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RECENT ACCOUNTING PRONOUNCEMENTS | 6 Months Ended
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Jun. 24, 2018
Accounting Changes and Error Corrections [Abstract] |
RECENT ACCOUNTING PRONOUNCEMENTS | RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements Adopted Effective January 1, 2018, we adopted ASC 606, which replaces existing revenue recognition guidance and outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenues, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services. Prior to the adoption of ASC 606, we recognized the majority of our revenues using the percentage-of-completion method of accounting. Based on the nature of products provided or services performed, revenue was recorded as costs were incurred (the percentage-of-completion cost-to-cost method) or as units were delivered (the percentage-of-completion units-of-delivery method). For most of our contracts, the customer obtains control or receives benefits as we perform on the contract. As a result, under ASC 606 revenue is recognized over a period of time utilizing the percentage-of-completion cost-to-cost method. This change generally results in an acceleration of revenue for contracts that were historically accounted for using the percentage-of-completion units-of-delivery method as revenues are now recognized earlier in the performance period as we incur costs. For more information on our policy for recognizing revenue under ASC 606, see “Note 2 – Significant Accounting Policy Updates.” Significant programs impacted by these changes include the C-130J and C-5 programs in our Aeronautics business segment; tactical missile programs (Hellfire and Joint Air-to-Surface Standoff Missile (JASSM)), Patriot Advanced Capability-3 (PAC-3), and fire control programs (LANTIRN® and SNIPER®) in our MFC business segment; the Black Hawk and Seahawk helicopter programs in our RMS business segment; and commercial satellite programs in our Space business segment. We adopted ASC 606 using the full retrospective method, which means we applied the new standard to each prior year presented in our financial statements going back to January 1, 2016, with a cumulative effect adjustment to retained earnings as of January 1, 2016 for contracts that were in process at that point in time. Accordingly, the amounts for all periods presented in this Form 10-Q have been adjusted to reflect the impacts of ASC 606. Effective January 1, 2018, we also adopted ASU 2017-07, which changed the income statement presentation of certain components of net periodic benefit cost related to defined benefit pension and other postretirement benefit plans. ASU 2017-07 requires entities to record only the service cost component of FAS pension and other postretirement benefit plan expense in operating profit and the non-service cost components of FAS pension and other postretirement benefit plan expense (i.e., interest cost, expected return on plan assets, net actuarial gains or losses, and amortization of prior service cost or credits) as part of non-operating expense. Previously, we recorded all components of net periodic benefit cost in operating profit as part of cost of sales. We adopted ASU 2017-07 using the retrospective method, which means we applied the new standard to each prior period presented in our financial statements going back to January 1, 2016. The following tables summarize the effects of adopting ASC 606 and ASU 2017-07 on our consolidated statement of earnings for the quarter and six months ended June 25, 2017 (unaudited; in millions, except per share data):
