We have audited the accompanying consolidated balance sheets of Lockheed Martin Corporation as of December 31, 2016 and
2015, and the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the
Corporations management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lockheed Martin Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), Lockheed Martin Corporations internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 9, 2017 expressed an adverse opinion thereon.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
Organization
We are a global security and aerospace company principally engaged in the research,
design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity
services. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government.
Basis of presentation
Our consolidated financial statements include the accounts of subsidiaries we
control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation. Our receivables, inventories, customer advances and amounts in excess of costs incurred and certain
amounts in other current liabilities primarily are attributable to long-term contracts or programs in progress for which the related operating cycles are longer than one year. In accordance with industry practice, we include these items in current
assets and current liabilities. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a per diluted share basis. Certain prior period amounts have been reclassified to conform with
current year presentation.
The discussion and presentation of the operating results of our business segments have been
impacted by the following recent events.
On August 16, 2016, we completed the previously announced divestiture of
the Information Systems & Global Solutions (IS&GS) business, which merged with a subsidiary of Leidos Holdings, Inc. (Leidos), in a Reverse Morris Trust transaction (the Transaction). This Transaction represents the
culmination of the strategic review of our government information technology infrastructure services business and our technical services business performed in 2015 to explore whether the IS&GS business could achieve greater growth and create
more value for customers and stockholders outside of Lockheed Martin. As a result of the divestiture, the operating results of the IS&GS business have been classified as discontinued operations in the consolidated statements of earnings for all
periods presented and the assets and liabilities of the IS&GS business have been classified as assets and liabilities of discontinued operations in the consolidated balance sheet as of December 31, 2015. However, the cash flows of the
IS&GS business have not been reclassified in our consolidated statements of cash flows as we retained the cash as part of the Transaction. See Note 3 Acquisitions and Divestitures for additional information about the
divestiture of the IS&GS business.
On August 24, 2016, our ownership interest in the AWE Management Limited
(AWE) venture, which operates the United Kingdoms nuclear deterrent program, increased by 18%. As a result of the increase, we now hold a 51% controlling interest in AWE and are required to consolidate the AWE venture in our consolidated
financial statements. Accordingly, the operating results and cash flows of AWE have been included in our consolidated statements of earnings and consolidated statements of cash flows since August 24, 2016, the date we obtained a controlling
interest, and the assets and liabilities of AWE are included in the consolidated balance sheet as of December 31, 2016. Previously, we accounted for our investment in AWE using the equity method of accounting. See Note
3 Acquisitions and Divestitures for additional information about the change in ownership of AWE.
During the third quarter of 2016, the business segment formerly known as Mission Systems and Training (MST) was renamed Rotary
and Missions Systems (RMS) to better reflect a broader range of products and capabilities subsequent to the acquisition of Sikorsky Aircraft Corporation (Sikorsky) in November 2015 and the realignment of certain programs from the former IS&GS
business to RMS in the fourth quarter of 2015. While RMS was renamed to more accurately reflect the expanded portfolio, there was no additional change to the composition of the portfolio in connection with the name change. The information for this
segment for all periods included in these consolidated financial statements has been labeled using the new name.
On
November 6, 2015, we completed the acquisition of Sikorsky for $9.0 billion, net of cash acquired, and aligned Sikorsky under our RMS business segment. The operating results and cash flows of Sikorsky have been included in our consolidated
statements of earnings and consolidated statements of cash flows since the November 6, 2015 acquisition date. Additionally, the assets and liabilities of Sikorsky are included in our consolidated balance sheets as of December 31, 2016 and
December 31, 2015. See Note 3 Acquisitions and Divestitures for additional information about the acquisition of Sikorsky and related final purchase accounting.
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During the fourth quarter of 2015, we realigned certain programs among our
business segments. The amounts, discussion and presentation of our business segments for all periods presented in these consolidated financial statements reflect the program realignment.
Use of estimates
We prepare our consolidated financial statements in conformity with U.S. generally
accepted accounting principles (GAAP). In doing so, we are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience
and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources.
Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement
benefit plans, environmental receivables and liabilities, evaluation of goodwill and other assets for impairment, income taxes including deferred tax assets, fair value measurements and contingencies.
Sales and earnings
We record net sales and estimated profits for substantially all of our contracts
using the
percentage-of-completion
method for cost-reimbursable and fixed-price contracts for products and services with the U.S. Government. Sales are recorded on all
time-and-materials
contracts as the work is performed based on agreed-upon hourly rates and allowable costs. We account for our services contracts with
non-U.S.
Government customers using the services method of accounting. We classify net sales as products or services on our consolidated statements of earnings based on the attributes of the underlying contracts.
Percentage-of-Completion
Method
The
percentage-of-completion
method for product contracts depends on the nature of the products provided under the contract. For example, for
contracts that require us to perform a significant level of development effort in comparison to the total value of the contract and/or to deliver minimal quantities, sales are recorded using the
cost-to-cost
method to measure progress toward completion. Under the
cost-to-cost
method of accounting, we recognize sales and
an estimated profit as costs are incurred based on the proportion that the incurred costs bear to total estimated costs. For contracts that require us to provide a substantial number of similar items without a significant level of development, we
record sales and an estimated profit on a
percentage-of-completion
basis using
units-of-delivery
as the basis to measure progress toward completing the contract. For contracts to provide services to the U.S. Government, sales are generally recorded
using the
cost-to-cost
method.
Award and
incentive fees, as well as penalties related to contract performance, are considered in estimating sales and profit rates on contracts accounted for under the
percentage-of-completion
method. Estimates of award fees are based on past experience and anticipated performance. We record incentives or penalties when there is
sufficient information to assess anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant event are not recognized until the event occurs.
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,
the estimation of total sales and costs at completion is complicated and subject to many variables and, accordingly, is 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.
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In addition, comparability of our business segment sales, operating profit and
operating margins may be impacted 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 (such
as those mentioned below in Note 15 Restructuring Charges), which are excluded from segment operating results; reserves for disputes; asset impairments; and losses on sales of assets. Segment operating profit and items
such as risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, net
of state income taxes, increased segment operating profit, by approximately $1.5 billion in 2016, $1.7 billion in 2015 and $1.6 billion in 2014. These adjustments increased net earnings by approximately $950 million ($3.13 per
share) in 2016, $1.1 billion ($3.50 per share) in 2015 and $1.1 billion ($3.41 per share) in 2014.
Services
Method
For cost-reimbursable contracts for services to
non-U.S.
Government customers, we record net sales as services are performed, except for award and incentive
fees. Award and incentive fees are recorded when they are fixed or determinable, generally at the date the amount is communicated to us by the customer. This approach results in the recognition of such fees at contractual intervals (typically every
six months) throughout the contract and is dependent on the customers processes for notification of awards and issuance of formal notifications. Under fixed-price service contracts, we are paid a predetermined fixed amount for a specified
scope of work and generally have full responsibility for the costs associated with the contract and the resulting profit or loss. We record net sales under fixed-price service contracts with
non-U.S.
Government customers on a straight-line basis over the period of contract performance, unless evidence suggests that net sales are earned or the obligations are fulfilled in a different pattern. Costs for all service contracts are expensed as
incurred.
Research and development and similar costs
Except for certain arrangements described
below, we account for independent research and development costs as part of the general and administrative costs that are allocated among all of our contracts and programs in progress under U.S. Government contractual arrangements and charged to
cost of sales. Under certain arrangements in which a customer shares in product development costs, our portion of unreimbursed costs is expensed as incurred in cost of sales. Independent research and development costs charged to cost of sales
totaled $988 million in 2016, $817 million in 2015 and $733 million in 2014. Costs we incur under customer-sponsored research and development programs pursuant to contracts are included in net sales and cost of sales.
Stock-based compensation
Compensation cost related to all share-based payments is measured at the
grant date based on the estimated fair value of the award. We generally recognize the compensation cost ratably over a three-year vesting period, net of estimated forfeitures. At each reporting date, the number of shares is adjusted to the number
ultimately expected to vest.
Income taxes
We calculate our provision for income taxes using the
asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying amount of assets and
liabilities and their respective tax bases, as well as from operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary
differences to be recovered or paid.
We periodically assess our tax exposures related to periods that are open to
examination. Based on the latest available information, we evaluate our tax positions to determine whether the position will more likely than not be sustained upon examination by the Internal Revenue Service (IRS) or other taxing authorities. If we
cannot reach a
more-likely-than-not
determination, no benefit is recorded. If we determine that the tax position is more likely than not to be sustained, we record the largest amount of benefit that is more
likely than not to be realized when the tax position is settled. We record interest and penalties related to income taxes as a component of income tax expense on our consolidated
statements of earnings. Interest and penalties were not
material.
Cash and cash equivalents
Cash equivalents include highly liquid instruments with
original maturities of 90 days or less.
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Receivables
Receivables include amounts billed and
currently due from customers and unbilled costs and accrued profits primarily related to sales on long-term contracts that have been recognized but not yet billed to customers. Pursuant to contract provisions, agencies of the U.S. Government and
certain other customers have title to, or a security interest in, assets related to such contracts as a result of advances, performance-based payments and progress payments. We reflect those advances and payments as an offset to the related
receivables balance for contracts that we account for on a
percentage-of-completion
basis using the
cost-to-cost
method to measure progress towards completion.
On occasion, customers may seek financing for the purchase of our products. In connection with these transactions, we may
enter into arrangements along with our customers with unrelated thirdparty financial institutions to facilitate the
non-recourse
sale of customer receivables. For accounting purposes, these transactions
are treated as a sale of receivables and the sale proceeds from the banks are reflected in our operating cash flows on the statement of cash flows. During 2016, there was no significant activity related to sales of customer receivables.
Inventories
We record inventories at the lower of cost or estimated net realizable value. Costs on
long-term contracts and programs in progress represent recoverable costs incurred for production or contract-specific facilities and equipment, allocable operating overhead, advances to suppliers and, in the case of contracts with the U.S.
Government and substantially all other governments, research and development and general and administrative expenses. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest
in, inventories related to such contracts as a result of advances, performance-based payments and progress payments. We reflect those advances and payments as an offset against the related inventory balances for contracts that we account for on a
percentage-of-completion
basis using
units-of-delivery
as the basis to measure progress toward
completing the contract. We determine the costs of other product and supply inventories by the
first-in
first-out
or average cost methods.
Property, plant and equipment
We record property, plant and equipment at cost. We provide for
depreciation and amortization on plant and equipment generally using accelerated methods during the first half of the estimated useful lives of the assets and the straight-line method thereafter. The estimated useful lives of our plant and equipment
generally range from 10 to 40 years for buildings and five to 15 years for machinery and equipment. No depreciation expense is recorded on construction in progress until such assets are placed into operation. Depreciation expense related to plant
and equipment was $747 million in 2016, $716 million in 2015 and $713 million in 2014.
We review the
carrying amounts of long-lived assets for impairment if events or changes in the facts and circumstances indicate that their carrying amounts may not be recoverable. We assess impairment by comparing the estimated undiscounted future cash flows of
the related asset grouping to its carrying amount. If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying amount.
Capitalized software
We capitalize certain costs associated with the development or purchase of
internal-use
software. The amounts capitalized are included in other noncurrent assets on our consolidated
balance sheets and are amortized on a straight-line basis over the estimated useful life of the
resulting software, which ranges from two to six years. As of December 31, 2016 and 2015, capitalized software totaled $427 million and $473 million, net of accumulated amortization of $1.9 billion in each of the years. No
amortization expense is recorded until the software is ready for its intended use. Amortization expense related to capitalized software was $136 million in 2016, $161 million in 2015 and $194 million in 2014.
Goodwill
The assets and liabilities of acquired businesses are recorded under the acquisition method
of accounting at their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses.
We perform an impairment test of our goodwill at least annually in the fourth quarter and more frequently whenever certain
events or changes in circumstances indicate the carrying value of goodwill may be impaired. Such events or changes in circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of our
industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our business or the disposal of all or a portion of a reporting unit. Our goodwill has been allocated to and is tested for impairment
at a level referred to as the reporting unit, which is our business segment level or a level below the business segment. The level at which we test goodwill for impairment requires us to determine whether the operations below the business segment
constitute a business for which discrete financial information is available and segment management regularly reviews the operating results.
We may use both qualitative and quantitative approaches when testing goodwill for impairment. Under the qualitative approach,
for selected reporting units we perform a qualitative evaluation of events and circumstances impacting the
70
reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds
its carrying amount, no further evaluation is necessary. Otherwise, we perform a quantitative
two-step
impairment test. For certain reporting units we only perform a quantitative impairment test.
Under step one of the quantitative impairment test, we compare the fair value of each reporting unit to its carrying value,
including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, we then perform step two of the quantitative
impairment test and compare the implied value of the reporting units goodwill with the carrying value of its goodwill. The implied value of the reporting units goodwill is calculated by creating a hypothetical balance sheet as if the
reporting unit had just been acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any intangible assets that may not have any corresponding carrying value in our balance sheet). The implied value of the
reporting units goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit. If the carrying value of the reporting units goodwill exceeds the implied value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
We estimate the fair value of each reporting unit using
a combination of a discounted cash flow (DCF) analysis and market-based valuation methodologies such as comparable public company trading values and values observed in recent business acquisitions. Determining fair value requires the exercise of
significant judgments, including judgments about the amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings multiples and relevant transaction multiples. The cash flows
employed in the DCF analyses are based on our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, U.S. Government budgets, existing firm orders, expected future orders, contracts with
suppliers, labor agreements, changes in working capital, long-term business plans and recent operating performance. The discount rates utilized in the DCF analysis are based on the respective reporting units weighted average cost of capital,
which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective
reporting unit.
In the fourth quarter of 2016, we performed our annual goodwill impairment test for each of our reporting
units. The results of our 2016 annual impairment tests of goodwill indicated that no impairment existed.
In the fourth
quarter of 2015, we performed our annual goodwill impairment test for each of our reporting units. During the fourth quarter of 2015, we realigned certain programs between our business segments in connection with our strategic review of our
government IT and technical services businesses. As part of the realignment, goodwill was reallocated between affected reporting units on a relative fair value basis. We performed goodwill impairment tests prior and subsequent to the realignment.
The results of our 2015 annual impairment tests of goodwill indicated that no impairment existed.
In the fourth quarter
of 2014, we completed our annual goodwill impairment test for each of our reporting units. The results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values, with the exception of our Technical
Services reporting unit within our IS&GS business. The impact of market pressures such as lower
in-theater
support as troop levels are drawn down and increased
re-competition
on existing contracts that are awarded primarily on the basis of price adversely impacted the fair value of this reporting unit. As a result, we compared the implied value of that reporting
units goodwill with the carrying value of its goodwill, and since the carrying value exceeded the implied value, we recorded a
non-cash
impairment charge of $119 million in the fourth quarter of
2014 equal to that differential. The impairment charge of $119 million was reclassified in connection with the divestiture of the IS&GS business and reclassification of the IS&GS business to discontinued operations.
