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OTHER | 9 Months Ended
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Sep. 29, 2024
Accounting Policies [Abstract] |
OTHER | OTHER Contract Estimates Significant estimates and assumptions are made in estimating contract sales, costs, and profit. We estimate profit as the difference between estimated revenues and total estimated costs to complete the contract. 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 our ability to earn 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 related to 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 evident, which we refer to as a reach-forward loss. 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. Increases in the profit booking rates, typically referred to as favorable profit booking rate adjustments, 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 and are typically referred to as unfavorable profit booking rate adjustments. Increases or decreases in profit booking rates are recognized in the current period they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin can be impacted favorably or unfavorably by, for example, certain items listed below, which may or may not impact sales. Favorable items include the positive resolution of contractual matters, cost recoveries on severance and restructuring, insurance recoveries and gains on sales of assets. Unfavorable items include the adverse resolution of contractual matters; supply chain disruptions; 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 profit booking rate adjustments increased sales by $358 million and $1.0 billion during the quarter and nine months ended September 29, 2024 and $231 million and $1.0 billion during the quarter and nine months ended September 24, 2023. These adjustments increased segment operating profit by approximately $375 million ($296 million, or $1.24 per share, after tax) and $990 million ($782 million, or $3.26 per share, after tax) during the quarter and nine months ended September 29, 2024, and $335 million ($265 million, or $1.06 per share, after tax) and $1.1 billion ($881 million, or $3.48 per share, after tax) during the quarter and nine months ended September 24, 2023. During the quarter ended September 29, 2024, we recognized losses of $80 million on a classified program at our Aeronautics business segment described below, resulting in total losses of $145 million on this classified program for the nine months ended September 29, 2024. Additionally, consolidated net profit booking rate adjustments during the nine months ended September 29, 2024 include a reach-forward loss of $100 million recognized in the first quarter of 2024 on a classified program at our MFC business segment described below. During the nine months ended September 24, 2023, we recognized a favorable profit adjustment of $65 million on an international surveillance and control program due to the positive resolution of a contractual matter, and a reach-forward loss of $100 million on the Canadian Maritime Helicopter Program (CMHP) as a result of increased costs and lower than planned revenues described below. We have various development programs for new and upgraded products, services, and related technologies which have complex design and technical challenges. This development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work by us and our suppliers. Many of these programs have cost-type contracting arrangements (e.g. cost-reimbursable or cost-plus-fee). In such cases, the associated financial risks are primarily in reduced fees, lower profit rates, or program cancellation if cost, schedule, or technical performance issues arise. However, some of our existing development programs are contracted on a fixed-price basis or include cost-type contracting for the development phase with fixed-price production options and our customers still continue to implement procurement strategies such as these that shift risk to contractors. Competitively bid programs with fixed-price development work or fixed-price production options increase the risk of a reach-forward loss upon contract award and during the period of contract performance. Due to the complex and often experimental nature of development programs, we may experience (and have experienced in the past) technical and quality issues during the development of new products or technologies for a variety of reasons. Our development programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs and fixed-price contract structure creates financial risk as estimated completion costs may exceed the current contract value, which could trigger earnings charges, termination provisions, or other financially significant exposures. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues, and such losses could be significant to our financial results, cash flows, or financial condition in any period that they are recognized. Any such losses are recorded in the period in which the loss is evident. We have experienced performance issues on a classified fixed-price incentive fee contract at our Aeronautics business segment. Phases within the contract involve highly complex design and systems integration and we have periodically recognized reach-forward losses. During the third quarter of 2024, we recognized losses of $80 million due to higher than anticipated costs to achieve program objectives, bringing total losses for the nine months ended September 29, 2024, to $145 million. With the additional $80 million of losses in the third quarter, cumulative losses increased to approximately $415 million. We will continue to monitor the technical requirements and our performance, the remaining work and any future changes in scope or schedule, and estimated costs to complete the program, and we may have to record additional losses in future periods if we experience further performance