|  | Quarter Ended
|  |  |  | Adjustments for |  |
|  | Historical |  | ASC 606 |  | ASU 2017-07 |  | Adjusted
Net sales |  |  |  |  |  |  |  |  |  |  |  |
Products |  | $ | 10,828 |  |  |  | $ | (206 | ) |  |  | $ | — |  |  |  | $ | 10,622 |  |
Services |  | 1,857 |  |  |  | 84 |  |  |  | — |  |  |  | 1,941 |  |
Total net sales |  | 12,685 |  |  |  | (122 | ) |  |  | — |  |  |  | 12,563 |  |
Cost of sales |  |  |  |  |  |  |  |  |  |  |  |
Products |  | (9,751 | ) |  |  | 189 |  |  |  | — |  |  |  | (9,562 | ) |
Services |  | (1,658 | ) |  |  | (48 | ) |  |  | — |  |  |  | (1,706 | ) |
Other unallocated, net |  | 149 |  |  |  | — |  |  |  | 212 |  |  |  | 361 |  |
Total cost of sales |  | (11,260 | ) |  |  | 141 |  |  |  | 212 |  |  |  | (10,907 | ) |
Gross profit |  | 1,425 |  |  |  | 19 |  |  |  | 212 |  |  |  | 1,656 |  |
Other income, net |  | 60 |  |  |  | — |  |  |  | — |  |  |  | 60 |  |
Operating profit |  | 1,485 |  |  |  | 19 |  |  |  | 212 |  |  |  | 1,716 |  |
Interest expense |  | (160 | ) |  |  | — |  |  |  | — |  |  |  | (160 | ) |
Other non-operating expense, net |  | (2 | ) |  |  | — |  |  |  | (212 | ) |  |  | (214 | ) |
Earnings before income taxes |  | 1,323 |  |  |  | 19 |  |  |  | — |  |  |  | 1,342 |  |
Income tax expense |  | (381 | ) |  |  | (6 | ) |  |  | — |  |  |  | (387 | ) |
Net earnings |  | $ | 942 |  |  |  | $ | 13 |  |  |  | $ | — |  |  |  | $ | 955 |  |
Earnings per common share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 3.27 |  |  |  | $ | 0.04 |  |  |  | $ | — |  |  |  | $ | 3.31 |  |
Diluted |  | $ | 3.23 |  |  |  | $ | 0.05 |  |  |  | $ | — |  |  |  | $ | 3.28 |  |
Cash dividends paid per common share |  | $ | 1.82 |  |  |  | $ | — |  |  |  | $ | — |  |  |  | $ | 1.82 |  |
|  | Six Months Ended
|  |  |  | Adjustments for |  |
|  | Historical |  | ASC 606 |  | ASU 2017-07 |  | Adjusted
Net sales |  |  |  |  |  |  |  |  |  |  |  |
Products |  | $ | 20,341 |  |  |  | $ | (106 | ) |  |  | $ | — |  |  |  | $ | 20,235 |  |
Services |  | 3,401 |  |  |  | 139 |  |  |  | — |  |  |  | 3,540 |  |
Total net sales |  | 23,742 |  |  |  | 33 |  |  |  | — |  |  |  | 23,775 |  |
Cost of sales |  |  |  |  |  |  |  |  |  |  |  |
Products |  | (18,438 | ) |  |  | 132 |  |  |  | — |  |  |  | (18,306 | ) |
Services |  | (3,034 | ) |  |  | (106 | ) |  |  | — |  |  |  | (3,140 | ) |
Other unallocated, net |  | 308 |  |  |  | — |  |  |  | 425 |  |  |  | 733 |  |
Total cost of sales |  | (21,164 | ) |  |  | 26 |  |  |  | 425 |  |  |  | (20,713 | ) |
Gross profit |  | 2,578 |  |  |  | 59 |  |  |  | 425 |  |  |  | 3,062 |  |
Other expense, net |  | 56 |  |  |  | — |  |  |  | — |  |  |  | 56 |  |
Operating profit |  | 2,634 |  |  |  | 59 |  |  |  | 425 |  |  |  | 3,118 |  |
Interest expense |  | (315 | ) |  |  | — |  |  |  | — |  |  |  | (315 | ) |
Other non-operating expense, net |  | (1 | ) |  |  | — |  |  |  | (425 | ) |  |  | (426 | ) |
Earnings before income taxes |  | 2,318 |  |  |  | 59 |  |  |  | — |  |  |  | 2,377 |  |
Income tax expense |  | (613 | ) |  |  | (20 | ) |  |  | — |  |  |  | (633 | ) |
Net earnings |  | $ | 1,705 |  |  |  | $ | 39 |  |  |  | $ | — |  |  |  | $ | 1,744 |  |