Intangible assets
Intangible assets from acquired businesses are recognized at their estimated fair
values at the date of acquisition and consist of customer programs, trademarks, customer relationships, technology and other intangible assets. Customer programs include values assigned to major programs of acquired businesses and represent the
aggregate value associated with the customer relationships, contracts, technology and trademarks underlying the associated program and are amortized on a straight-line basis over a period of expected cash flows used to measure the fair value, which
ranges from nine to 20 years. Acquired intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This testing compares carrying value to fair value and, when appropriate, the carrying value of these
assets is reduced to fair value. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to 20 years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by
future net cash inflows.
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Customer advances and amounts in excess of cost
incurred
We receive advances, performance-based payments and progress payments from customers that may exceed costs incurred on certain contracts, including contracts with agencies of the U.S. Government. We classify such
advances, other than those reflected as a reduction of receivables or inventories as discussed above, as current liabilities.
Postretirement benefit plans
Many of our employees are covered by defined benefit pension plans and we
provide certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). GAAP requires that the amounts we record related to our postretirement benefit plans be computed, based on service to date,
using actuarial valuations that are based in part on certain key economic assumptions we make, including the discount rate, the expected long-term rate of return on plan assets and other actuarial assumptions including participant longevity (also
known as mortality) estimates, health care cost trend rates and employee turnover, each as appropriate based on the nature of the plans.
A market-related value of our plan assets, determined using actual asset gains or losses over the prior three year period, is
used to calculate the amount of deferred asset gains or losses to be amortized. These asset gains or losses, along with those resulting from adjustments to our benefit obligation, will be amortized to expense using the corridor method, where gains
and losses are recognized to the extent they exceed 10% of the greater of plan assets or benefit obligations, over the average future service period of employees expected to receive benefits under the plans of approximately 9 years as of
December 31, 2016. This amortization period is expected to extend (approximately double) in 2020 when our
non-union
pension plan is frozen to use the average remaining life expectancy of the participants
instead of average future service.
We recognize on a
plan-by-plan
basis the funded status of our postretirement benefit plans under GAAP as either an asset recorded within other noncurrent assets or a liability recorded
within noncurrent liabilities on our consolidated
balance sheets. There is a corresponding
non-cash
adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax
assets, in stockholders equity. The GAAP funded status is measured as the difference between the fair value of the plans assets and the benefit obligation of the plan. The funded status under the Employee Retirement Income Security Act
of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA), is calculated on a different basis than under GAAP.
Environmental matters
We record a liability for environmental matters when it is probable that a
liability has been incurred and the amount can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular site. We do not discount the recorded liabilities, as the
amount and timing of future cash payments are not fixed or cannot be reliably determined. Our environmental liabilities are recorded on our consolidated
balance sheets within other liabilities, both current and noncurrent. We expect to
include a substantial portion of environmental costs in our net sales and cost of sales in future periods pursuant to U.S. Government agreement or regulation. At the time a liability is recorded for future environmental costs, we record a receivable
for estimated future recovery considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price). We continuously evaluate the recoverability of
our environmental receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and recent efforts by some U.S. Government
representatives to limit such reimbursement. We include the portion of those environmental costs expected to be allocated to our
non-U.S.
Government contracts, or that is determined to not be recoverable under
U.S. Government contracts, in our cost of sales at the time the liability is established. Our environmental receivables are recorded on our consolidated
balance sheets within other assets, both current and noncurrent. We project costs and
recovery of costs over approximately 20 years.
Investments in marketable securities
Investments
in marketable securities consist of debt and equity securities and are classified as trading securities. As of December 31, 2016 and 2015, the fair value of our trading securities totaled $1.2 billion and $1.1 billion and was included
in other noncurrent assets on our consolidated balance sheets. Our trading securities are held in a separate trust, which includes investments to fund our deferred compensation plan liabilities. Net gains on trading securities in 2016 were
$66 million, net losses on trading securities in 2015 were $11 million and net gains on trading securities in 2014 were $65 million. Gains and losses on these investments are included in other unallocated, net within cost of sales on
our consolidated
statements of earnings in order to align the classification of changes in the market value of investments held for the plan with changes in the value of the corresponding plan liabilities.
Equity method investments
Investments where we have the ability to exercise significant influence, but
do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our consolidated
balance sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the
investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our consolidated
statements of earnings since the activities of the investee are
closely aligned
72
with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying
amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of December 31, 2016 and 2015, our equity
method investments totaled $1.4 billion and $1.3 billion, which primarily are composed of our Space Systems business segments investment in United Launch Alliance (ULA), see Note 14 Legal Proceedings,
Commitments and Contingencies, and our Aeronautics and RMS business segments investments in the Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) venture. Our share of net earnings related to our equity method investees
was $443 million in 2016, $320 million in 2015 and $327 million in 2014, of which approximately $325 million, $245 million and $280 million related to our Space Systems business segment.
Derivative financial instruments
We use derivative instruments principally to reduce our exposure to
market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing
foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. These contracts hedge forecasted foreign currency transactions in order to
mitigate fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through
our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to reduce the amount of interest paid. These swaps are designated as fair
value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are
designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
We record derivatives at their fair value. The classification of gains and losses resulting from changes in the fair values of
derivatives is dependent on our intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives attributable to the effective portion of hedges are either reflected in earnings and largely
offset by corresponding adjustments to the hedged items or reflected net of income taxes in accumulated other comprehensive loss until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are
attributable to the ineffective portion of the hedges or of derivatives that are not considered to be highly effective hedges, if any, are immediately recognized in earnings. The aggregate notional amount of our outstanding interest rate swaps at
December 31, 2016 and 2015 was $1.2 billion and $1.5 billion. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2016 and 2015 was $4.0 billion and $4.1 billion. Derivative
instruments did not have a material impact on net earnings and comprehensive income during 2016, 2015 and 2014. Substantially all of our derivatives are designated for hedge accounting. See Note 16 Fair Value
Measurements for more information on the fair value measurements related to our derivative instruments.
Recent
Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue from Contracts with Customers, as
amended (Topic 606) (the ASU), which will change the way we recognize revenue and significantly expand the disclosure requirements for revenue arrangements. In July 2015, the FASB approved a
one-year
deferral
of the effective date of the ASU to 2018 for public companies, with an option that would permit companies to adopt the ASU in 2017. Further amendments and technical corrections were made to the ASU during 2016. This ASU may be adopted using the full
retrospective method, whereby the ASU would be applied to each prior year presented and the cumulative effect of applying the ASU would be recognized at the beginning of the earliest year presented or the modified retrospective method, whereby the
cumulative effect of applying the ASU would be recognized at the beginning of the year of adoption. We will adopt the requirements of the new standard effective January 1, 2018 using the full retrospective transition method.
As the ASU will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact revenue and
cost recognition on thousands of contracts across all of our business segments, as well as, our business processes and our information technology systems. As a result, our evaluation of the effect of the ASU will extend through 2017. We have closely
monitored the standard setting process, including amendments and technical corrections to the ASU following its issuance in May 2014 and participated in aerospace and defense forums to understand the impact of the ASU on our industry.
We commenced our evaluation of the impact of the ASU in late 2014, by evaluating its impact on selected contracts at each of
our business segments. With this baseline understanding, we developed a project plan to evaluate thousands of contracts across our business segments, develop processes and tools to dual report financial results under both GAAP and the
73
ASU and assess the internal control structure in order to adopt the ASU on January 1, 2018. We have periodically briefed our Audit Committee on our progress made towards adoption. Based on
our evaluation to date, we anticipate being able to estimate the impacts of adopting the ASU in the second half of 2017.
We recognize the majority of our revenue using the
percentage-of-completion
method of accounting, whereby revenue is recognized as we progress on the contract. For contracts with a significant amount of development
and/or requiring the delivery of a minimal number of units, revenue and profit is recognized using the
percentage-of-completion
cost-to-cost
method to measure progress. For example, we use this method in Aeronautics for the
F-35
program; in MFC for the THAAD program; in RMS for the Littoral
Combat Ship and Aegis Combat System programs; and in Space Systems for government satellite programs. For contracts that require us to produce a substantial number of similar items without a significant level of development, we record revenue and
profit using the
percentage-of-completion
units-of-delivery
as the basis for measuring
progress on the contract. For example, we use this method in Aeronautics for the
C-130J
and
C-5
programs; in MFC for tactical missile programs (i.e., Hellfire, JASSM),
PAC-3
programs and fire control programs (i.e., LANTIRN, Sniper); in RMS for Black Hawk and Seahawk helicopter programs; and in Space Systems for commercial satellite programs. For contracts to provide services to
the U.S. Government, revenue is generally recorded using the
percentage-of-completion
cost-to-cost
method.
Under the ASU,
revenue will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). Given the nature of our products and terms and conditions in our contracts, in particular those with the
U. S. Government (including FMS contracts), the customer obtains control as we perform on the contract. Therefore, we expect to recognize revenue over time for almost all of our contracts using a method similar to our current
percentage-of-completion
cost-to-cost
method. Accordingly, adoption of the ASU will primarily
impact our contracts where revenue is currently recognized using the
percentage-of-completion
units-of-delivery
method, with the resulting impact being revenue will be recognized earlier in the performance period as we incur costs, as opposed to when units are
delivered. This change will also impact our balance sheet presentation with an expected decrease in inventories, an increase in contract assets (i.e., unbilled receivables) and a net increase to retained earnings to primarily reflect the impact of
converting
units-of-delivery
contracts to the
cost-to-cost
method for recognizing revenue
and profits.
In January 2017, the FASB issued ASU
No. 2017-04,
Intangibles-Goodwill and Other (Topic 350), which will simplify the goodwill impairment calculation, by eliminating Step 2 from the current goodwill impairment test. The new standard does not change how a goodwill impairment is identified. We will
continue to perform our quantitative goodwill impairment test by comparing the fair value of each reporting unit to its carrying amount, but if we are required to recognize a goodwill impairment charge, under the new standard the amount of the
charge will be calculated by subtracting the reporting units fair value from its carrying amount. Under the current standard, if we are required to recognize a goodwill impairment charge, Step 2 requires us to calculate the implied value of
goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge is calculated by subtracting the reporting units
implied fair value of goodwill from its actual goodwill balance. The standard should be applied prospectively from the date of adoption. We are currently evaluating when we will adopt the ASU and the expected impact to related disclosures.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842), which
increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors. The ASU
is effective January 1, 2019 for public companies, with early adoption permitted. The ASU will be applied using a modified retrospective approach to the beginning of the earliest period presented in the financial statements. We are currently
evaluating when we will adopt the ASU and the expected impact to our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changed the accounting for certain aspects of employee share-based payments. The ASU requires companies to recognize
additional tax benefits or expenses related to the vesting or settlement of employee share-based awards (the difference between the actual tax benefit and the tax benefit initially recognized for financial reporting purposes) as income tax benefit
or expense in earnings, rather than in additional
paid-in
capital, in the reporting period in which they occur. The ASU also requires companies to classify cash flows resulting from employee share-based
payments, including the additional tax benefits or expenses related to the vesting or settlement of share-based awards, as cash flows from operating activities rather than financing activities. Although this change will reduce some of the
administrative complexities of tracking share-based awards, it will increase the volatility of our income tax expense and cash flows from operations. The new standard is effective for annual reporting periods beginning after December 15, 2016,
with early adoption permitted. We early adopted the ASU during the second quarter of 2016 and are therefore required to report the impacts as though the ASU had been adopted on January 1, 2016. Accordingly, we recognized additional income tax
74
benefits as an increase to earnings of $152 million ($0.50 per share) during the year ended December 31, 2016. Additionally, we recognized additional income tax benefits as an increase
to operating cash flows of $152 million during the year ended December 31, 2016. The new accounting standard did not impact any periods prior to January 1, 2016, as we applied the changes in the ASU on a prospective basis.
In September 2015, the FASB issued ASU
No. 2015-16,
Business Combinations (Topic
805), which simplifies the accounting for adjustments made to preliminary amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Instead, adjustments will be recognized in the
period in which the adjustments are determined, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. We adopted the ASU on January 1,
2016 and are prospectively applying the ASU to business combination adjustments identified after the date of adoption.
In
November 2015, the FASB issued ASU
No. 2015-17,
Income Taxes (Topic 740), which simplifies the presentation of deferred income taxes and requires that deferred tax assets and liabilities, as well as any
related valuation allowance, be classified as noncurrent in our consolidated balance sheets. We applied the provisions of the ASU retrospectively and reclassified approximately $1.6 billion from current to noncurrent assets and approximately
$140 million from current to noncurrent liabilities in our consolidated balance sheet as of December 31, 2015.
Note
2 Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per
common share were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted average common shares outstanding for basic computations
|
|
|
299.3
|
|
|
|
310.3
|
|
|
|
316.8
|
|
Weighted average dilutive effect of equity awards
|
|
|
3.8
|
|
|
|
4.4
|
|
|
|
5.6
|
|
Weighted average common shares outstanding for diluted
computations
|
|
|
303.1
|
|
|
|
314.7
|
|
|
|
322.4
|
|
We compute basic and diluted earnings per common share by dividing net earnings by the
respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units and
exercise of outstanding stock options based on the treasury stock method.
There were no anti-dilutive equity awards for
the years ended December 31, 2016, 2015 and 2014.
Note 3 Acquisitions and Divestitures
Acquisitions
Acquisition of Sikorsky
Aircraft Corporation
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation and
certain affiliated companies (collectively Sikorsky) from United Technologies Corporation (UTC) and certain of UTCs subsidiaries. The purchase price of the acquisition was $9.0 billion, net of cash acquired. As a result of the
acquisition, Sikorsky became a wholly-owned subsidiary of ours. Sikorsky is a global company primarily engaged in the research, design, development, manufacture and support of military and commercial helicopters. Sikorskys products include
military helicopters such as the Black Hawk, Seahawk,
CH-53K,
H-92;
and commercial helicopters such as the
S-76
and
S-92.
The acquisition enables us to extend our core business into the military and commercial rotary wing markets, allowing us to strengthen our position in the aerospace and defense industry. Further, this
acquisition will expand our presence in commercial and international markets. Sikorsky has been aligned under our RMS business segment.
To fund the $9.0 billion acquisition price, we utilized $6.0 billion of proceeds borrowed under a temporary
364-day
revolving credit facility (the
364-day
Facility), $2.0 billion of cash on hand and $1.0 billion from the issuance of commercial paper. In the fourth quarter
of 2015, we repaid all outstanding borrowings under the
364-day
Facility with the proceeds from the issuance of $7.0 billion of fixed interest-rate long-term notes in a public offering (the November 2015
Notes). In the fourth quarter of 2015, we also repaid the $1.0 billion in commercial paper borrowings (see Note 10 Debt).