issues, increases in scope, or cost growth, which could be material to our financial results. Additionally, we will continue to assess the likelihood of losses for future phases. We will be required to recognize additional losses for such phases if they are probable and such loss becomes evident. Last, we and our industry team will continue to incur advanced procurement costs (also referred to as pre-contract costs) to enhance our ability to achieve the schedule and certain milestones. We will monitor the recoverability of pre-contract costs, which could be impacted by the customer’s decision regarding future phases of the program. We have contracted with the Canadian government for the CMHP at our RMS business segment that provides for design, development, and production of CH-148 aircraft (the Original Equipment contract), which is a military variant of the S-92 helicopter, and for logistical support to the fleet (the In Service Support contract) over an extended time period. The last of the 28 CH-148 aircraft is scheduled to be delivered in 2025. The program has experienced performance issues, including delays in the final aircraft deliveries from the original contract requirement, and the Royal Canadian Air Force’s flight hours have been significantly less than originally anticipated, which has impacted program revenues and the recovery of our costs under this program. We have incurred significant costs and recognized the related sales, of which about $970 million are currently included in contract assets on the balance sheet which could become at risk for future recovery. Such assets are recovered based on future flight hours, which are not entirely within our control and are dependent upon aircraft availability and performance and the availability of Canadian government resources. During the third quarter of 2024, we entered into a modification to the In Service Support contract to better align contract scope with the Canadian government’s needs. This modification mitigates, but does not eliminate the risk related to future sales and recovery of our costs. We continue to engage in discussions with the Canadian government to potentially restructure certain contractual terms and conditions that may be beneficial to both parties. However, any restructuring discussions may be prolonged or unsuccessful and are dependent upon Canadian government resources and priorities and other factors outside of our control. Under the contract terms as modified, future sales and recovery of costs are dependent upon the Royal Canadian Air Force’s flight hours and program costs and performance. As of September 29, 2024, cumulative losses remained at approximately $100 million. Future performance issues or changes in our estimates may affect our ability to recover our costs, including recovery of the contract assets recognized on the balance sheet and our assessment of the reach-forward loss, which could be material to our operating results. We also have a number of contracts with Türkish industry for the Türkish Utility Helicopter Program (TUHP), which anticipates co-production with Türkish industry for production of T70 helicopters for use in Türkiye, as well as the related provision of Türkish goods and services under buy-back or offset obligations, to include the future sales of helicopters built in Türkiye for sale globally. In 2020, the U.S. Government imposed certain sanctions on Türkish entities and persons that have affected our ability to perform under the TUHP contracts. We have provided force majeure notices under the affected contracts, and have partially stopped work on TUHP effective October 5, 2024. We are currently in discussions regarding the path forward for the program in light of the continued impact of the sanctions on our ability to perform under the TUHP contracts and our decision to partially stop work. As of September 29, 2024, cumulative losses related to development work for the program remained insignificant and the program remains in a contract liability position on the balance sheet. The TUHP contracts may be negotiated to be restructured or terminated, either in whole or in part and as a result, we could be at risk of recording significant reach-forward losses in future periods. Additionally, we could elect to pursue other relief or remedies, which could result in a further reduction in sales, the imposition of penalties or assessment of damages, and increased unrecoverable costs, which could be material to our financial results. Our MFC business segment was previously awarded a competitively bid classified contract, which includes a cost-reimbursable base contract for the initial phase of the program and multiple fixed price options for additional phases. The options for additional phases may be exercised over the next several years and if performed we expect they would each be at a loss. During the first quarter of 2024, we concluded it was probable that an option would be exercised based on progress made on the program and discussions with the customer. Accordingly, in the first quarter of 2024 we recognized a reach forward loss of approximately $100 million, bringing the cumulative losses recognized on the program to approximately $150 million, including charges for precontract costs recognized in prior periods. During the second and third quarters of 2024, there were no significant changes to the previously recognized losses. We will continue to assess the likelihood that additional options will be exercised, utilizing factors such as our performance, future requirements of the program, discussions with the customer and suppliers, customer funding, and experience with other customer programs, among other factors. We will be required to recognize additional losses for the remaining options if they become probable of being exercised. The potential total loss across the additional options is up to approximately $1.3 billion. The ultimate amount of additional loss recognized, if any, will depend on how many of the additional options are exercised or become probable of being exercised and performance on those options. 