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OTHER | 6 Months Ended
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Jun. 29, 2025
Accounting Policies [Abstract] |
OTHER | OTHER Contract Estimates We generate sales from long-term contracts for the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. Substantially all of our sales are recognized over time using the percentage-of-completion cost-to-cost measure of progress. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the product or service. Certain sales are recognized at a point in time, which typically occurs upon customer acceptance or receipt of the product or service. Significant judgments and assumptions are made in estimating contract sales, costs, and profit. We estimate profit as the difference between total estimated sales and total estimated costs to complete the contract and recognize that profit as costs are incurred (over time sales recognition) or when the customer accepts the product or service (point in time sales recognition). Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), un-priced change orders, requests for equitable adjustment (REAs), and contract claims. Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative sales recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled. Contract costs include significant estimates related to labor, subcontractors, materials, overhead, general and administrative expenses, and costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers. Significant estimates related to costs include the complexity and scope of the work to be performed, labor productivity and availability, labor rates including terms of collective bargaining arrangements, execution by our subcontractors, the availability and cost of materials including any impact from changing costs or inflation, the length of time to complete the performance obligation, overhead and general and administrative cost rates, and estimated useful lives of components and assets, among others. In particular, fixed-price development programs involve significant management judgment, as development contracts by nature have elements that have not been done before and thus, are highly subject to future unexpected changes in estimates as described below. 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., labor, subcontractors, materials, overhead, general and administrative expenses, and offset or localization agreements). 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. We review our estimates related to sales, cost, and profit for each contract at least annually or when a change in circumstances warrants a modification to a previous estimate. For significant contracts, we review our estimates more frequently. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. Profit booking rates may increase during the performance of the contract if we successfully retire risks related to earning variable consideration and/or 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, which we refer to as favorable profit booking rate adjustments. 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, which we refer to as unfavorable profit booking rate adjustments. We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative profit booking rate adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. Profit booking rate adjustments can have a significant effect on our financial statements and affect the comparability of our segment sales, operating profit and operating margin. Segment operating profit and margin can also be impacted favorably or unfavorably by, for example, certain items such as the positive resolution of contractual matters, cost recoveries on severance and restructuring, insurance recoveries and gains on sales of assets, as well as unfavorable items including 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. 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. The following table presents the effect of profit booking rate adjustments on our financial results (in millions, except per share data):
|  | Quarters Ended |  | Six Months Ended
|  | June 29, 2025 |  | June 30, 2024 |  | June 29, 2025 |  | June 30, 2024
Sales |  | $ | (361) |  |  |  | $ | 383 |  |  |  | $ | 142 |  |  |  | $ | 655 |  |
Segment operating profit |  | (1,045) |  |  |  | 420 |  |  |  | (565) |  |  |  | 615 |  |
% of segment operating profit |  | (183) | % |  |  | 21 | % |  |  | (21) | % |  |  | 16 | % |
Net earnings |  | (826) |  |  |  | 332 |  |  |  | (446) |  |  |  | 486 |  |
Diluted earnings per share |  | (3.53) |  |  |  | 1.39 |  |  |  | (1.90) |  |  |  | 2.02 |  |
During the quarter ended June 29, 2025, we recorded losses of $950 million on an ongoing classified program at our Aeronautics business segment, and $570 million on Canadian Maritime Helicopter Program (CMHP) and $95 million on Türkish Utility Helicopter Program (TUHP) at our RMS business segment. During the six months ended June 29, 2025, in addition to the losses above, we recorded $125 million of adjustments resulting from favorable performance upon completion on certain commercial civil space programs at Space and an $80 million favorable adjustment upon completion of a classified program at Aeronautics. During the six months ended June 30, 2024 we recognized a reach-forward loss of $100 million on a classified program at our MFC business segment. 