements. In July 2015, the FASB approved a one-year deferral of the effective date of the ASU to 2018 for public companies, with an option that would permit companies to adopt the ASU in 2017. This ASU may be adopted either retrospectively or on a modified retrospective basis whereby the ASU 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. We are currently evaluating the effect the ASU is expected to have on our consolidated financial statements and related disclosures. As the ASU 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 ASU will extend over future periods. We will adopt the requirements of the new standard effective January 1, 2018 and we anticipate using the full retrospective transition method. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): that increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors. The ASU is effective January 1, 2019 for public companies, with early adoption permitted. The ASU will be applied using a modified retrospective approach to the beginning of the earliest period presented in the financial statements. We are currently evaluating when we will adopt the ASU and the expected impact to our consolidated financial statements and related disclosures. On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changed the accounting for certain aspects of employee share-based payments. The ASU requires companies to recognize additional tax benefits or expenses related to the vesting or settlement of employee share-based awards (the difference between the actual tax benefit and the tax benefit initially recognized for financial reporting purposes) as income tax benefit or expense in earnings, rather than in additional paid-in capital, in the reporting period in which they occur. The ASU also requires companies to classify cash flows resulting from employee share-based payments, including the additional tax benefits or expenses related to the vesting or settlement of share-based awards, as cash flows from operating activities rather than financing activities. Although this change will reduce some of the administrative complexities of tracking share-based awards, it will increase the volatility of our income tax expense and cash flows from operations. The new standard is effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. We early adopted the ASU during the second quarter of 2016 and are therefore required to report the impacts as though the ASU had been adopted on January 1, 2016. Accordingly, we recognized additional income tax benefits as an increase to earnings of $22 million ($0.07 per share) and $137 million ($0.45 per share) during the quarter and nine months ended September 25, 2016. Additionally, we recognized additional income tax benefits as an increase to operating cash flows of $137 million during the nine months ended September 25, 2016. The adjustments for the third quarter included only the quarterly impacts, whereas the adjustments for the first nine months of 2016 include the second and third quarter impacts and the reclassification of income tax benefits of $104 million originally recognized in additional paid-in capital and cash flows from financing activities in the first quarter of 2016. The new accounting standard did not impact any periods prior to January 1, 2016, as we applied the changes in the ASU on a prospective basis. In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): that simplifies the accounting for adjustments made to preliminary amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Instead, adjustments will be recognized in the period in which the adjustments are determined, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. We adopted the ASU on January 1, 2016 and are prospectively applying the ASU to business combination adjustments identified after the date of adoption. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): that simplifies the presentation of deferred income taxes and requires that deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent in our consolidated balance sheets. We applied the provisions of the ASU retrospectively and reclassified approximately $1.6 billion from current to noncurrent assets and approximately $140 million from current to noncurrent liabilities in our consolidated balance sheet as of December 31, 2015.

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