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. It is converted into sales in future periods as work is performed or deliveries are made. 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, 2024, our ending backlog was $165.7 billion. We expect to recognize approximately 35% of our backlog over the next 12 months and approximately 59% over the next 24 months as revenue with the remainder recognized thereafter. Income Taxes Our effective income tax rates were 15.4% and 15.6% for the quarter and nine months ended September 29, 2024 and 13.8% and 15.1% for the quarter and nine months ended September 24, 2023. The rate for the third quarter 2024 was higher than the rate for the third quarter 2023 primarily due to additional research and development tax credits that were claimed for years prior to 2023 reflected in the 2023 rate. The rates for all periods benefited from research and development tax credits, tax deductions for foreign derived intangible income and dividends paid to our defined contribution plans with an employee stock ownership plan feature. Investments We make investments in companies that we believe are advancing or developing new technologies applicable to our business. These investments are primarily in early-stage companies and may be in the form of common or preferred stock, warrants, convertible debt securities, investments in funds or equity method investments. Most of these investments are in equity securities without readily determinable fair values (privately held securities), which are measured initially at cost and are then adjusted to fair value only if there is an observable price change or reduced for impairment, if applicable. The carrying amounts of the investments were $603 million and $581 million at September 29, 2024 and December 31, 2023. Due to changes in fair value and/or sales of investments, we recorded net losses of $19 million ($14 million, or $0.06 per share, after-tax) and $5 million ($4 million, or $0.02 per share, after-tax) during the quarter and nine months ended September 29, 2024 and net losses of $13 million ($10 million, or $0.04 per share, after-tax) and $24 million ($18 million, or $0.07 per share, after-tax) during the quarter and nine months ended September 24, 2023. These gains or losses are reflected in the other non-operating income, net account on our consolidated statements of earnings. Revolving Credit Facility At September 29, 2024, we had a $3.0 billion Revolving Credit Facility with various banks, with the option to increase the commitments under the Revolving Credit Facility by an additional amount of up to $500 million (for an aggregate amount of up to $3.5 billion). Effective August 23, 2024, we amended the agreement for the Revolving Credit Facility (the “Revolving Credit Agreement”) to extend the expiration date of the Revolving Credit Agreement from August 24, 2028 to August 24, 2029 and removed the existing financial maintenance covenant. The Revolving Credit Agreement is available for any of our lawful corporate purposes, including supporting commercial paper borrowings. Borrowings under the Revolving Credit Agreement are unsecured and bear interest at rates set forth in the Revolving Credit Agreement. There were no borrowings under the Revolving Credit Agreement at September 29, 2024. Debt Issuance On January 29, 2024, we issued a total of $2.0 billion of senior unsecured notes, consisting of $650 million aggregate principal amount of 4.50% Notes due 2029 (the 2029 Notes), $600 million aggregate principal amount of 4.80% Notes due 2034 (the 2034 Notes) and $750 million aggregate principal amount of 5.20% Notes due 2064 (the 2064 Notes and, together with the 2029 Notes and 2034 Notes, the Notes). Net proceeds of $1.98 billion were received from the offering after deducting pricing discounts and debt issuance costs, which are being amortized and recorded as interest expense over the term of the Notes. We may, at our option, redeem the Notes of any series in whole or in part at any time and from time to time at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or an applicable make-whole amount, plus accrued and unpaid interest to the date of redemption. The Notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness. Impairment and Severance Charges During the second quarter of 2024, we recorded charges totaling $87 million ($69 million, or $0.29 per share, after-tax) for trademark and fixed asset impairments as well as severance costs resulting from the strategic review of our Sikorsky business during the second quarter of 2024 due, in part, to the impacts of the U.S. Army announcement to cancel the Future Attack Reconnaissance Aircraft (FARA) program at the conclusion of fiscal year 2024, for which our Sikorsky business was competing. Sale of Commercial Engine Solutions On September 9, 2024, we completed the sale of our Commercial Engine Solutions (CES) business, which was part of our Aeronautics business segment. We received $170 million in cash from the sale. Gains recognized from the sale in the quarter ended September 29, 2024 were not significant. The final gain is subject to certain post-closing adjustments, including final working capital, indemnification, and tax adjustments, which we expect to complete in 2025. This sale did not represent a strategic shift and the impacts to our consolidated results of operation, financial position, and cash were not significant. Accordingly, the operating results and cash flows for the CES business up to the divestiture date have not been reclassified to discontinued operations.

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