75
Allocation of Purchase Price to Assets Acquired and Liabilities Assumed
We accounted for the acquisition of Sikorsky as a business combination, which requires us to record the assets acquired and
liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. During the fourth quarter of 2016, we completed our appraisals and determined the fair values of the
assets acquired and liabilities assumed upon acquisition of Sikorsky. As a result of the completed valuation the significant adjustments to the carrying amounts were as follows: Goodwill, trademarks intangible assets and customer programs intangible
assets increased by about $78 million, $71 million and $57 million and inventories, net was decreased by about $185 million. The measurement period adjustments did not result in a significant adjustment to amortization expense
for intangible assets during 2016.
The following table summarizes the fair values of the assets acquired and liabilities
assumed at the acquisition date, including the refinements described in the previous paragraph (in millions):
|
|
|
|
|
Cash and cash equivalents
|
|
|
$ 75
|
|
Receivables, net
|
|
|
1,924
|
|
Inventories, net
|
|
|
1,632
|
|
Other current assets
|
|
|
46
|
|
Property, plant and equipment
|
|
|
649
|
|
Goodwill
|
|
|
2,842
|
|
Intangible assets:
|
|
|
|
|
Customer programs
|
|
|
3,184
|
|
Trademarks
|
|
|
887
|
|
Other noncurrent assets
|
|
|
572
|
|
Deferred income taxes, noncurrent
|
|
|
256
|
|
Total identifiable assets and goodwill
|
|
|
12,067
|
|
Accounts payable
|
|
|
(565)
|
|
Customer advances and amounts in excess of costs incurred
|
|
|
(1,197)
|
|
Salaries, benefits, and payroll taxes
|
|
|
(105)
|
|
Other current liabilities
|
|
|
(430)
|
|
Customer contractual obligations
(a)
|
|
|
(507)
|
|
Other noncurrent liabilities
|
|
|
(185)
|
|
Total liabilities assumed
|
|
|
(2,989)
|
|
Total consideration
|
|
|
$ 9,078
|
|
(a)
|
Recorded in other noncurrent liabilities on our
consolidated balance sheets.
|
Intangible assets related to customer programs were recognized for each
major helicopter and aftermarket program and represent the aggregate value associated with the customer relationships, contracts, technology and tradenames underlying the associated program. These intangible assets will be amortized on a
straight-line basis over a weighted-average useful life of approximately 15 years. The useful life is based on a period of expected cash flows used to measure the fair value of each of intangible assets.
Customer contractual obligations represent liabilities on certain development programs where the expected costs exceed the
expected sales under contract. We measured these liabilities based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the
estimated net cash outflows of the developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of $507 million. These liabilities will be
liquidated in accordance with the underlying economic pattern of the contractual obligations, as reflected by the estimated future net cash outflows incurred on the associated contracts. From the acquisition date through the year ended
December 31, 2016, we recognized approximately $130 million in sales related to customer contractual obligations. Estimated liquidation of the customer contractual obligation is approximated as follows: $110 million in 2017,
$70 million in 2018, $70 million in 2019, $60 million in 2020, $40 million in 2021 and $27 million thereafter.
The fair values of the assets acquired and liabilities assumed were determined using income, market and cost valuation
methodologies. The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820,
Fair Value
Measurement
. The income approach was primarily used to value the customer programs and trademarks intangible assets.
76
The income approach indicates value for an asset or liability based on the present value of cash flow projected to be generated over the remaining economic life of the asset or liability being
measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort,
operational performance including company-specific synergies, aftermarket retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are adjusted to
reflect the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The adjusted future cash flows are then discounted to present value using an appropriate discount
rate. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The market approach is a valuation technique that uses prices and other relevant
information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of
comparables. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property, plant and equipment. The cost to replace a given asset
reflects the estimated reproduction or replacement cost, less an allowance for loss in value due to depreciation.
The
purchase price allocation resulted in the recognition of $2.8 billion of goodwill, all of which is expected to be amortizable for tax purposes. Substantially all of the goodwill was assigned to our RMS business. The goodwill recognized is
attributable to expected revenue synergies generated by the integration of our products and technologies with those of Sikorsky, costs synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do not
qualify for separate recognition, such as the assembled workforce of Sikorsky.
Determining the fair value of assets
acquired and liabilities assumed requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the DCF analyses are based on our
best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, customer budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working
capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield different results.
Impact to
2015 Financial Results
Sikorskys 2015 financial results have been included in our consolidated financial
results only for the period from the November 6, 2015 acquisition date through December 31, 2015. As a result, our consolidated financial results for the year ended December 31, 2015 do not reflect a full year of Sikorskys
results. From the November 6, 2015 acquisition date through December 31, 2015, Sikorsky generated net sales of approximately $400 million and operating loss of approximately $45 million, inclusive of intangible amortization and
adjustments required to account for the acquisition.
We incurred approximately $38 million of
non-recoverable
transaction costs associated with the Sikorsky acquisition in 2015 that were expensed as incurred. These costs are included in other income, net on our consolidated statements of earnings. We also
incurred approximately $48 million in costs associated with issuing the $7.0 billion November 2015 Notes used to repay all outstanding borrowings under the
364-day
Facility used to finance the
acquisition. The financing costs were recorded as a reduction of debt and will be amortized to interest expense over the term of the related debt.
Supplemental Pro Forma Financial Information (unaudited)
The following table presents summarized unaudited pro forma financial information as if Sikorsky had been included in our
financial results for the entire years in 2015 and 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Net sales
|
|
$
|
45,366
|
|
|
$
|
47,369
|
|
Net earnings
|
|
|
3,534
|
|
|
|
3,475
|
|
Basic earnings per common share
|
|
|
11.39
|
|
|
|
10.97
|
|
Diluted earnings per common share
|
|
|
11.23
|
|
|
|
10.78
|
|
The unaudited supplemental pro forma financial data above has been calculated after applying
our accounting policies and adjusting the historical results of Sikorsky with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2014. Significant pro forma adjustments include the recognition of additional
amortization expense related to acquired intangible assets and additional interest expense related to the short-term debt used to finance the acquisition. These
77
adjustments assume the application of fair value adjustments to intangibles and the debt issuance occurred on January 1, 2014 and are approximated as follows: amortization expense of
$125 million and $150 million in 2015 and 2014, respectively; and interest expense of $40 million and $50 million in 2015 and 2014, respectively. In addition, significant nonrecurring adjustments include the elimination of a
$72 million pension curtailment loss, net of tax, recognized in 2015 and the elimination of a $58 million income tax charge related to historic earnings of foreign subsidiaries recognized by Sikorsky in 2015.
The unaudited supplemental pro forma financial information also reflects an increase in interest expense, net of tax, of
approximately $110 million and approximately $120 million in 2015 and 2014, respectively. The increase in interest expense is the result of assuming the November 2015 Notes were issued on January 1, 2014. Proceeds of the November 2015
Notes were used to repay all outstanding borrowings under the
364-day
Facility used to finance a portion of the purchase price of Sikorsky, as contemplated at the date of acquisition.
The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing cost or
revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the acquisition, related financing and associated notes issuance and
repayment of the
364-day
Facility had been consummated on January 1, 2014, nor are they indicative of future results.
AWE Management Limited
On August 24, 2016, our ownership interest in the AWE venture increased by 18% in exchange for our assuming a more
significant role in managing the operations of the venture. As a result of the increase in ownership interest, we now hold a 51% controlling interest in AWE. Accordingly, we are required to consolidate AWE, which has been aligned under our Space
Systems business segment. Space Systems operating results includes 100% of AWEs net sales and 51% of AWEs operating profit since August 24, 2016. Previously, we accounted for our investment in AWE using the equity method of
accounting. Under the equity method, none of AWEs net sales and only 33% of AWEs net earnings were included in operating profit of the Space Systems business segment.
We accounted for this transaction as a step acquisition (as defined by U.S. GAAP), which requires us to
consolidate and record the assets and liabilities of AWE at fair value. Accordingly, we recorded intangible assets of $243 million related to customer relationships, $32 million of net liabilities, and noncontrolling interests of
$107 million. The intangible assets are being amortized over a period of eight years in accordance with the underlying pattern of economic benefit reflected by the future net cash flows. In 2016, we recognized a
non-cash
net gain of $104 million associated with obtaining a controlling interest in AWE, which consisted of a $127 million pretax gain recognized in the operating results of our Space Systems
business segment and $23 million of
tax-related
items at our corporate office. The gain represents the fair value of our 51% interest in AWE, less the carrying value of our previously held investment in
AWE and deferred taxes. The gain was recorded in other income, net in the consolidated statements of earnings. The fair value of AWE (including the intangible assets), our controlling interest, and the noncontrolling interests were determined using
the income approach.
Other acquisitions
We paid $898 million in 2014 for acquisitions of businesses and investments in affiliates, net of cash acquired,
primarily related to the acquisitions of Zeta, Systems Made Simple and Industrial Defender. In August 2014, we completed the acquisition of all interests in Zeta, a designer of systems that enable collection, processing, safeguarding and
dissemination of information for intelligence and defense communities, which is included in our Space Systems business segment. In connection with the acquisition of Zeta, we recorded goodwill of approximately $290 million, related to expected
synergies from combining operations and value of the existing workforce. The recorded goodwill is not deductible for tax purposes. Additionally, in connection with the acquisition of Zeta, we recorded other intangible assets of approximately
$100 million, primarily related to customer relationships and technologies, which will be amortized over a weighted average period of 10 years. Also during 2014, we completed the acquisitions of interests in Systems Made Simple, a provider of
health information technology solutions, and Industrial Defender, a provider of cybersecurity solutions for control systems in the oil and gas, utility and chemical industries. Both businesses were included in our former IS&GS business. We
recorded goodwill of approximately $370 million and intangible assets of approximately $125 million related to these acquisitions, which were reclassified to discontinued operations in connection with the divestiture of IS&GS.
78
Divestiture of the Information Systems & Global Solutions Business
On August 16, 2016, we completed the previously announced divestiture of the IS&GS business, which merged with a
subsidiary of Leidos, in a Reverse Morris Trust transaction (the Transaction). The Transaction was completed in a multi-step process pursuant to which we initially contributed the IS&GS business to Abacus Innovations Corporation
(Abacus), a wholly owned subsidiary of Lockheed Martin created to facilitate the Transaction, and the common stock of Abacus was distributed to participating Lockheed Martin stockholders through an exchange offer. Under the terms of the exchange
offer, Lockheed Martin stockholders had the option to exchange shares of Lockheed Martin common stock for shares of Abacus common stock. At the conclusion of the exchange offer, all shares of Abacus common stock were exchanged for 9,369,694 shares
of Lockheed Martin common stock held by Lockheed Martin stockholders that elected to participate in the exchange. The shares of Lockheed Martin common stock that were exchanged and accepted were retired, reducing the number of shares of our common
stock outstanding by approximately 3%. Following the exchange offer, Abacus merged with a subsidiary of Leidos, with Abacus continuing as the surviving corporation and a wholly-owned subsidiary of Leidos. As part of the merger, each share of Abacus
common stock was automatically converted into one share of Leidos common stock. We did not receive any shares of Leidos common stock as part of the Transaction and do not hold any shares of Leidos or Abacus common stock following the Transaction.
Based on an opinion of outside tax counsel, subject to customary qualifications and based on factual representations, the exchange offer and merger will qualify as
tax-free
transactions to Lockheed Martin and
its stockholders, except to the extent that cash was paid to Lockheed Martin stockholders in lieu of fractional shares.
In connection with the Transaction, Abacus borrowed an aggregate principal amount of approximately $1.84 billion under
term loan facilities with third party financial institutions, the proceeds of which were used to make a
one-time
special cash payment of $1.80 billion to Lockheed Martin and to pay associated borrowing
fees and expenses. The entire special cash payment was used to repay debt, pay dividends and repurchase stock during the third and fourth quarters of 2016. The obligations under the Abacus term loan facilities were guaranteed by Leidos as part of
the Transaction.
As a result of the Transaction, we recognized a net gain of approximately $1.2 billion. The net
gain represents the $2.5 billion fair value of the shares of Lockheed Martin common stock exchanged and retired as part of the exchange offer, plus the $1.8 billion
one-time
special cash payment,
less the net book value of the IS&GS business of about $3.0 billion at August 16, 2016 and other adjustments of about $100 million. The final gain is subject to certain post-closing adjustments, including final working capital,
indemnification, and tax adjustments, which we expect to complete in 2017.
We classified the operating results of our
IS&GS business as discontinued operations in our consolidated financial statements in accordance with U.S. GAAP, as the divestiture of this business represented a strategic shift that had a major effect on our operations and financial results.
However, the cash flows generated by the IS&GS business have not been reclassified in our consolidated statements of cash flows as we retained this cash as part of the Transaction.
The carrying amounts of major classes of the IS&GS business assets and liabilities that were classified as assets and
liabilities of discontinued operations as of December 31, 2015 are as follows (in millions):
|
|
|
|
|
Receivables, net
|
|
$
|
807
|
|
Inventories, net
|
|
|
143
|
|
Other current assets
|
|
|
19
|
|
Property, plant and equipment, net
|
|
|
101
|
|
Goodwill
|
|
|
2,881
|
|
Intangible assets
|
|
|
125
|
|
Other noncurrent assets
|
|
|
54
|
|
Total assets of the disposal group
|
|
$
|
4,130
|
|
Accounts payable
|
|
$
|
(229)
|
|
Customer advances and amounts in excess of costs incurred
|
|
|
(285)
|
|
Salaries, benefits and payroll taxes
|
|
|
(209)
|
|
Other current liabilities
|
|
|
(225)
|
|
Deferred income taxes
|
|
|
(145)
|
|
Other noncurrent liabilities
|
|
|
(60)
|
|
Total liabilities of the disposal group
|
|
$
|
(1,153)
|
|
79
The operating results of IS&GS that have been reflected within net earnings
from discontinued operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
(a)
|
|
|
2015
|
|
|
2014
|
|
Net sales
|
|
$
|
3,410
|
|
|
$
|
5,596
|
|
|
$
|
5,654
|
|
Cost of sales
|
|
|
(2,953)
|
|
|
|
(4,868)
|
|
|
|
(4,963)
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
|
|
|
|
(119)
|
|
Severance charges
|
|
|
(19)
|
|
|
|
(20)
|
|
|
|
|
|
Gross profit
|
|
|
438
|
|
|
|
708
|
|
|
|
572
|
|
Other income, net
|
|
|
16
|
|
|
|
16
|
|
|
|
8
|
|
Operating profit
|
|
|
454
|
|
|
|
724
|
|
|
|
580
|
|
Other
non-operating
income, net
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Earnings from discontinued operations before income
taxes
|
|
|
454
|
|
|
|
724
|
|
|
|
581
|
|
Income tax expense
|
|
|
(147)
|
|
|
|
(245)
|
|
|
|
(220)
|
|
Net gain on divestiture of discontinued
operations
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued operations
|
|
$
|
1,549
|
|
|
$
|
479
|
|
|
$
|
361
|
|
(a)
|
Operating results for the year ended December 31,
2016 reflect operating results prior to the August 16, 2016 divestiture date, not the full year as shown for the prior years.
|
The operating profit reflected above does not represent the IS&GS businesss historical operating profit, as the
results reported within net earnings from discontinued operations only include costs that were directly attributable to the IS&GS business and exclude certain overhead costs that were previously allocated to the IS&GS business for each
period. For instance, certain corporate overhead costs and certain defined benefit pension costs that were historically allocated to and included in the operating results of the IS&GS business have been reclassified and included in the results
of our continuing operations because we will continue to incur these costs subsequent to the divestiture of the IS&GS business.