Earnings per common share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 5.90 |  |  |  | $ | 0.13 |  |  |  | $ | — |  |  |  | $ | 6.03 |  |
Diluted |  | $ | 5.84 |  |  |  | $ | 0.13 |  |  |  | $ | — |  |  |  | $ | 5.97 |  |
Cash dividends paid per common share |  | $ | 3.64 |  |  |  | $ | — |  |  |  | $ | — |  |  |  | $ | 3.64 |  |
As a result of the increase in net earnings, our comprehensive income for the quarter and six months ended June 25, 2017 increased by $13 million to $1.2 billion and increased by $39 million to $2.2 billion. The following table summarizes the effects of adopting ASC 606 on our consolidated balance sheet as of December 31, 2017 (ASU 2017-07 had no impact on our consolidated balance sheet) (unaudited; in millions, except par value):
|  |  | Adjustments for |
|  | Historical |  | ASC 606 |  | Adjusted
Assets |  |  |  |  |  |  |  |  |
Current assets |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 2,861 |  |  |  | $ | — |  |  |  | $ | 2,861 |  |
Receivables, net |  | 8,603 |  |  |  | (6,338 | ) |  |  | 2,265 |  |
Contract assets |  | — |  |  |  | 7,992 |  |  |  | 7,992 |  |
Inventories |  | 4,487 |  |  |  | (1,609 | ) |  |  | 2,878 |  |
Other current assets |  | 1,510 |  |  |  | (1 | ) |  |  | 1,509 |  |
Total current assets |  | 17,461 |  |  |  | 44 |  |  |  | 17,505 |  |
Property, plant and equipment, net |  | 5,775 |  |  |  | — |  |  |  | 5,775 |  |
Goodwill |  | 10,807 |  |  |  | — |  |  |  | 10,807 |  |
Intangible assets, net |  | 3,797 |  |  |  | — |  |  |  | 3,797 |  |
Deferred income taxes |  | 3,111 |  |  |  | 45 |  |  |  | 3,156 |  |
Other noncurrent assets |  | 5,570 |  |  |  | 10 |  |  |  | 5,580 |  |
Total assets |  | $ | 46,521 |  |  |  | $ | 99 |  |  |  | $ | 46,620 |  |
Liabilities and equity |  |  |  |  |  |  |  |  |
Current liabilities |  |  |  |  |  |  |  |  |
Accounts payable |  | $ | 1,467 |  |  |  | $ | — |  |  |  | $ | 1,467 |  |
Contract liabilities (a) |  | 6,752 |  |  |  | 276 |  |  |  | 7,028 |  |
Salaries, benefits and payroll taxes |  | 1,785 |  |  |  | — |  |  |  | 1,785 |  |
Current maturities of long-term debt |  | 750 |  |  |  | — |  |  |  | 750 |  |
Other current liabilities |  | 1,883 |  |  |  | — |  |  |  | 1,883 |  |
Total current liabilities |  | 12,637 |  |  |  | 276 |  |  |  | 12,913 |  |
Long-term debt, net |  | 13,513 |  |  |  | — |  |  |  | 13,513 |  |
Accrued pension liabilities |  | 15,703 |  |  |  | — |  |  |  | 15,703 |  |
Other postretirement benefit liabilities |  | 719 |  |  |  | — |  |  |  | 719 |  |
Other noncurrent liabilities |  | 4,558 |  |  |  | (10 | ) |  |  | 4,548 |  |
Total liabilities |  | 47,130 |  |  |  | 266 |  |  |  | 47,396 |  |
Stockholders’ equity |  |  |  |  |  |  |  |  |
Common stock, $1 par value per share |  | 284 |  |  |  | — |  |  |  | 284 |  |
Additional paid-in capital |  | — |  |  |  | — |  |  |  | — |  |
Retained earnings |  | 11,573 |  |  |  | (168 | ) |  |  | 11,405 |  |
Accumulated other comprehensive loss |  | (12,540 | ) |  |  | 1 |  |  |  | (12,539 | ) |
Total stockholders’ deficit |  | (683 | ) |  |  | (167 | ) |  |  | (850 | ) |
Noncontrolling interests in subsidiary |  | 74 |  |  |  | — |  |  |  | 74 |  |
Total deficit |  | (609 | ) |  |  | (167 | ) |  |  | (776 | ) |
Total liabilities and equity |  | $ | 46,521 |  |  |  | $ | 99 |  |  |  | $ | 46,620 |  |
(a) | Formerly referred to as customer advances and amounts in excess of costs incurred.