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 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 condition and operating results in any period that they are recognized. Any such losses are recognized in the period in which the loss is evident. We have experienced significant performance issues on an existing classified program at our Aeronautics business segment. The initial phase is on a fixed-price incentive fee contract with fixed-price incentive fee options for additional phases. Phases within the program involve highly complex design and systems integration and we had previously recognized reach-forward losses amounting to $730 million on the initial phase and $95 million on the additional phases. Challenges and performance issues continued into 2025 and had a greater impact on schedule and costs than previously estimated. As a result, Aeronautics performed a comprehensive review of its design, integration, test, and other processes to achieve the technical requirements of the program, which was completed in the second quarter of 2025. Based on this review and ongoing discussions with the customer and suppliers, Aeronautics made significant changes to its processes and testing approach, resulting in significant updates to the program’s schedule and cost estimates. As a result, during the second quarter of 2025, we recognized additional reach-forward losses on the initial phase of $690 million and on additional phases of $260 million. The drivers that gave rise to the growth recognized on the initial phase and downstream impacts on estimates of cost and profitability in additional phases include: (1) observed software development performance degradation and integration findings; (2) learnings in recent software and build experience on other programs; (3) significant changes in test plan; (4) safety-critical and other necessary design and engineering changes; and (5) complete schedule realignment. As of June 29, 2025, cumulative losses recognized to date on this program were approximately $1.4 billion on the initial phase and $355 million on the additional phases. As of June 29, 2025, $583 million remained accrued in other current liabilities in our consolidated balance sheet. We will continue to proactively manage the technical requirements and our performance, the remaining work and any future changes in scope or schedule, and estimated costs to complete the program, including future phases. We may need to record additional losses in future periods if we experience further performance issues, increases in scope, or cost growth. Any such losses could be material to our financial results in any period that they are recognized. 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 which could be significant. We will monitor the recoverability of pre-contract costs, which could be impacted by our assessment of the customer’s decision regarding the funding of future phases of the program. Our MFC business segment has been performing under 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. We previously disclosed that the options may be exercised over the next several years and if performed expect they would each be at a loss. During the first quarter of 2024, we concluded it was probable that the first option would be exercised and recognized a reach-forward loss of approximately $100 million. During the fourth quarter of 2024, we again assessed the likelihood that additional options may be exercised and concluded then that it is probable that all options will be exercised based on performance to date, future requirements of the program, discussions with the customer and suppliers, and anticipated customer funding, among other factors, resulting in the recognition of additional reach-forward losses of approximately $1.31 billion. As of June 29, 2025, cumulative losses recognized on the program remained at approximately $1.46 billion in total, of which, $1.30 billion remained accrued in other current liabilities in our consolidated balance sheet. We have contracted with the Canadian government for the Canadian Maritime Helicopter Program (CMHP) at our RMS business segment. The program 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. While we continue to be in discussions with the Canadian government to potentially restructure certain contractual terms and conditions that may be beneficial to both parties, and entered into a contract modification in 2024 to better align contract scope with the Canadian government’s need, which resulted in a reduction in our contract assets in the fourth quarter of 2024 and first quarter of 2025, any restructuring discussions may be prolonged or unsuccessful, and could result in a contract termination, and are dependent upon Canadian government resources and priorities and other factors outside of our control, such as trade relations with the United States. Communications with the customer during the second quarter of 2025 led to subsequent decisions made by us to focus on providing additional mission capabilities, enhanced logistical support, fleet life extension, and revised expectations regarding flight hours. Based on the ongoing discussions with the customer and decisions made by management, we revised our cost and sales estimates for this program. As a result, during the second quarter of 2025 we recognized additional losses of $570 million on the program. As of June 29, 2025, cumulative losses recognized on the program were approximately $670 million and approximately $680 million of contract assets remained on the balance sheet. 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, and potential damages, which could be material to our financial results in any period that they are recognized. 