Certain corporate overhead costs incurred by us and previously allocated to the IS&GS business were reclassified from the
IS&GS business to other unallocated, net in our consolidated statements of earnings. These overhead costs were primarily related to expenses for senior management, legal, human resources, finance, accounting, treasury, tax, information
technology, communications, ethics and compliance, corporate employee benefits, incentives and stock-based compensation, shared services processing and administration and depreciation for corporate fixed assets, and were not directly attributable to
the IS&GS business. We reclassified $82 million in 2016, $165 million in 2015 and $169 million in 2014 of corporate overhead costs to other unallocated, net. Additionally, we retained all assets and obligations related to the
pension benefits earned by current and former IS&GS business salaried employees through the divestiture of the IS&GS business. As a result, the
non-service
portion of net pension costs (interest cost,
actuarial gains and losses and expected return on plan assets) for these plans was reclassified from the operating results of the IS&GS business and reported as a reduction to the FAS/CAS pension adjustment. The service portion of pension costs
related to IS&GS business salaried employees that transferred to Leidos continued to be included in the operating results of the IS&GS business classified as discontinued operations because such costs will no longer be incurred by us
subsequent to the divestiture of the IS&GS business. These net pension costs were $54 million in 2016, $71 million in 2015 and $59 million in 2014.
Significant severance charges related to the IS&GS business were historically recorded at the Lockheed Martin corporate
office. These charges have been reclassified into the operating results of the IS&GS business, classified as discontinued operations, and excluded from the operating results of our continuing operations. The amount of severance charges
reclassified were $19 million in 2016 and $20 million in 2015.
Financial information related to the IS&GS
businesss cash flows, such as depreciation and amortization, capital expenditures, and other
non-cash
items, included in our consolidated statements of cash flows was not significant.
Other Divestitures
During 2016, we completed the sale of our Lockheed Martin Commercial Flight Training (LMCFT) business, which was classified as
held for sale in the fourth quarter of 2015. Other, net in 2015 includes a
non-cash
asset impairment charge of approximately $90 million. This charge was partially offset by a net deferred tax benefit of
about $80 million, which is
80
recorded in income tax expense. The net impact reduced net earnings by about $10 million. LMCFTs financial results are not material and there was no significant impact on our
consolidated financial results as a result of completing the sale of our LMCFT business. Accordingly, LMCFTs financial results are not classified in discontinued operations.
Note 4 Goodwill and Acquired Intangibles
Changes in the carrying amount of goodwill by segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
|
MFC
|
|
|
RMS
|
|
|
Space
Systems
|
|
|
Total
|
|
Balance at December 31, 2014
(a)
|
|
|
$171
|
|
|
$
|
2,181
|
|
|
$
|
4,022
|
|
|
|
$1,590
|
|
|
$
|
7,964
|
|
Sikorsky acquisition
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
|
|
|
|
|
|
2,764
|
|
Other
|
|
|
|
|
|
|
17
|
|
|
|
(48)
|
|
|
|
(2)
|
|
|
|
(33)
|
|
Balance at December 31, 2015
|
|
|
171
|
|
|
|
2,198
|
|
|
|
6,738
|
|
|
|
1,588
|
|
|
|
10,695
|
|
Purchase accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
78
|
|
Other
|
|
|
|
|
|
|
62
|
|
|
|
(68)
|
|
|
|
(3)
|
|
|
|
(9)
|
|
Balance at December 31, 2016
|
|
|
$171
|
|
|
$
|
2,260
|
|
|
$
|
6,748
|
|
|
|
$1,585
|
|
|
$
|
10,764
|
|
(a)
|
Includes reclassifications of goodwill among our business
segments as a result of our program realignment, which occurred during the fourth quarter of 2015 (see Note 1 Significant Accounting Policies).
|
The gross carrying amounts and accumulated amortization of our acquired intangible assets consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Finite-Lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer programs
|
|
|
$3,184
|
|
|
|
$(273)
|
|
|
|
$2,911
|
|
|
|
|
|
|
|
|
|
|
|
$3,127
|
|
|
|
$ (38)
|
|
|
|
$3,089
|
|
Customer relationships
|
|
|
359
|
|
|
|
(92)
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
(59)
|
|
|
|
78
|
|
Other
|
|
|
111
|
|
|
|
(83)
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
(72)
|
|
|
|
39
|
|
Total finite-lived intangibles
|
|
|
3,654
|
|
|
|
(448)
|
|
|
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
3,375
|
|
|
|
(169)
|
|
|
|
3,206
|
|
Indefinite-Lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
887
|
|
|
|
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
816
|
|
|
|
|
|
|
|
816
|
|
Total acquired intangibles
|
|
|
$4,541
|
|
|
|
$(448)
|
|
|
|
$4,093
|
|
|
|
|
|
|
|
|
|
|
|
$4,191
|
|
|
|
$(169)
|
|
|
|
$4,022
|
|
Acquired finite-lived intangible assets are amortized to expense primarily on a straight-line
basis over the following estimated useful lives: customer programs, from nine to 20 years; customer relationships, from four to 10 years; technology, from five to seven years; trademarks, from two to five years; and other intangibles, from three to
10 years.
Amortization expense from continuing operations for acquired finite-lived intangible assets was
$284 million, $68 million and $20 million in 2016, 2015 and 2014. Estimated future amortization expense is as follows: $318 million in 2017; $298 million in 2018; $285 million in 2019; $263 million in 2020;
$256 million in 2021 and $1,786 million thereafter.
Note 5 Information on Business Segments
We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space
Systems. We organize our business segments based on the nature of products and services offered.
Following is a brief
description of the activities of our business segments:
|
|
Aeronautics
Engaged in the research, design, development, manufacture, integration,
sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies.
|
|
|
Missiles and Fire Control
Provides air and missile defense systems; tactical missiles
and
air-to-ground
precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services;
manned and unmanned ground vehicles; and energy management solutions.
|
81
|
|
Rotary and Mission Systems
Provides design, manufacture, service and support for a
variety of military and civil helicopters; ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship; simulation
and training services; and unmanned systems and technologies. In addition, RMS supports the needs of customers in cybersecurity and delivers communications and command and control capability through complex mission solutions for defense
applications. The 2015 results of the acquired Sikorsky business have been included in our consolidated results of operations from the November 6, 2015 acquisition date through December 31, 2015. Accordingly, the consolidated results of
operations for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.
|
|
|
Space Systems
Engaged in the research and development, design, engineering and
production of satellites, strategic and defensive missile systems and space transportation systems. Space systems provides network-enabled situational awareness and integrates complex space and ground-based global systems to help our customers
gather, analyze and securely distribute critical intelligence data. Space Systems is also responsible for various classified systems and services in support of vital national security systems. The results of AWE have been included in our
consolidated results of operations from August 24, 2016, when we obtained controlling interest through December 31, 2016. Accordingly, the consolidated results of operations for the year ended December 31, 2016 do not reflect a full
year of AWE operations. Operating profit for our Space Systems business segment also includes our share of earnings for our investment in ULA, which provides expendable launch services to the U.S. Government.
|
The financial information in the following tables includes the results of businesses we have acquired during the past three
years (see Note 3 Acquisitions and Divestitures) from their respective dates of acquisition. The business segment operating results in the following tables exclude businesses included in discontinued operations (see
Note 3 Acquisitions and Divestitures) for all years presented. Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation.
Operating profit of our business segments includes our share of earnings or losses from equity method investees as the
operating activities of the equity method investees are closely aligned with the operations of our business segments. United Launch Alliance (ULA), which is part of our Space Systems business segment, is our primary equity method investee. Operating
profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stock-based compensation; the effects of items not considered part of managements evaluation of segment operating performance, such as charges
related to significant severance actions (see Note 15 Restructuring Charges) and goodwill impairments; gains or losses from divestitures; the effects of certain legal settlements; corporate costs not allocated to our
business segments; and other miscellaneous corporate activities. These items are included in the reconciling item Unallocated items between operating profit from our business segments and our consolidated operating profit. See Note
1 Significant Accounting Policies under the caption Use of Estimates for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
Our business segments results of operations include pension expense only as calculated under U.S. Government Cost
Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension cost through the pricing of our products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each of our business
segments net sales and cost of sales. Since our consolidated financial statements must present pension expense calculated in accordance with the financial accounting standards (FAS) requirements under GAAP, which we refer to as FAS pension
expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in our business segments results of operations to equal the FAS pension expense.
82
Selected Financial Data by Business Segment
Summary operating results for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
17,769
|
|
|
$
|
15,570
|
|
|
$
|
14,920
|
|
Missiles and Fire Control
|
|
|
6,608
|
|
|
|
6,770
|
|
|
|
7,092
|
|
Rotary and Mission Systems
|
|
|
13,462
|
|
|
|
9,091
|
|
|
|
8,732
|
|
Space Systems
|
|
|
9,409
|
|
|
|
9,105
|
|
|
|
9,202
|
|
Total net sales
|
|
$
|
47,248
|
|
|
$
|
40,536
|
|
|
$
|
39,946
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
1,887
|
|
|
$
|
1,681
|
|
|
$
|
1,649
|
|
Missiles and Fire Control
|
|
|
1,018
|
|
|
|
1,282
|
|
|
|
1,344
|
|
Rotary and Mission Systems
|
|
|
906
|
|
|
|
844
|
|
|
|
936
|
|
Space Systems
|
|
|
1,289
|
|
|
|
1,171
|
|
|
|
1,187
|
|
Total business segment operating profit
|
|
|
5,100
|
|
|
|
4,978
|
|
|
|
5,116
|
|
Unallocated items
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS/CAS pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS pension expense
(a)
|
|
|
(1,019
|
)
|
|
|
(1,127
|
)
|
|
|
(1,099)
|
|
Less: CAS pension cost
(a) (b)
|
|
|
1,921
|
|
|
|
1,527
|
|
|
|
1,416
|
|
FAS/CAS pension adjustment
|
|
|
902
|
|
|
|
400
|
|
|
|
317
|
|
Severance charges
(a) (c)
|
|
|
(80
|
)
|
|
|
(82
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
(149
|
)
|
|
|
(133
|
)
|
|
|
(154)
|
|
Other, net
(d), (e)
|
|
|
(224
|
)
|
|
|
(451
|
)
|
|
|
(267)
|
|
Total unallocated items
|
|
|
449
|
|
|
|
(266
|
)
|
|
|
(104)
|
|
Total consolidated operating profit
|
|
$
|
5,549
|
|
|
$
|
4,712
|
|
|
$
|
5,012
|
|
(a)
|
FAS pension expense, CAS pension costs and severance
charges reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees (see Note 11 Postretirement Plans).
|
(b)
|
The higher CAS pension cost primarily reflects the impact
of phasing in CAS Harmonization.
|
(c)
|
See Note 15 Restructuring Charges for
information on charges related to certain severance actions at our business segments. Severance charges for initiatives that are not significant are included in business segment operating profit.
|
(d)
|
Other, net in 2015 includes a
non-cash
asset impairment charge of approximately $90 million related to our decision in 2015 to divest our LMCFT business (see Note 3 Acquisitions and Divestitures). This charge was
partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million.
|
(e)
|
Other, net in 2015 includes approximately $38 million
of
non-recoverable
transaction costs associated with the acquisition of Sikorsky.
|
83
Selected Financial Data by Business Segment (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
137
|
|
|
$
|
102
|
|
|
$
|
103
|
|
Missiles and Fire Control
|
|
|
305
|
|
|
|
315
|
|
|
|
256
|
|
Rotary and Mission Systems
|
|
|
1,816
|
|
|
|
1,533
|
|
|
|
1,245
|
|
Space Systems
|
|
|
110
|
|
|
|
146
|
|
|
|
137
|
|
Total intersegment sales
|
|
$
|
2,368
|
|
|
$
|
2,096
|
|
|
$
|
1,741
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
299
|
|
|
$
|
317
|
|
|
$
|
322
|
|
Missiles and Fire Control
|
|
|
105
|
|
|
|
99
|
|
|
|
99
|
|
Rotary and Mission Systems
|
|
|
476
|
|
|
|
211
|
|
|
|
167
|
|
Space Systems
|
|
|
212
|
|
|
|
220
|
|
|
|
232
|
|
Total business segment depreciation and amortization
|
|
|
1,092
|
|
|
|
847
|
|
|
|
820
|
|
Corporate activities
|
|
|
75
|
|
|
|
98
|
|
|
|
107
|
|
Total depreciation and amortization
(a)
|
|
$
|
1,167
|
|
|
$
|
945
|
|
|
$
|
927
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
358
|
|
|
$
|
387
|
|
|
$
|
283
|
|
Missiles and Fire Control
|
|
|
167
|
|
|
|
120
|
|
|
|
142
|
|
Rotary and Mission Systems
|
|
|
271
|
|
|
|
169
|
|
|
|
164
|
|
Space Systems
|
|
|
183
|
|
|
|
172
|
|
|
|
172
|
|
Total business segment capital expenditures
|
|
|
979
|
|
|
|
848
|
|
|
|
761
|
|
Corporate activities
|
|
|
75
|
|
|
|
60
|
|
|
|
66
|
|
Total capital expenditures
(b)
|
|
$
|
1,054
|
|
|
$
|
908
|
|
|
$
|
827
|
|
(a)
|
Total depreciation and amortization in the table above
excludes $48 million, $81 million and $67 million for the years ended December 31, 2016, 2015 and 2014 related to the former IS&GS business segment. These amounts are included in depreciation and amortization in our
consolidated statements of cash flows as we did not reclassify our cash flows to exclude the IS&GS business segment. See Note 3 Acquisitions and Divestitures for more information.