The following table summarizes the effects of adopting ASC 606 on certain components within our net cash provided by operating activities for the six months ended June 25, 2017 (ASC 606 had no impact on total operating cash flows or cash flows from investing and financing activities) (unaudited; in millions):
|  |  | Adjustments for |
|  | Historical |  | ASC 606 |  | Adjusted
Operating activities |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 1,705 |  |  |  | $ | 39 |  |  |  | $ | 1,744 |  |
Adjustments to reconcile net earnings to net cash provided by operating activities |  |  |  |  |  |  |  |  |
Depreciation and amortization |  | 581 |  |  |  | — |  |  |  | 581 |  |
Stock-based compensation |  | 101 |  |  |  | — |  |  |  | 101 |  |
Changes in assets and liabilities |  |  |  |  |  |  |  |  |
Receivables, net |  | (560 | ) |  |  | (59 | ) |  |  | (619 | ) |
Contract assets |  | — |  |  |  | (170 | ) |  |  | (170 | ) |
Inventories |  | (271 | ) |  |  | 233 |  |  |  | (38 | ) |
Accounts payable |  | 940 |  |  |  | — |  |  |  | 940 |  |
Contract liabilities (a) |  | (316 | ) |  |  | (72 | ) |  |  | (388 | ) |
Postretirement benefit plans |  | 685 |  |  |  | — |  |  |  | 685 |  |
Income taxes |  | 3 |  |  |  | — |  |  |  | 3 |  |
Other, net |  | 342 |  |  |  | 29 |  |  |  | 371 |  |
Net cash provided by operating activities |  | $ | 3,210 |  |  |  | $ | — |  |  |  | $ | 3,210 |  |
(a) | Formerly referred to as customer advances and amounts in excess of costs incurred.
Effective January 1, 2018, we also adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides entities an option to reclassify certain tax effects as a result of the Tax Act from accumulated other comprehensive income or loss to retained earnings. The adoption of ASU 2018-02 increased our AOCL at January 1, 2018 by $2.4 billion with a corresponding increase to retained earnings by the same amount with zero impact to total equity. The reclassification was primarily related to the impact of U.S. tax reform on deferred tax assets associated with net actuarial losses (and prior service credits) resulting from our defined benefit pension and other postretirement benefit plans that were originally recorded in AOCL within equity. Those amounts were originally recorded net of deferred tax benefits based on the federal statutory income tax rate in effect at the time they were recorded. GAAP requires entities to remeasure deferred tax assets and liabilities as a result of a change in tax laws or rates, with the impacts reflected in earnings. Accordingly, in the fourth quarter of 2017, we remeasured the deferred tax assets associated with our AOCL using the lower U.S. corporate income tax rate under the Tax Act, with the impacts of the remeasurement recorded as a one-time charge to earnings. Prior to ASU 2018-02, GAAP required the original deferred tax amount recorded in accumulated other comprehensive income or loss, to remain at the old tax rate despite the fact that its related deferred tax asset or liability was remeasured as a result of the Tax Act. ASU 2018-02 allows entities to record a one-time reclassification of these tax effects between accumulated other comprehensive income or loss and retained earnings. We reclassify the impact of the income tax effects of tax reform from AOCL in the period in which they occur. Recent Accounting Pronouncements Not Yet Adopted In August 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-12, Derivatives and Hedging (Topic 815), which eliminates the requirement to separately measure and report hedge ineffectiveness. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We do not expect a significant impact to our consolidated assets and liabilities, net earnings, or cash flows as a result of adopting this new standard. We plan to adopt the new standard effective January 1, 2019. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for most lease arrangements and expands disclosures about leasing arrangements for both lessees and lessors, among other items. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective transition method. Currently, the new standard requires companies to apply the new lease requirements as of the beginning of the earliest period presented in the financial statements, which would be January 1, 2017 in our December 31, 2019 Form 10-K. However, the FASB has proposed a change that would allow companies to elect an optional transition method whereby companies could continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption rather than in the earliest period presented, which would result in an adjustment, if any, to our January 1, 2019 retained earnings balance in our December 31, 2019 Form 10-K without adjusting our historical financial statements for 2017 or 2018. We plan to adopt the new standard on January 1, 2019 and will evaluate the transition method if and when the FASB issues new guidance that permits the optional transition method. We commenced our evaluation of the impact of the new lease accounting standard in late 2016 by evaluating its impact on selected contracts. With this baseline understanding, we developed a project plan to evaluate numerous contracts across our corporation, develop processes and tools to implement the new standard and identify and design changes to internal controls by January 1, 2019, which we continued to perform under this plan through the end of the second quarter of 2018. The majority of our existing lease arrangements are classified as operating leases, which we expect will continue to be classified as operating under the new standard. Upon adoption of the new standard, we will record a right-of-use asset and lease liability on our balance sheet for all of our lease arrangements. Based on our progress to date, we anticipate being able to estimate the impacts of adopting the new standard in our third quarter of 2018.

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