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OTHER | 9 Months Ended
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Sep. 29, 2019
Accounting Policies [Abstract] |
OTHER | OTHER Changes in Estimates Significant estimates and assumptions are made in estimating contract sales and costs, including the profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and 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, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization 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 or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. When estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is determined. 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 for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations 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 fulfill the performance obligations 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 margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and 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; certain asset impairments; and losses on sales of certain assets. Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by approximately $480 million and $1.5 billion during the quarter and nine months ended September 29, 2019 and $545 million and $1.4 billion during the quarter and nine months ended September 30, 2018. These adjustments increased net earnings by approximately $379 million ($1.33 per share) and $1.2 billion ($4.07 per share) during the quarter and nine months ended September 29, 2019 and $431 million ($1.50 per share) and $1.1 billion ($3.93 per share) during the quarter and nine months ended September 30, 2018. We recognized net sales from performance obligations satisfied in prior periods of approximately $495 million and $1.7 billion during the quarter and nine months ended September 29, 2019 and $595 million and $1.6 billion during the quarter and nine months ended September 30, 2018, which primarily relate to changes in profit booking rates that impacted revenue. As previously disclosed, we are responsible for a program to design, develop and construct a ground-based radar at our RMS business segment. The program has experienced performance issues for which we have periodically accrued reserves. As of September 29, 2019, cumulative losses remained at approximately $195 million on this program. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional charges. However, based on the losses previously recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition. As previously disclosed, we have two commercial satellite programs, for the delivery of three satellites in total, at our Space business segment for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. During 2019, we launched two satellites from one of the programs, and these satellites have now been handed over to the customer. Accordingly, the risk related to these satellites has decreased significantly and is primarily related to post-launch warranty and support. Based on reserves already accrued, at this time we do not anticipate that additional charges, if any, related to this program would be material. The third satellite, which relates to the second program, remains developmental. As of September 29, 2019, cumulative losses for these two programs remained at approximately $410 million. While these losses reflect our estimated total losses, we will continue to incur unrecoverable general and administrative costs each period until we complete the contract for the third satellite. We also may experience further challenges in the delivery and integration of new satellite technology, anomalies discovered during system testing requiring repair or rework, further schedule delays, and penalties that could require us to record additional loss reserves, which may be material to our operating results. We are late to the contract delivery schedule for the third satellite. If we are not able to deliver the third satellite by the contract termination date, the customer could seek to exercise a termination right under the contract, in which case we would have to refund the payments we have received and pay certain penalties. However, we believe that it is not probable that the customer will seek to exercise any termination rights. As previously disclosed, we are responsible for designing, developing and installing an upgraded turret for the Warrior Capability Sustainment Program at our MFC business segment. As of September 29, 2019, cumulative losses remained at approximately $140 million. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional reserves. However, based on the losses already recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition. Backlog Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of September 29, 2019, our ending backlog was $137.4 billion. We expect to recognize approximately 38% of our backlog over the next 12 months and approximately 63% over the next 24 months as revenue, with the remainder recognized thereafter. Severance and Restructuring Charges During the second quarter of 2018, we recorded charges totaling $96 million ($76 million, or $0.26 per share, after tax) related to certain severance and restructuring actions at our RMS business segment. As of September 29, 2019, we have paid approximately $65 million in severance payments associated with these actions. In addition, we have recovered a significant portion of these payments through the pricing of our products and services to the U.S. Government and other customers, which are included in RMS’ operating results. Income Taxes Our effective income tax rates were 9.7% and 12.5% for the quarter and nine months ended September 29, 2019, and 6.5% and 12.9% for the quarter and nine months ended September 30, 2018. The rate for the quarter ended September 29, 2019 benefited from $62 million, or $0.22 per share, of additional tax deductions for the prior year, primarily attributable to foreign derived intangible income treatment based on proposed tax regulations released on March 4, 2019, and our change in tax accounting method reflecting a 2012 Court of Federal Claims decision, which held that the tax basis in certain assets should be increased and realized upon the assets’ disposition. The rate for the nine months ended September 29, 2019 benefited from $127 million, or $0.45 per share, of additional tax deductions for the prior year, of which approximately $65 million, or $0.23 per share, was recorded during the first quarter of 2019 based on proposed tax regulations released on March 4, 2019 which clarified foreign military sales qualify for foreign derived intangible income treatment. The rates for the quarter and nine months ended September 30, 2018 benefited from $148 million, or $0.52 per share, and $152 million, or $0.53 per share, of additional tax deductions for the prior year, primarily attributable to true-ups to the net one-time charges related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and our change in tax accounting method reflecting the 2012 Court of Federal Claims decision. The rates for all periods benefited from tax deductions for dividends paid to our defined contribution plans with an employee stock ownership plan feature, tax deductions for foreign derived intangible income, tax deductions for employee equity awards, and the research and development tax credit. Sale of Customer Receivables On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. We sold customer receivables of $80 million and $280 million during the quarter and nine months ended September 29, 2019 and $41 million and $268 million during the quarter and nine months ended September 30, 2018. There were no gains or losses related to sales of these receivables. Revolving Credit Facility Extension In August 2019, our $2.5 billion revolving credit facility (the 5-year Facility) was amended to extend its expiration date by one year from August 24, 2023 to August 24, 2024.

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