|
(b)
|
Total capital expenditures in the table above excludes
$9 million, $31 million and $18 million for the years ended December 31, 2016, 2015 and 2014 related to the former IS&GS business segment. These amounts are included in capital expenditures in our consolidated statements of
cash flows as we did not reclassify our cash flows to exclude the IS&GS business segment. See Note 3 Acquisitions and Divestitures for more information.
|
84
Selected Financial Data by Business Segment (continued)
Net Sales by Customer Category
Net sales by customer category were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
11,714
|
|
|
$
|
11,195
|
|
|
$
|
10,704
|
|
Missiles and Fire Control
|
|
|
4,026
|
|
|
|
4,150
|
|
|
|
4,509
|
|
Rotary and Mission Systems
|
|
|
9,187
|
|
|
|
6,961
|
|
|
|
6,752
|
|
Space Systems
|
|
|
8,543
|
|
|
|
8,845
|
|
|
|
8,921
|
|
Total U.S. Government net sales
|
|
$
|
33,470
|
|
|
$
|
31,151
|
|
|
$
|
30,886
|
|
International
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
5,973
|
|
|
$
|
4,328
|
|
|
$
|
4,183
|
|
Missiles and Fire Control
|
|
|
2,444
|
|
|
|
2,449
|
|
|
|
2,421
|
|
Rotary and Mission Systems
|
|
|
3,798
|
|
|
|
2,016
|
|
|
|
1,921
|
|
Space Systems
|
|
|
488
|
|
|
|
218
|
|
|
|
89
|
|
Total international net sales
|
|
$
|
12,703
|
|
|
$
|
9,011
|
|
|
$
|
8,614
|
|
U.S. Commercial and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
82
|
|
|
$
|
47
|
|
|
$
|
33
|
|
Missiles and Fire Control
|
|
|
138
|
|
|
|
171
|
|
|
|
162
|
|
Rotary and Mission Systems
|
|
|
477
|
|
|
|
114
|
|
|
|
59
|
|
Space Systems
|
|
|
378
|
|
|
|
42
|
|
|
|
192
|
|
Total U.S. commercial and other net sales
|
|
$
|
1,075
|
|
|
$
|
374
|
|
|
$
|
446
|
|
Total net sales
|
|
$
|
47,248
|
|
|
$
|
40,536
|
|
|
$
|
39,946
|
|
(a)
|
International sales include foreign military sales contracted through the U.S. Government, direct commercial
sales with international governments and commercial and other sales to international customers.
|
Our
Aeronautics business segment includes our largest program, the
F-35
Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the
F-35
program represented approximately 23% of our total consolidated net sales during each of 2016 and 2015, and 20% during 2014.
Total assets and customer advances and amounts in excess of costs incurred for each of our business segments were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Assets
(a)
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
7,896
|
|
|
$
|
6,618
|
|
Missiles and Fire Control
|
|
|
4,000
|
|
|
|
4,027
|
|
Rotary and Mission Systems
|
|
|
18,367
|
|
|
|
19,187
|
|
Space Systems
|
|
|
5,250
|
|
|
|
4,861
|
|
Total business segment assets
|
|
|
35,513
|
|
|
|
34,693
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
4,130
|
|
Corporate assets
(b)
|
|
|
12,293
|
|
|
|
10,481
|
|
Total assets
|
|
$
|
47,806
|
|
|
$
|
49,304
|
|
|
|
|
Customer advances and amounts in excess of costs incurred
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
2,133
|
|
|
$
|
2,045
|
|
Missiles and Fire Control
|
|
|
1,517
|
|
|
|
1,766
|
|
Rotary and Mission Systems
|
|
|
2,590
|
|
|
|
2,415
|
|
Space Systems
|
|
|
536
|
|
|
|
477
|
|
Total customer advances and amounts in excess of costs
incurred
|
|
$
|
6,776
|
|
|
$
|
6,703
|
|
(a)
|
We have no long-lived assets with material carrying values
located in foreign countries.
|
(b)
|
Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables
and investments held in a separate trust.
|
85
Note 6 Receivables, net
Receivables, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
U.S. Government
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
$
|
792
|
|
|
$
|
1,205
|
|
Unbilled costs and accrued profits
|
|
|
6,877
|
|
|
|
5,243
|
|
Less: customer advances and progress payments
|
|
|
(1,346
|
)
|
|
|
(1,193)
|
|
Total U.S. Government receivables, net
|
|
|
6,323
|
|
|
|
5,255
|
|
Other governments and commercial
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
|
546
|
|
|
|
704
|
|
Unbilled costs and accrued profits
|
|
|
1,847
|
|
|
|
1,888
|
|
Less: customer advances
|
|
|
(514
|
)
|
|
|
(593)
|
|
Total other governments and commercial receivables,
net
|
|
|
1,879
|
|
|
|
1,999
|
|
Total receivables, net
|
|
$
|
8,202
|
|
|
$
|
7,254
|
|
We expect to bill substantially all of the December 31, 2016 unbilled costs and accrued
profits during 2017.
Note 7 Inventories, net
Inventories, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Work-in-process,
primarily related to long-term contracts and programs in progress
|
|
$
|
7,864
|
|
|
$
|
8,081
|
|
Spare parts, used aircraft and general stock materials
|
|
|
833
|
|
|
|
1,030
|
|
Other inventories
|
|
|
719
|
|
|
|
740
|
|
Total inventories
|
|
|
9,416
|
|
|
|
9,851
|
|
Less: customer advances and progress payments
|
|
|
(4,746
|
)
|
|
|
(5,032)
|
|
Total inventories, net
|
|
$
|
4,670
|
|
|
$
|
4,819
|
|
Work-in-process
inventories at
December 31, 2016 and 2015 included general and administrative costs of $529 million and $565 million. General and administrative costs incurred and recorded in inventories totaled $3.3 billion in 2016, $2.7 billion in 2015
and $2.5 billion in 2014. General and administrative costs charged to cost of sales from inventories totaled $3.3 billion in 2016, $2.8 billion in 2015 and $2.5 billion in 2014.
Note 8 Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
127
|
|
|
$
|
112
|
|
Buildings
|
|
|
6,385
|
|
|
|
6,007
|
|
Machinery and equipment
|
|
|
7,389
|
|
|
|
7,261
|
|
Construction in progress
|
|
|
976
|
|
|
|
886
|
|
Total property, plant and equipment
|
|
|
14,877
|
|
|
|
14,266
|
|
Less: accumulated depreciation and amortization
|
|
|
(9,328
|
)
|
|
|
(8,877)
|
|
Total property, plant and equipment, net
|
|
$
|
5,549
|
|
|
$
|
5,389
|
|
86
Note 9 Income Taxes
Our provision for federal and foreign income tax expense for continuing operations consisted of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,327
|
|
|
$
|
1,573
|
|
|
$
|
1,770
|
|
Deferred
|
|
|
(231
|
)
|
|
|
(473
|
)
|
|
|
(351)
|
|
Total federal income tax expense
|
|
|
1,096
|
|
|
|
1,100
|
|
|
|
1,419
|
|
Foreign income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
56
|
|
|
|
39
|
|
|
|
13
|
|
Deferred
|
|
|
(19
|
)
|
|
|
34
|
|
|
|
(8)
|
|
Total foreign income tax expense
|
|
|
37
|
|
|
|
73
|
|
|
|
5
|
|
Total income tax expense
|
|
$
|
1,133
|
|
|
$
|
1,173
|
|
|
$
|
1,424
|
|
State income taxes are included in our operations as general and administrative costs and,
under U.S. Government regulations, are allowable costs in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. As a
result, the impact of certain transactions on our operating profit and of other matters presented in these consolidated financial statements is disclosed net of state income taxes. Our total net state income tax expense was $112 million for
2016, $106 million for 2015, and $149 million for 2014.
Our reconciliation of the 35% U.S. federal statutory
income tax rate to actual income tax expense for continuing operations is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Income tax expense at the U.S. federal statutory tax rate
|
|
|
$1,710
|
|
|
|
35.0%
|
|
|
|
$1,505
|
|
|
|
35.0%
|
|
|
|
$1,637
|
|
|
|
35.0%
|
|
Adoption of stock-based compensation ASU
|
|
|
(152)
|
|
|
|
(3.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. manufacturing deduction benefit
|
|
|
(117)
|
|
|
|
(2.4)
|
|
|
|
(123)
|
|
|
|
(2.9)
|
|
|
|
(124)
|
|
|
|
(2.6)
|
|
Research and development tax credit
|
|
|
(107)
|
|
|
|
(2.2)
|
|
|
|
(70)
|
|
|
|
(1.6)
|
|
|
|
(63)
|
|
|
|
(1.3)
|
|
Tax deductible dividends
|
|
|
(92)
|
|
|
|
(1.9)
|
|
|
|
(87)
|
|
|
|
(2.0)
|
|
|
|
(82)
|
|
|
|
(1.8)
|
|
Other, net
|
|
|
(109)
|
|
|
|
(2.2)
|
|
|
|
(52)
|
|
|
|
(1.2)
|
|
|
|
56
|
|
|
|
1.1
|
|
Income tax expense
|
|
|
$1,133
|
|
|
|
23.2%
|
|
|
|
$1,173
|
|
|
|
27.3%
|
|
|
|
$1,424
|
|
|
|
30.4%
|
|
In 2016, we early adopted the accounting standard update for employee share-based payment
awards. Accordingly, we recognized additional income tax benefits of $152 million during the year ended December 31, 2016. The 2016 income tax rate also benefited from the nontaxable gain recorded in connection with the consolidation of
AWE.
We recognized tax benefits of $107 million in 2016, $70 million in 2015, and $63 million in 2014 from
U.S. research and development (R&D) tax credits, including benefits attributable to prior periods. In December 2015, the R&D tax credit was permanently extended and reinstated, retroactive to the beginning of 2015, which reduced income tax
expense by approximately $70 million. In 2014, the R&D tax credit was temporarily reinstated for one year, retroactive to the beginning of 2014, which reduced income tax expense by approximately $45 million.
We receive a tax deduction for dividends paid on shares of our common stock held by certain of our defined contribution plans
with an employee stock ownership plan feature. The amount of the tax deduction has increased as we increased our dividend over the last three years, partially offset by a decline in the number of shares in these plans.
As a result of a decision in 2015 to divest our LMCFT business (see Note 3 Acquisitions and
Divestitures), we recorded an asset impairment charge of approximately $90 million. This charge was partially offset by a net deferred tax benefit of about $80 million. The net impact of the resulting tax benefit reduced the effective
income tax rate by 1.2 percentage points in 2015.
We participate in the IRS Compliance Assurance Process program.
Examinations of the years 2015 and 2016 remain under IRS review.
87
The primary components of our federal and foreign deferred income tax assets and
liabilities at December 31 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets related to:
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits
|
|
$
|
1,012
|
|
|
$
|
919
|
|
Pensions
(a)
|
|
|
5,197
|
|
|
|
4,462
|
|
Other postretirement benefit obligations
|
|
|
302
|
|
|
|
375
|
|
Contract accounting methods
|
|
|
878
|
|
|
|
1,039
|
|
Foreign company operating losses and credits
|
|
|
30
|
|
|
|
62
|
|
Other
|
|
|
327
|
|
|
|
418
|
|
Valuation allowance
(b)
|
|
|
(15
|
)
|
|
|
(73)
|
|
Deferred tax assets, net
|
|
|
7,731
|
|
|
|
7,202
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
|
|
|
Goodwill and purchased intangibles
|
|
|
378
|
|
|
|
274
|
|
Property, plant and equipment
|
|
|
346
|
|
|
|
457
|
|
Exchanged debt securities and other
(c)
|
|
|
418
|
|
|
|
408
|
|
Deferred tax liabilities
|
|
|
1,142
|
|
|
|
1,139
|
|
Net deferred tax assets
|
|
$
|
6,589
|
|
|
$
|
6,063
|
|
(a)
|
The increase in 2016 was primarily due to the reduction in
the discount rate used to measure our postretirement benefit plans (see Note 11 Postretirement Plans).
|
(b)
|
A valuation allowance was provided against certain foreign
company deferred tax assets arising from carryforwards of unused tax benefits.
|
(c)
|
Includes deferred taxes associated with the exchange of
debt securities in prior years.
|
As of December 31, 2016 and 2015, our liabilities associated with
unrecognized tax benefits are not material.
We and our subsidiaries file income tax returns in the U.S. Federal
jurisdiction and various foreign jurisdictions. With few exceptions, the statute of limitations is no longer open for U.S. Federal or
non-U.S.
income tax examinations for the years before 2013, other than with
respect to refunds.
U.S. income taxes and foreign withholding taxes have not been provided on earnings of
$386 million, $310 million, and $249 million that have not been distributed by our
non-U.S.
companies as of December 31, 2016, 2015, and 2014. Our intention is to permanently reinvest these
earnings, thereby indefinitely postponing their remittance to the U.S. If these earnings had been remitted, we estimate that the additional income taxes after foreign tax credits would have been approximately $64 million in 2016,
$49 million in 2015, and $52 million in 2014.
Our federal and foreign income tax payments, net of refunds
received, were $1.3 billion in 2016, $1.8 billion in 2015, and $1.5 billion in 2014. Our 2014 net payments reflect a $200 million refund from the IRS primarily attributable to our
tax-deductible
discretionary pension contributions during the fourth quarter of 2013.
88
Note 10 Debt
Our long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Notes
|
|
|
|
|
|
|
|
|
2.13% and 7.65% due 2016
|
|
$
|
|
|
|
$
|
952
|
|
1.85% due 2018
|
|
|
750
|
|
|
|
750
|
|
4.25% due 2019
|
|
|
900
|
|
|
|
900
|
|
2.50% due 2020
|
|
|
1,250
|
|
|
|
1,250
|
|
3.35% due 2021
|
|
|
900
|
|
|
|
900
|
|
3.10% due 2023
|
|
|
500
|
|
|
|
500
|
|
2.90% due 2025
|
|
|
750
|
|
|
|
750
|
|
3.55% due 2026
|
|
|
2,000
|
|
|
|
2,000
|
|
3.60% due 2035
|
|
|
500
|
|
|
|
500
|
|
4.50% and 6.15% due 2036
|
|
|
1,152
|
|
|
|
1,152
|
|
4.85% due 2041
|
|
|
600
|
|
|
|
600
|
|
4.07% due 2042
|
|
|
1,336
|
|
|
|
1,336
|
|
3.80% due 2045
|
|
|
1,000
|
|
|
|
1,000
|
|
4.70% due 2046
|
|
|
2,000
|
|
|
|
2,000
|
|
Other notes with rates from 5.50% to 8.50%, due 2023 to
2040
|
|
|
1,656
|
|
|
|
1,706
|
|
Total debt
|
|
|
15,294
|
|
|
|
16,296
|
|
Less: unamortized discounts and issuance costs
|
|
|
(1,012)
|
|
|
|
(1,035)
|
|
Total debt, net
|
|
|
14,282
|
|
|
|
15,261
|
|
Less: current portion
|
|
|
|
|
|
|
(956)
|
|
Long-term debt, net
|
|
$
|
14,282
|
|
|
$
|
14,305
|
|
Revolving Credit Facilities
On October 9, 2015, we entered into a new $2.5 billion revolving credit facility (the
5-year
Facility) with various banks and concurrently terminated our existing $1.5 billion revolving credit facility, which was scheduled to expire in August 2019. The
5-year
Facility was amended in October 2016 to extend its expiration date by one year from October 9, 2020 to October 9, 2021. The
5-year
Facility is available
for general corporate purposes. The undrawn portion of the
5-year
Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and the banks may grant, at their
discretion, an increase in the borrowing capacity under the
5-year
Facility of up to an additional $500 million. During 2016, we borrowed and fully repaid amounts under our commercial paper programs.