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 partially stopped work on TUHP effective October 5, 2024. We have been in discussions with our prime contract customer 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, including recent discussions of a potential mutually agreeable framework to restructure the program, including changing the scope of work. Our customer has asserted that it is entitled to penalties and damages, that we do not have the contractual right to stop work and that our decision to stop work may lead to a termination for default and additional penalties and damages. In light of the status of the continuing discussions with our prime contract customer and the current status of the TUHP program, we recognized a loss of $95 million in the second quarter of 2025. As of June 29, 2025, cumulative losses recognized to date on the program were approximately $130 million and the program remains in a contract liability position on the balance sheet. Additionally, if we are unable to finalize an agreement on mutually agreeable terms, we or our customer 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, including the drawdown by the customer of letters of credit and performance bonds, and increased unrecoverable costs, which could be material to our financial results in any period that they are recognized. Commercial Paper We have agreements in place with financial institutions to provide for the issuance of commercial paper. The outstanding balance of commercial paper can fluctuate daily and the amount outstanding during the period may be greater or less than the amount reported at the end of the period. As of June 29, 2025, we had $1.4 billion of commercial paper borrowings with a weighted-average rate of 4.55%. As of December 31, 2024 we had no commercial paper borrowings outstanding. All of our commercial paper borrowings had maturities of up to three months or less from the date of issuance. We may, as conditions warrant, continue to issue commercial paper backed by our revolving credit facility to manage the timing of cash flows. 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 June 29, 2025, our ending backlog was $166.5 billion. We expect to recognize approximately 38% of our backlog over the next 12 months and a total of approximately 64% over the next 24 months as revenue with the remainder recognized thereafter. Impairment and Other Charges During the second quarter of 2025, we recorded charges totaling $66 million ($52 million, or $0.22 per share, after-tax) primarily for the write-off of fixed assets resulting from the U.S. Air Force’s Next Generation Air Dominance (NGAD) competition and down-select decision. 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. Income Taxes Our effective income tax rates were 18.0% and 16.3% for the quarter and six months ended June 29, 2025 and 15.8% for both the quarter and six months ended June 30, 2024. The higher effective income tax rates for the quarter and six months ended June 29, 2025 were primarily attributable to increased interest expense on our uncertain tax position partially offset by changes in pre-tax earnings due to program losses previously described. The rates for all periods benefited from tax deductions for foreign derived intangible income, research and development tax credits, dividends paid to our defined contribution plans with an employee stock ownership plan feature and employee equity awards. In our Annual Report on Form 10-K for the year ended December 31, 2018, we described our adoption of Accounting Standards Codification (ASC) 606 for certain manufacturing contracts. In connection with that change and the associated changes to the income recognition rules enacted in the 2017 Tax Cuts and Jobs Act, we correspondingly changed our method of accounting for U.S. federal income tax purposes with the Internal Revenue Service (IRS). As part of the IRS Compliance Assurance Process (CAP) program, the IRS initially approved that accounting method change for 2018 and 2019 without any adjustments, stating in writing that our new tax accounting method was an acceptable method that clearly reflected income. After an additional review of the accounting method change in subsequent years, the IRS issued to us a Revenue Agent’s Report (RAR) for 2018-2019 on May 20, 2025 with an accompanying Notice of Proposed Adjustment (NOPA) for 2018-2020 in relation to our accounting method change (the Proposed Adjustments). The Proposed Adjustments, which seek approximately $4.6 billion of additional federal income tax (excluding interest), are based on the premise that we must recognize revenue as performance obligations on a contract are satisfied and as advance payments are received but must defer costs until delivery of the finished product. The Proposed Adjustments create a mismatch between revenue and costs, effectively disallow recognition of cost of goods sold for impacted contracts, and result in gross receipts taxation for each year at issue. We strongly disagree with the IRS’s claims and are pursuing applicable administrative remedies with the IRS Independent Office of Appeals and, if necessary, judicial remedies if an acceptable administrative resolution cannot be reached. We do not expect resolution of this matter within twelve months and cannot predict with certainty the timing of such resolution. We believe our reserves for tax contingencies are adequate; however, if this matter is resolved unfavorably, there could be a material impact on our profitability and future cash flows. As of December 31, 2024, our liabilities associated with uncertain tax positions were not material. As of the quarter ended June 29, 2025, our liabilities associated with uncertain tax positions increased to $512 million with a corresponding increase to net deferred tax assets primarily attributable to the Proposed Adjustments. As of the quarter ended June 29, 2025, interest and penalties related to uncertain tax positions, which are included in income tax expense, increased to $129 million with $103 million representing the cumulative amount related to the Proposed Adjustments.

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