| OTHER | NOTE 9 – 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, estimating
total sales and costs at completion is complicated and subject to
many variables and, accordingly estimates are 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
margins 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. 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 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 by $550 million and $1.0 billion for the
quarter and six months ended June 28, 2015 and $440 million
and $965 million for the quarter and six months ended June 29,
2014. These adjustments increased net earnings by $355 million
($1.12 per share) and $675 million ($2.12 per share) for the
quarter and six months ended June 28, 2015 and $285 million
($.88 per share) and $625 million ($1.93 per share) for the quarter
and six months ended June 29, 2014.
Restructuring Charges
Fourth Quarter 2013 Action
In November 2013, we committed to a plan to close and consolidate
certain facilities and reduce our total workforce by approximately
4,000 positions within our IS&GS, MST and Space Systems
business segments. This plan resulted from a strategic review of
our facility capacity and future workload projections for these
businesses and was intended to better align our organization and
cost structure and improve the affordability of our products and
services given the changes in U.S. Government spending as well as
the rapidly changing competitive and economic landscape. As of
June 28, 2015, we have paid approximately $135 million in
severance payments associated with this action, of which $28
million was paid during the six months ended June 28,
2015.
In connection with our plan to consolidate facilities, during the
quarter ended June 28, 2015, we sold two properties in
California and received aggregate cash proceeds of approximately
$70 million. Gains on the sales have been deferred and will be
recognized in future periods after 2015 once our continuing
involvement associated with the properties has been completed.
We also expect to incur total accelerated costs (e.g., accelerated
depreciation expense related to long-lived assets at the sites to
be closed) and incremental costs (e.g., relocation of equipment and
other employee related costs) of approximately $15 million, $50
million and $190 million at our IS&GS, MST and Space Systems
business segments. As of June 28, 2015, we have incurred total
accelerated and incremental costs of $174 million, inclusive of
amounts incurred during the six months ended June 28, 2015.
The accelerated and incremental costs are recorded as incurred in
cost of sales on our Statements of Earnings and included in the
respective business segment’s results of operations.
The remaining payments associated with the severance and
incremental costs are expected to be substantially paid by the end
of 2015. 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, with the
impact included in the respective business segment’s results
of operations.
Income Taxes
Our effective income tax rates were 30.8% and 30.7% for the quarter
and six months ended June 28, 2015 and 33.7% and 32.2% for the
quarter and six months ended June 29, 2014. The rates for all
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 effective tax
rates for the quarter and six months ended June 28, 2015 were
lower than the prior year periods primarily due to tax reserve
adjustments recorded in the quarter ended June 29, 2014. The
effective rates during all periods did not include a benefit from
the U.S. research and development tax credit because the credit had
expired.
We made net income tax payments of approximately $500 million and
$560 million during the six months ended June 28, 2015 and
June 29, 2014. The 2014 payments are net of $200 million in
tax refunds primarily attributable to our tax-deductible pension
contributions made during the quarter ended December 31,
2013.
Stockholders’ Equity
Repurchases of Common Stock
During the six months ended June 28, 2015, we repurchased
7.9 million shares of our common stock for $1.5 billion. We
had total remaining authorization of $2.1 billion for future common
share repurchases under our program as of June 28,
2015. 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 $942 million ($3.00 per share)
and $1.4 billion ($4.50 per share) during the quarter and six
months ended June 28, 2015. The 2015 dividend amounts include
the declaration of our 2015 third quarter dividend of $1.50 per
share, which totaled $471 million. We declared cash dividends
totaling $856 million ($2.66 per share) and $1.3 billion ($3.99 per
share) during the quarter and six months ended June 29, 2014.
The 2014 dividend amounts include the declaration of our 2014 third
quarter dividend of $1.33 per share, which totaled $428
million.
Restricted Stock Unit Grants
In January 2015, we granted certain employees approximately
0.6 million restricted stock units (RSUs) with a grant-date
fair value of $192.28 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
Other, net
AOCL
Balance at December 31, 2014 $ (11,813 ) $ (57 ) $
(11,870 )
Other comprehensive loss before reclassifications
— (11 ) (11 )
Amounts reclassified from AOCL
Recognition of net actuarial losses (a) 554
— 554
Amortization of net prior service credits (a)
(129 )
—
(129 )
Total reclassified from AOCL
425
—
425
Total other comprehensive income (loss)
425
(11 )
414
Balance at June 28, 2015
$ (11,388 )
$ (68 )
$ (11,456 )
Balance at December 31, 2013 $ (9,649 ) $ 48 $ (9,601 )
Other comprehensive loss (income) before reclassifications
Net actuarial losses (b) (3,778 ) — (3,778 )
Prior service credits (b) 3,043 — 3,043
Other
—
15
15
Total other comprehensive (loss) income before
reclassifications
(735 )
15
(720 )
Amounts reclassified from AOCL
Recognition of net actuarial losses (a) 306 — 306
Amortization of net prior service costs (a) 28 — 28
Other
—
3
3
Total reclassified from AOCL
334
3
337
Total other comprehensive income (loss)
(401 )
18
(383 )
Balance at June 29, 2014
$ (10,050 )
$ 66
$ (9,984 )
(a) Reclassifications from AOCL related
to our postretirement benefit plans were recorded as a component of
net periodic benefit cost for each period presented (Note 6). These
amounts include $213 million and $167 million for the quarters
ended June 28, 2015 and June 29, 2014, which are
comprised of the recognition of net actuarial losses of $277
million and $153 million for the quarters ended June 28, 2015
and June 29, 2014 and the amortization of net prior service
(credits) costs of $(64) million and $14 million for the quarters
ended June 28, 2015 and June 29, 2014.
(b) Changes in AOCL before
reclassifications in 2014 related to our postretirement benefit
plans include net actuarial losses from the re-measurement of
Long-term Debt
On February 20, 2015, we issued $2.25 billion of notes in
a registered public offering consisting 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%. We may, at our option, redeem some or
all of the notes at any time by paying the principal amount of
notes being redeemed plus any make-whole premium and accrued and
unpaid interest to the date of redemption. Interest on the notes is
payable on March 1 and September 1 of each year,
beginning on September 1, 2015. These notes rank equally in
right of payment with all of our existing unsecured and
unsubordinated indebtedness.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued
a new standard that will change the way we recognize revenue
and significantly expand the disclosure requirements for
revenue arrangements. On July 9, 2015, the FASB approved a
one-year deferral of the effective date of the standard to 2018 for
public companies, with an option that would permit companies to
adopt the standard as early as the original effective date of 2017.
Early adoption prior to the original effective date is not
permitted. The new standard may be adopted either retrospectively
or on a modified retrospective basis whereby the new standard 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. In addition, the FASB is contemplating making
additional changes to certain elements of the new standard. We are
currently evaluating the methods of adoption allowed by the new
standard and the effect the standard is expected to have on our
consolidated financial statements and related disclosures. As the
new standard 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 new standard will extend over future periods. |