There were no borrowings outstanding under the
5-year
Facility as of years ended December 31, 2016 and 2015.
In contemplation of our acquisition of Sikorsky, on October 9, 2015, we also entered into a
364-day
revolving credit facility (the
364-day
Facility, and together with the
5-year
Facility, the Facilities) with various banks that
provided $7.0 billion of funding for general corporate purposes, including the acquisition of Sikorsky. Concurrent with the consummation of the Sikorsky acquisition, we borrowed $6.0 billion under the
364-day
Facility. On November 23, 2015, we repaid all outstanding borrowings under the
364-day
Facility with proceeds received from an issuance of new debt (see
below) and terminated any remaining commitments of the lenders under the
364-day
Facility.
Borrowings under the
5-year
Facility bear interest at rates based, at our option, on a
Eurodollar Rate or a Base Rate, as defined in the
5-year
Facilitys agreement. Each banks obligation to make loans under the
5-year
Facility is subject to,
among other things, our compliance with various representations, warranties, and covenants, including covenants limiting our ability and certain of our subsidiaries ability to encumber assets and a covenant not to exceed a maximum leverage
ratio, as defined in the
5-year
Facility agreement. As of December 31, 2016 and 2015, we were in compliance with all covenants contained in the
5-year
Facility
agreement, as well as in our debt agreements.
Long-Term Debt
In September 2016, we repaid $500 million of long-term notes with a fixed interest rate of 2.13% according to their
scheduled maturities.
89
In May 2016, we repaid $452 million of long-term notes with a fixed interest
rate of 7.65% according to their scheduled maturities. We also had related variable interest rate swaps with a notional amount of $450 million mature, which did not have a significant impact on net earnings or comprehensive income.
We made interest payments of approximately $600 million, approximately $375 million and approximately
$325 million during the years ended December 31, 2016, 2015 and 2014, respectively.
On November 23, 2015,
we issued $7.0 billion of notes (the November 2015 Notes) in a registered public offering. We received net proceeds of $6.9 billion from the offering, after deducting discounts and debt issuance costs, which are being amortized as interest
expense over the life of the debt. The November 2015 Notes consist of:
|
|
$750 million maturing in 2018 with a fixed interest rate of 1.85% (the 2018 Notes);
|
|
|
$1.25 billion maturing in 2020 with a fixed interest rate of 2.50% (the 2020 Notes);
|
|
|
$500 million maturing in 2023 with a fixed interest rate of 3.10% the 2023 Notes);
|
|
|
$2.0 billion maturing in 2026 with a fixed interest rate of 3.55% (the 2026 Notes);
|
|
|
$500 million maturing in 2036 with a fixed interest rate of 4.50% (the 2036 Notes); and
|
|
|
$2.0 billion maturing in 2046 with a fixed interest rate of 4.70% (the 2046 Notes).
|
We may, at our option, redeem some or all of the November 2015 Notes and unpaid interest 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 is payable on the 2018 Notes and the 2020 Notes on May 23 and November 23 of each year; on
the 2023 Notes and the 2026 Notes on January 15 and July 15 of each year; and on the 2036 Notes and the 2046 Notes on May 15 and November 15 of each year. The November 2015 Notes rank equally in right of payment with all of our
existing unsecured and unsubordinated indebtedness. The proceeds of the November 2015 Notes were used to repay $6.0 billion of borrowings under our
364-day
Facility and for general corporate purposes.
On February 20, 2015, we issued $2.25 billion of notes (the February 2015 Notes) in a registered public
offering. We received net proceeds of $2.21 billion from the offering, after deducting discounts and debt issuance costs, which are being amortized as interest expense over the life of the debt. The February 2015 Notes consist 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. These notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness. The proceeds of the February 2015 Notes were used for general corporate purposes.
Commercial Paper
We have agreements in place with financial institutions to provide for the issuance of commercial paper. In connection with
the Sikorsky acquisition, in the fourth quarter of 2015 we borrowed and repaid approximately $1.0 billion under our commercial paper programs. There were no commercial paper borrowings outstanding as of December 31, 2016 and 2015. If we
were to issue commercial paper in the future, the borrowings would be supported by the
5-year
Facility.
Note 11 Postretirement Plans
Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans
Many of our employees are covered by qualified defined benefit pension plans and we provide certain health care and life
insurance benefits to eligible retirees (collectively, postretirement benefit plans). We also sponsor nonqualified defined benefit pension plans to provide for benefits in excess of qualified plan limits.
Non-union
employees hired after December 2005 do not participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined contribution plan in addition to our
other retirement savings plans. They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006. Over the last
few years, we have negotiated similar changes with various labor organizations such that new union represented employees do not participate in our defined benefit pension plans. In June 2014, we amended certain of our qualified and nonqualified
defined benefit pension plans for
non-union
employees to freeze future retirement benefits. The calculation of retirement benefits under the affected defined benefit pension plans is determined by a formula
that takes into account the participants years of credited service and average compensation. The freeze will take effect in two stages.
90
Beginning on January 1, 2016, the
pay-based
component of the formula used to determine retirement benefits was frozen so that future pay increases,
annual incentive bonuses or other amounts earned for or related to periods after December 31, 2015 are not used to calculate retirement benefits. On January 1, 2020, the service-based component of the formula used to determine retirement
benefits will also be frozen so that participants will no longer earn further credited service for any period after December 31, 2019. When the freeze is complete, the majority of our salaried employees will have transitioned to an enhanced
defined contribution retirement savings plan. As part of the November 6, 2015 acquisition of Sikorsky, we established a new defined benefit pension plan for Sikorskys union workforce that provides benefits for their prospective service
with us. The Sikorsky salaried employees participate in a defined contribution plan. We did not assume any legacy pension liability from UTC.
We have made contributions to trusts established to pay future benefits to eligible retirees and dependents, including
Voluntary Employees Beneficiary Association trusts and 401(h) accounts, the assets of which will be used to pay expenses of certain retiree medical plans. We use December 31 as the measurement date. Benefit obligations as of the end of
each year reflect assumptions in effect as of those dates. Net periodic benefit cost is based on assumptions in effect at the end of the respective preceding year.
The rules related to accounting for postretirement benefit plans under GAAP require us to recognize on a
plan-by-plan
basis the funded status of our postretirement benefit plans as either an asset or a liability on our consolidated balance sheets. There is a corresponding
non-cash
adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax assets, in stockholders equity. The funded status is measured as the difference between the fair value
of the plans assets and the benefit obligation of the plan.
The net periodic benefit cost recognized each year
included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined
Benefit Pension Plans
(a)
|
|
|
|
|
|
|
|
|
Retiree Medical and
Life Insurance Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service cost
|
|
$
|
827
|
|
|
$
|
836
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
21
|
|
|
$
|
22
|
|
Interest cost
|
|
|
1,861
|
|
|
|
1,791
|
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
110
|
|
|
|
123
|
|
Expected return on plan assets
|
|
|
(2,666)
|
|
|
|
(2,734)
|
|
|
|
(2,693)
|
|
|
|
|
|
|
|
|
|
|
|
(138)
|
|
|
|
(147)
|
|
|
|
(146)
|
|
Recognized net actuarial losses
|
|
|
1,359
|
|
|
|
1,599
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
43
|
|
|
|
23
|
|
Amortization of net prior service (credit) cost
(b)
|
|
|
(362)
|
|
|
|
(365)
|
|
|
|
(134)
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
4
|
|
|
|
4
|
|
Total net periodic benefit cost
|
|
$
|
1,019
|
|
|
$
|
1,127
|
|
|
$
|
1,099
|
|
|
|
|
|
|
|
|
|
|
$
|
61
|
|
|
$
|
31
|
|
|
$
|
26
|
|
(a)
|
Total net periodic benefit cost associated with our
qualified defined benefit plans represents pension expense calculated in accordance with GAAP (FAS pension expense). We are required to calculate pension expense in accordance with both GAAP and CAS rules, each of which results in a different
calculated amount of pension expense. The CAS pension cost is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in net sales and cost of sales for products and services. We include
the difference between FAS pension expense and CAS pension cost, referred to as the FAS/CAS pension adjustment, as a component of other unallocated, net on our consolidated statements of earnings. The FAS/CAS pension adjustment, which was
$902 million in 2016, $400 million in 2015, and $317 million in 2014, effectively adjusts the amount of CAS pension cost in the business segment operating profit so that pension expense recorded on our consolidated statements of
earnings is equal to FAS pension expense. FAS pension expense and CAS pension costs reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees.
|
(b)
|
Net of the reclassification for discontinued operations
presentation of pension benefits related to former IS&GS salaried employees ($14 million in 2016, $24 million in 2015 and $17 million in 2014).
|
91
The following table provides a reconciliation of benefit obligations, plan assets
and unfunded status related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefit
Pension Plans
|
|
|
|
|
|
|
|
|
Retiree Medical and
Life Insurance Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
43,702
|
|
|
$
|
45,882
|
|
|
|
|
|
|
|
|
|
|
$
|
2,883
|
|
|
$
|
3,034
|
|
Service cost
|
|
|
827
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
21
|
|
Interest cost
|
|
|
1,861
|
|
|
|
1,791
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
110
|
|
Benefits paid
|
|
|
(2,172)
|
|
|
|
(2,055)
|
|
|
|
|
|
|
|
|
|
|
|
(222)
|
|
|
|
(307)
|
|
Actuarial losses (gains)
|
|
|
1,402
|
|
|
|
(1,988)
|
|
|
|
|
|
|
|
|
|
|
|
(135)
|
|
|
|
(170)
|
|
New longevity assumptions
(a)
|
|
|
(687)
|
|
|
|
(834)
|
|
|
|
|
|
|
|
|
|
|
|
(53)
|
|
|
|
(77)
|
|
Plan amendments and acquisitions
(b)
|
|
|
110
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
(32)
|
|
|
|
157
|
|
Service cost related to discontinued operations
|
|
|
21
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Part D subsidy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
14
|
|
Participants contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
101
|
|
Ending balance
|
|
$
|
45,064
|
|
|
$
|
43,702
|
|
|
|
|
|
|
|
|
|
|
$
|
2,649
|
|
|
$
|
2,883
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at fair value
|
|
$
|
32,096
|
|
|
$
|
34,673
|
|
|
|
|
|
|
|
|
|
|
$
|
1,813
|
|
|
$
|
1,932
|
|
Actual return on plan assets
|
|
|
1,470
|
|
|
|
(527)
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
(27)
|
|
Benefits paid
|
|
|
(2,172)
|
|
|
|
(2,055)
|
|
|
|
|
|
|
|
|
|
|
|
(222)
|
|
|
|
(307)
|
|
Company contributions
|
|
|
23
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
100
|
|
Medicare Part D subsidy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
14
|
|
Participants contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
101
|
|
Ending balance at fair value
|
|
$
|
31,417
|
|
|
$
|
32,096
|
|
|
|
|
|
|
|
|
|
|
$
|
1,787
|
|
|
$
|
1,813
|
|
Unfunded status of the plans
|
|
$
|
(13,647)
|
|
|
$
|
(11,606)
|
|
|
|
|
|
|
|
|
|
|
$
|
(862)
|
|
|
$
|
(1,070)
|
|
(a)
|
We adopted new longevity assumptions originally published
by the Society of Actuaries in October 2014. The Society of Actuaries refined their original publication in October 2015 and again in October 2016.
|
(b)
|
Includes special termination benefits of $27 million
for qualified pension and $9 million for retiree medical recognized in 2016 related to former IS&GS salaried employees. The November 2015 acquisition of Sikorsky increased our qualified defined benefit pension obligations by about
$30 million.
|
The following table provides amounts recognized on our consolidated balance sheets
related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefit
Pension Plans
|
|
|
|
|
|
|
|
|
Retiree Medical and
Life Insurance Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Prepaid pension asset
|
|
$
|
208
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Accrued postretirement benefit liabilities
|
|
|
(13,855)
|
|
|
|
(11,807)
|
|
|
|
|
|
|
|
|
|
|
|
(862)
|
|
|
|
(1,070)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
(pre-tax)
related
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
|
20,184
|
|
|
|
19,632
|
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
|
627
|
|
Prior service (credit) cost
(a)
|
|
|
(2,896)
|
|
|
|
(3,565)
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
167
|
|
Total
(b)
|
|
$
|
17,288
|
|
|
$
|
16,067
|
|
|
|
|
|
|
|
|
|
|
$
|
543
|
|
|
$
|
794
|
|
(a)
|
Pre-tax
amounts of
$210 million for qualified pension prior service credits and $9 million for retiree medical prior service costs were recognized from the divestiture of our IS&GS business (combined $134 million, net of tax).
|
(b)
|
Accumulated other comprehensive loss related to
postretirement benefit plans, after tax, of $12.0 billion and $11.3 billion at December 31, 2016 and 2015 (see Note 12 Stockholders Equity) includes $17.3 billion ($11.2 billion after tax)
and $16.1 billion ($10.4 billion after tax) for qualified defined benefit pension plans, $543 million ($351 million after tax) and $794 million ($514 million after tax) for retiree medical and life insurance plans and
$677 million ($448 million after tax) and $620 million ($408 million after tax) for other plans.
|
92
The accumulated benefit obligation (ABO) for all qualified defined benefit
pension plans was $44.9 billion and $43.5 billion at December 31, 2016 and 2015, of which $44.8 billion and $43.4 billion related to plans where the ABO was in excess of plan assets. The ABO represents benefits accrued
without assuming future compensation increases to plan participants. Certain key information related to our qualified defined benefit pension plans as of December 31, 2016 and 2015 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Plans where ABO was in excess of plan assets
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
44,946
|
|
|
$
|
43,575
|
|
Less: fair value of plan assets
|
|
|
31,091
|
|
|
|
31,768
|
|
Unfunded status of plans
(a)
|
|
|
(13,855)
|
|
|
|
(11,807)
|
|
|
|
|
Plans where ABO was less than plan assets
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
|
118
|
|
|
|
127
|
|
Less: fair value of plan assets
|
|
|
326
|
|
|
|
328
|
|
Funded status of plans
(b)
|
|
$
|
208
|
|
|
$
|
201
|
|
(a)
|
Represents accrued pension liabilities, which are included
on our consolidated balance sheets.
|
(b)
|
Represents prepaid pension assets, which are included on
our consolidated balance sheets in other noncurrent assets.
|
We also sponsor nonqualified defined
benefit plans to provide benefits in excess of qualified plan limits. The aggregate liabilities for these plans at December 31, 2016 and 2015 were $1.2 billion, which also represent the plans unfunded status. We have set aside
certain assets totaling $460 million and $421 million as of December 31, 2016 and 2015 in a separate trust which we expect to be used to pay obligations under our nonqualified defined benefit plans. In accordance with GAAP, those
assets may not be used to offset the amount of the benefit obligation similar to the postretirement benefit plans in the table above. The unrecognized net actuarial losses at December 31, 2016 and 2015 were $642 million and
$632 million. The unrecognized prior service credit at December 31, 2016 was $74 million and was $95 million at December 31, 2015. The expense associated with these plans totaled $125 million in 2016, $117 million
in 2015 and $115 million in 2014. We also sponsor a small number of other postemployment plans and foreign benefit plans. The aggregate liability for the other postemployment plans was $63 million and $70 million as of
December 31, 2016 and 2015. The expense for the other postemployment plans, as well as the liability and expense associated with the foreign benefit plans, was not material to our results of operations, financial position or cash flows. The
actuarial assumptions used to determine the benefit obligations and expense associated with our nonqualified defined benefit plans and postemployment plans are similar to those assumptions used to determine the benefit obligations and expense
related to our qualified defined benefit pension plans and retiree medical and life insurance plans as described below.
The following table provides the amounts recognized in other comprehensive income (loss) related to postretirement benefit
plans, net of tax, for the years ended December 31, 2016, 2015 and 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred but Not Yet
Recognized in Net
Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of
Previously
Deferred Amounts
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses
|
|
Actuarial gains and losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified defined benefit pension plans
|
|
$
|
(1,236)
|
|
|
$
|
(291)
|
|
|
$
|
(5,505)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
879
|
|
|
$
|
1,034
|
|
|
$
|
758
|
|
Retiree medical and life insurance plans
|
|
|
94
|
|
|
|
46
|
|
|
|
(160)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
28
|
|
|
|
15
|
|
Other plans
|
|
|
(62)
|
|
|
|
21
|
|
|
|
(245)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
47
|
|
|
|
33
|
|
|
|
|
(1,204)
|
|
|
|
(224)
|
|
|
|
(5,910)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
|
|
1,109
|
|
|
|
806
|
|
|
|
|
|
|
|
|
|
Credit (cost)
|
|
|
|
|
|
|
|
|
|
|
|
(Credit) cost
(a)
|
|
Net prior service credit and cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified defined benefit pension plans
|
|
|
(54)
|
|
|
|
(18)
|
|
|
|
2,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235)
|
|
|
|
(235)
|
|
|
|
(87)
|
|
Retiree medical and life insurance plans
|
|
|
27
|
|
|
|
(102)
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
2
|
|
|
|
3
|
|
Other plans
|
|
|
(1)
|
|
|
|
(7)
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
|
|
|
|
(10)
|
|
|
|
(5)
|
|
|
|
|
(28)
|
|
|
|
(127)
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(230)
|
|
|
|
(243)
|
|
|
|
(89)
|
|
|
|
$
|
(1,232)
|
|
|
$
|
(351)
|
|
|
$
|
(2,870)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
708
|
|
|
$
|
866
|
|
|
$
|
717
|
|
(a)
|
Reflects the reclassification for discontinued operations presentation of benefits related to former IS&GS
salaried employees ($9 million in 2016, $16 million in 2015 and $11 million in 2014). In addition, we recognized $134 million of prior service credits from the divestiture of our IS&GS business, which were reclassified as
discontinued operations.
|
93
We expect that approximately $1.2 billion, or about $800 million net of
tax, of actuarial losses and net prior service credit related to postretirement benefit plans included in accumulated other comprehensive loss at the end of 2016 to be recognized in net periodic benefit cost during 2017. Of this amount,
$1.1 billion, or $743 million net of tax, relates to our qualified defined benefit plans and is included in our expected 2017 pension expense of $1.4 billion.
Actuarial Assumptions
The actuarial assumptions used to determine the benefit obligations at December 31 of each year and to determine the net
periodic benefit cost for each subsequent year, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefit
Pension Plans
|
|
|
|
|
|
|
|
|
Retiree Medical and
Life Insurance Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted average discount rate
|
|
|
4.125%
|
|
|
|
4.375%
|
|
|
|
4.00%
|
|
|
|
|
|
|
|
|
|
|
|
4.00%
|
|
|
|
4.25%
|
|
|
|
3.75%
|
|
Expected long-term rate of return on assets
|
|
|
7.50%
|
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
|
|
|
|
|
|
|
|
7.50%
|
|
|
|
8.00%
|
|
|
|
8.00%
|
|
Rate of increase in future compensation levels (for applicable bargained pension plans)
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
4.30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health care trend rate assumed for next year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.75%
|
|
|
|
9.00%
|
|
|
|
8.50%
|
|
Ultimate health care trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
Year that the ultimate health care trend rate is
reached
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2032
|
|
|
|
2032
|
|
|
|
2029
|
|
The decrease in the discount rate from December 31, 2015 to December 31, 2016
resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $1.4 billion at December 31, 2016. The increase in the discount rate from December 31, 2014 to
December 31, 2015 resulted in a decrease in the projected benefit obligations of our qualified defined benefit pension plans of approximately $2.1 billion at December 31, 2015.
The long-term rate of return assumption represents the expected long-term rate of earnings on the funds invested, or to be
invested, to provide for the benefits included in the benefit obligations. That assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the
trust funds, plan expenses and the potential to outperform market index returns.
Plan Assets
Investment policies and strategies
Lockheed Martin Investment Management Company (LMIMCo), our
wholly-owned subsidiary, has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. LMIMCos investment objectives for the assets of these plans are (1) to minimize the net
present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long-term rate of return assumptions; and (3) to diversify assets to minimize the risk of large
losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives.
Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within
prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to
meet benefit obligations as they come due.
LMIMCos investment policies require that asset allocations of
postretirement benefit plans be maintained within the following approximate ranges:
|
|
|
Asset Class
|
|
Asset Allocation
Ranges
|
Cash and cash equivalents
|
|
0-20%
|
Equity
|
|
15-65%
|
Fixed income
|
|
10-60%
|
Alternative investments:
|
|
|
Private equity funds
|
|
0-15%
|
Real estate funds
|
|
0-10%
|
Hedge funds
|
|
0-20%
|
Commodities
|
|
0-25%
|
94
Fair value measurements
The rules related to accounting
for postretirement benefit plans under GAAP require certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not included on our consolidated balance sheets. The following table presents the fair
value of the assets (in millions) of our qualified defined benefit pension plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy, which has three levels based on the reliability of the
inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other observable inputs and Level 3
includes fair values estimated using significant unobservable inputs. Certain other investments are measured at fair value using their Net Asset Value (NAV) per share and do not have readily determined values and are thus not subject to leveling in
the fair value hierarchy. The NAV is the total value of the fund divided by the number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(a)
|
|
$
|
2,301
|
|
|
$
|
2,301
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,658
|
|
|
$
|
2,658
|
|
|
$
|
|
|
|
|
$
|
|
Equity
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equity securities
|
|
|
4,166
|
|
|
|
4,139
|
|
|
|
23
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4,790
|
|
|
|
4,771
|
|
|
|
19
|
|
|
|
|
|
International equity securities
|
|
|
3,971
|
|
|
|
3,927
|
|
|
|
40
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
6,121
|
|
|
|
6,087
|
|
|
|
24
|
|
|
|
10
|
|
Commingled equity funds
|
|
|
2,332
|
|
|
|
788
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,794
|
|
|
|
614
|
|
|
|
1,180
|
|
|
|
|
|
Fixed income
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
4,333
|
|
|
|
|
|
|
|
4,316
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
3,929
|
|
|
|
|
|
|
|
3,914
|
|
|
|
15
|
|
U.S. Government securities
|
|
|
6,811
|
|
|
|
|
|
|
|
6,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,069
|
|
|
|
|
|
|
|
5,069
|
|
|
|
|
|
U.S. Government-sponsored enterprise securities
|
|
|
919
|
|
|
|
|
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377
|
|
|
|
|
|
|
|
1,377
|
|
|
|
|
|
Other fixed income investments
|
|
|
2,215
|
|
|
|
|
|
|
|
2,214
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3,252
|
|
|
|
|
|
|
|
3,246
|
|
|
|
6
|
|
Alternative investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
|
|
33
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
Private equity funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Commodities
(a)
|
|
|
523
|
|
|
|
525
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
1
|
|
|
|
(27
|
)
|
|
|
|
|
Total
|
|
$
|
27,604
|
|
|
$
|
11,680
|
|
|
$
|
15,898
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
$
|
29,221
|
|
|
$
|
14,131
|
|
|
$
|
14,859
|
|
|
|
$ 231
|
|
Investments measured at NAV
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled equity funds
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
|
3,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate funds
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments measured at NAV
|
|
|
5,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Cash and cash equivalents, equity securities, fixed income securities and commodities included derivative
assets and liabilities whose fair values were not material as of December 31, 2016 and 2015. LMIMCos investment policies restrict the use of derivatives to either establish long exposures for purposes of expediency or capital efficiency
or to hedge risks to the extent of a plans current exposure to such risks. Most derivative transactions are settled on a daily basis.
|
(b)
|
Certain investments that are valued using the net asset value per share (or its equivalent) as a practical
expedient have not been classified in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets.
|
As of December 31, 2016 and 2015, the assets associated with our foreign defined benefit pension plans were not material
and have not been included in the table above.
95
The following table presents the changes during 2016 and 2015 in the fair value
of plan assets categorized as Level 3 in the preceding table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Equity
Funds
|
|
|
Other
|
|
|
Total
|
|
Balance at January 1, 2015
|
|
|
$
|
|
|
|
$ 61
|
|
|
|
$ 61
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses, net
|
|
|
|
|
|
|
(12)
|
|
|
|
(12)
|
|
Unrealized gains, net
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
Purchases, sales and settlements, net
|
|
|
|
|
|
|
(22)
|
|
|
|
(22)
|
|
Transfers into (out of) Level 3, net
|
|
|
200
|
|
|
|
(3)
|
|
|
|
197
|
|
Balance at December 31, 2015
|
|
|
$200
|
|
|
|
$ 31
|
|
|
|
$231
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses, net
|
|
|
|
|
|
|
(6)
|
|
|
|
(6)
|
|
Unrealized gains, net
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Purchases, sales and settlements, net
|
|
|
(200)
|
|
|
|
(7)
|
|
|
|
(207)
|
|
Transfers into Level 3, net
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
Balance at December 31, 2016
|
|
|
$
|
|
|
|
$ 26
|
|
|
|
$ 26
|
|
Valuation techniques
Cash equivalents are mostly comprised of
short-term money-market instruments and are valued at cost, which approximates fair value.
U.S. equity securities and
international equity securities categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and international equity
securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian
obtains corroborated quotes from a pricing vendor or categorized as Level 3 if the custodian obtains uncorroborated quotes from a broker or investment manager.
Commingled equity funds categorized as Level 1 are traded on active national and international exchanges and are valued
at their closing prices on the last trading day of the year. For commingled equity funds not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment
manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor.
Fixed income investments categorized as Level 2 are valued by the trustee using pricing models that use verifiable
observable market data (e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Fixed income investments are
categorized at Level 3 when valuations using observable inputs are unavailable. The trustee obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager.
Commodities are traded on an active commodity exchange and are valued at their closing prices on the last trading day of the
year.
Certain commingled equity funds, consisting of equity mutual funds, are valued using the NAV. The NAV valuations
are based on the underlying investments and typically redeemable within 90 days.
Private Equity funds consist of
partnership and
co-investment
funds. The NAV is based on valuation models of the underlying securities, which includes unobservable inputs that cannot be corroborated using verifiable observable market data.
These funds typically have redemption periods between eight and 12 years.
Real Estate funds consist of partnerships, most
of which are
closed-end
funds, for which the NAV is based on valuation models and periodic appraisals. These funds typically have redemption periods between eight and 10 years.
Hedge Funds consist of direct hedge funds for which the NAV is generally based on the valuation of the underlying investments.
Redemptions in hedge funds are based on the specific terms of each fund, and generally range from a minimum of one month to several months.
96
Contributions and Expected Benefit Payments
The funding of our qualified defined benefit pension plans is determined in accordance with ERISA, as amended by the PPA, and
in a manner consistent with CAS and Internal Revenue Code rules. There were no contributions to our legacy qualified defined benefit pension plans during 2016. We do not plan to make contributions to our legacy pension plans in 2017 because none are
required using current assumptions including investment returns on plan assets. We made $23 million in contributions during 2016 to our newly established Sikorsky pension plan and expect to make $45 million in contributions to this plan
during 2017.
The following table presents estimated future benefit payments, which reflect expected future employee
service, as of December 31, 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022 2026
|
|
Qualified defined benefit pension plans
|
|
$
|
2,260
|
|
|
$
|
2,340
|
|
|
$
|
2,420
|
|
|
$
|
2,510
|
|
|
$
|
2,590
|
|
|
|
$13,920
|
|
Retiree medical and life insurance plans
|
|
|
180
|
|
|
|
180
|
|
|
|
190
|
|
|
|
190
|
|
|
|
190
|
|
|
|
870
|
|
Defined Contribution Plans
We maintain a number of defined contribution plans, most with 401(k) features, that cover substantially all of our employees.
Under the provisions of our 401(k) plans, we match most employees eligible contributions at rates specified in the plan documents. Our contributions were $617 million in 2016, $393 million in 2015 and $385 million in 2014, the
majority of which were funded in our common stock. Our defined contribution plans held approximately 36.9 million and 40.0 million shares of our common stock as of December 31, 2016 and 2015.
Note 12 Stockholders Equity
At December 31, 2016 and 2015, our authorized capital was composed of 1.5 billion shares of common stock and
50 million shares of series preferred stock. Of the 290 million shares of common stock issued and outstanding as of December 31, 2016, 289 million shares were considered outstanding for consolidated balance sheet presentation
purposes; the remaining shares were held in a separate trust. Of the 305 million shares of common stock issued and outstanding as of December 31, 2015, 303 million shares were considered outstanding for consolidated balance sheet
presentation purposes; the remaining shares were held in a separate trust. No shares of preferred stock were issued and outstanding at December 31, 2016 or 2015.
Repurchases of Common Stock
During 2016, we repurchased 8.9 million shares of our common stock for $2.1 billion. During 2015 and 2014, we paid
$3.1 billion and $1.9 billion to repurchase 15.2 million and 11.5 million shares of our common stock.
On September 22, 2016, our Board of Directors approved a $2.0 billion increase to our share repurchase program.
Inclusive of this increase, the total remaining authorization for future common share repurchases under our program was $3.5 billion as of December 31, 2016. 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. Due to the volume of repurchases made under our share repurchase program,
additional
paid-in
capital was reduced to zero, with the remainder of the excess purchase price over par value of $1.7 billion and $2.4 billion recorded as a reduction of retained earnings in 2016
and 2015.
We paid dividends totaling $2.0 billion ($6.77 per share) in 2016, $1.9 billion ($6.15 per share) in
2015 and $1.8 billion ($5.49 per share) in 2014. We have increased our quarterly dividend rate in each of the last three years, including a 10% increase in the quarterly dividend rate in the fourth quarter of 2016. We declared quarterly
dividends of $1.65 per share during each of the first three quarters of 2016 and $1.82 per share during the fourth quarter of 2016; $1.50 per share during each of the first three quarters of 2015 and $1.65 per share during the fourth quarter of
2015; and $1.33 per share during each of the first three quarters of 2014 and $1.50 per share during the fourth quarter of 2014.
97
Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of income taxes, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefit Plans
|
|
|
Other, net
|
|
|
AOCL
|
|
Balance at December 31, 2013
(a)
|
|
|
$ (9,649)
|
|
|
|
$ 48
|
|
|
|
$ (9,601)
|
|
Other comprehensive loss before reclassifications
|
|
|
(2,870)
|
|
|
|
(103)
|
|
|
|
(2,973)
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of net actuarial losses
|
|
|
806
|
|
|
|
|
|
|
|
806
|
|
Amortization of net prior service credits
|
|
|
(100)
|
|
|
|
|
|
|
|
(100)
|
|
Other
|
|
|
|
|
|
|
(2)
|
|
|
|
(2)
|
|
Total reclassified from AOCL
|
|
|
706
|
|
|
|
(2)
|
|
|
|
704
|
|
Total other comprehensive loss
|
|
|
(2,164)
|
|
|
|
(105)
|
|
|
|
(2,269)
|
|
Balance at December 31, 2014
(a)
|
|
|
(11,813)
|
|
|
|
(57)
|
|
|
|
(11,870)
|
|
Other comprehensive loss before reclassifications
|
|
|
(351)
|
|
|
|
(73)
|
|
|
|
(424)
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of net actuarial losses
|
|
|
1,109
|
|
|
|
|
|
|
|
1,109
|
|
Amortization of net prior service credits
|
|
|
(259)
|
|
|
|
|
|
|
|
(259)
|
|
Total reclassified from AOCL
|
|
|
850
|
|
|
|
|
|
|
|
850
|
|
Total other comprehensive income (loss)
|
|
|
499
|
|
|
|
(73)
|
|
|
|
426
|
|
Balance at December 31, 2015
(a)
|
|
|
(11,314)
|
|
|
|
(130)
|
|
|
|
(11,444)
|
|
Other comprehensive loss before reclassifications
|
|
|
(1,232)
|
|
|
|
|
|
|
|
(1,232)
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of net actuarial losses
|
|
|
938
|
|
|
|
|
|
|
|
938
|
|
Amortization of net prior service credits
|
|
|
(239)
|
|
|
|
|
|
|
|
(239)
|
|
Recognition of net prior service credits from divestiture of IS&GS segment
(b)
|
|
|
(134)
|
|
|
|
|
|
|
|
(134)
|
|
Other
(b)
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
Total reclassified from AOCL
|
|
|
565
|
|
|
|
9
|
|
|
|
574
|
|
Total other comprehensive (loss) income
|
|
|
(667)
|
|
|
|
9
|
|
|
|
(658)
|
|
Balance at December 31, 2016
(a)
|
|
|
$(11,981)
|
|
|
|
$(121)
|
|
|
|
$(12,102)
|
|
(a)
|
AOCL related to postretirement benefit plans is shown net
of tax benefits at December 31, 2016, 2015 and 2014 of $6.5 billion, $6.2 billion and $6.4 billion. These tax benefits include amounts recognized on our income tax returns as current deductions and deferred income taxes, which
will be recognized on our tax returns in future years. See Note 9 Income Taxes and Note 11 Postretirement Plans for more information on our income taxes and postretirement benefit plans.
|
(b)
|
Associated with the divesture of the IS&GS business and included in net gain on divestiture of discontinued
operations.
|
Note 13 Stock-Based Compensation
During 2016, 2015 and 2014, we recorded
non-cash
stock-based compensation expense
totaling $149 million, $133 million and $154 million, which is included as a component of other unallocated, net on our consolidated statements of earnings. The net impact to earnings for the respective years was $97 million,
$86 million and $100 million.
As of December 31, 2016, we had $83 million of unrecognized
compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.8 years. We received cash from the exercise of stock options totaling $106 million, $174 million and $308 million
during 2016, 2015 and 2014. In addition, our income tax liabilities for 2016, 2015 and 2014 were reduced by $219 million, $213 million and $215 million due to recognized tax benefits on stock-based compensation arrangements.
Stock-Based Compensation Plans
Under plans approved by our stockholders, we are authorized to grant key employees stock-based incentive awards, including
options to purchase common stock, stock appreciation rights, restricted stock units (RSUs), performance stock units (PSUs) or other stock units. The exercise price of options to purchase common stock may not be less than the fair market value of our
stock on the date of grant. No award of stock options may become fully vested prior to the third anniversary of the grant and no portion of a stock option grant may become vested in less than one year. The minimum
98
vesting period for restricted stock or stock units payable in stock is three years. Award agreements may provide for shorter or
pro-rated
vesting periods
or vesting following termination of employment in the case of death, disability, divestiture, retirement, change of control or layoff. The maximum term of a stock option or any other award is 10 years.
At December 31, 2016, inclusive of the shares reserved for outstanding stock options, RSUs and PSUs, we had approximately
12 million shares reserved for issuance under the plans. At December 31, 2016, approximately six million of the shares reserved for issuance remained available for grant under our stock-based compensation plans. We issue new shares upon
the exercise of stock options or when restrictions on RSUs and PSUs have been satisfied.
RSUs
The following table summarizes activity related to nonvested RSUs:
|
|
|
|
|
|
|
|
|
|
|
Number
of RSUs
(In thousands)
|
|
|
Weighted Average
Grant-Date Fair
Value Per Share
|
|
Nonvested at December 31, 2013
|
|
|
3,859
|
|
|
|
$ 82.42
|
|
Granted
|
|
|
745
|
|
|
|
146.85
|
|
Vested
|
|
|
(2,194)
|
|
|
|
87.66
|
|
Forfeited
|
|
|
(84)
|
|
|
|
91.11
|
|
Nonvested at December 31, 2014
|
|
|
2,326
|
|
|
|
$ 97.80
|
|
Granted
|
|
|
595
|
|
|
|
192.47
|
|
Vested
|
|
|
(1,642)
|
|
|
|
103.30
|
|
Forfeited
|
|
|
(43)
|
|
|
|
132.28
|
|
Nonvested at December 31, 2015
|
|
|
1,236
|
|
|
|
$ 134.87
|
|
Granted
|
|
|
679
|
|
|
|
206.69
|
|
Vested
|
|
|
(1,009)
|
|
|
|
137.62
|
|
Forfeited
|
|
|
(118)
|
|
|
|
203.65
|
|
Nonvested at December 31, 2016
|
|
|
788
|
|
|
|
$ 183.00
|
|
In 2016, we granted certain employees approximately 0.7 million restricted stock units
(RSUs) with a grant-date fair value of $206.69 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.
Stock Options
We generally recognize compensation cost for stock options ratably over the three-year vesting period. At December 31,
2016 and 2015, there were 3.0 million (weighted average exercise price of $85.82) and 4.2 million (weighted average exercise price of $86.61) stock options outstanding. All of the stock options outstanding are vested as of
December 31, 2016 and have a weighted average remaining contractual life of approximately three years and an aggregate intrinsic value of $491 million. There were 1.2 million (weighted average exercise price of $88.61) stock options
exercised during 2016. We did not grant stock options to employees during 2016 and 2015.
The following table pertains to
stock options granted through 2012, in addition to stock options that vested and were exercised in 2016, 2015 and 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Grant-date fair value of all stock options that vested
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
18
|
|
Intrinsic value of all stock options exercised
|
|
|
172
|
|
|
|
265
|
|
|
|
297
|
|
In 2012, we estimated the fair value for stock options at the date of grant using the
Black-Scholes option pricing model, which required us to make certain assumptions. We used the following weighted average assumptions in the model: risk-free interest rate of 0.78%, dividend yield of 5.40%, a five year historical volatility factor
of 0.28 and an expected option life of five years.
99
PSUs
In 2016, we granted certain employees PSUs with an aggregate target award of approximately 0.1 million shares of our
common stock. The PSUs vest three years from the grant date based on continuous service, with the number of shares earned (0% to 200% of the target award) depending upon the extent to which we achieve certain financial and market performance targets
measured over the period from January 1, 2016 through December 31, 2018. About half of the PSUs were valued at $206.37 per PSU in a manner similar to RSUs mentioned above as the financial targets are based on our operating results. We
recognize the grant-date fair value of these PSUs, less estimated forfeitures, as compensation expense ratably over the vesting period based on the number of awards expected to vest at each reporting date. The remaining PSUs were valued at $212.37
per PSU using a Monte Carlo model as the performance target is related to our total shareholder return relative to our peer group. We recognize the grant-date fair value of these awards, less estimated forfeitures, as compensation expense ratably
over the vesting period.
Note 14 Legal Proceedings, Commitments and Contingencies
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our
business, including matters arising under provisions relating to the protection of the environment and are subject to contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties,
compensatory or treble damages or
non-monetary
sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a
material adverse effect on the Corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. Among the factors that we consider in
this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other
advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as
individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with
certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We
follow a thorough process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise
indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
Legal Proceedings
As a result of our acquisition of Sikorsky, we assumed the defense of and any potential liability for the following civil
False Claims Act lawsuit. In October 2014, the U.S. Government filed a complaint in the U.S. District Court for the Eastern District of Wisconsin alleging that Sikorsky and two of its wholly-owned subsidiaries, Derco Aerospace (Derco) and Sikorsky
Support Services, Inc. (SSSI), violated the civil False Claims Act in connection with a contract that the U.S. Navy awarded to SSSI in June 2006 to support the Navys
T-34
and
T-44
fixed-wing turboprop training aircraft. SSSI subcontracted with Derco primarily to procure and manage the spare parts for the training aircraft. The Government alleges that SSSI overbilled the Navy on the
contract because Derco added profit and overhead costs to the price of the spare parts that Derco procured and then sold to SSSI. The Government also claims that SSSI submitted false Certificates of Final Indirect Costs in the years 2006 through
2012.
The Governments complaint asserts numerous claims for violations of the False Claims Act, breach of contract
and unjust enrichment. The Government seeks damages in excess of $45 million, subject to trebling, plus statutory penalties. We believe that we have legal and factual defenses to the governments claims. Although we continue to evaluate
our liability and exposure, we do not currently believe that it is probable that we will incur a material loss. If, contrary to our expectations, the Government prevails in this matter and proves damages at the high end of the range sought and is
successful in having these trebled, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
On April 24, 2009, we filed a declaratory judgment action against the New York Metropolitan Transportation Authority and
its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of our agreement based on the MTAs failure to provide access to sites
where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an
100
answer and counterclaim alleging that we breached the contract and subsequently terminated the contract for alleged default. The primary damages sought by the MTA are the cost to complete the
contract and potential
re-procurement
costs. While we are unable to estimate the cost of another contractor to complete the contract and the costs of
re-procurement,
we
note that our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is seeking damages of approximately $190 million. We dispute the MTAs allegations and are defending
against them. Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTAs termination of the contract was improper. Finally, our
declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench trial and
the filing of post-trial pleadings by the parties. At this time we are awaiting a decision from the District Court. Although this matter relates to the IS&GS business, we retained it when IS&GS was divested.
Environmental Matters
We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination,
disposal of hazardous waste and other environmental matters at several of our current or former facilities or at third-party sites where we have been designated as a potentially responsible party (PRP). A substantial portion of environmental costs
will be included in our net sales and cost of sales in future periods pursuant to U.S. Government regulations. At the time a liability is recorded for future environmental costs, we record a receivable for estimated future recovery considered
probable through the pricing of products and services to agencies of the U.S. Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price). We continuously evaluate the recoverability of our environmental receivables by
assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and recent efforts by some U.S. Government representatives to limit such
reimbursement. We include the portion of those environmental costs expected to be allocated to our
non-U.S.
Government contracts, or that is determined to not be recoverable under U.S. Government contracts, in
our cost of sales at the time the liability is established.
At each of December 31, 2016 and 2015, the aggregate
amount of liabilities recorded relative to environmental matters was $1.0 billion, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded receivables totaling $870 million and
$858 million at December 31, 2016 and 2015, most of which are recorded in other noncurrent assets on our consolidated balance sheets, for the estimated future recovery of these costs, as we consider the recovery probable based on the
factors previously mentioned. We project costs and recovery of costs over approximately 20 years.
Environmental cleanup
activities usually span several years, which makes estimating liabilities a matter of judgment because of uncertainties with respect to assessing the extent of the contamination as well as such factors as changing remediation technologies and
continually evolving regulatory environmental standards. There are a number of former operating facilities that we are monitoring or investigating for potential future remediation. We perform quarterly reviews of the status of our environmental
remediation sites and the related liabilities and receivables. Additionally, in our quarterly reviews we consider these and other factors in estimating the timing and amount of any future costs that may be required for remediation activities and
record a liability when it is probable that a loss has occurred and the loss can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular site. We do not discount
the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined. We reasonably cannot determine the extent of our financial exposure in all cases as, although a loss may be probable or
reasonably possible, in some cases it is not possible at this time to estimate the loss or reasonably possible loss or range of loss.
We also are pursuing claims for recovery of costs incurred or contribution to site cleanup costs against other PRPs, including
the U.S. Government, and are conducting remediation activities under various consent decrees and orders relating to soil, groundwater, sediment or surface water contamination at certain sites of former or current operations. Under an agreement
related to our Burbank and Glendale, California, sites, the U.S. Government reimburses us an amount equal to approximately 50% of expenditures for certain remediation activities in its capacity as a PRP under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).
The current standard in California for the maximum level of the
contaminant hexavalent chromium in drinking water is 10 parts per billion (ppb). This standard is being challenged by the California Manufacturers and Technology Association (CMTA) as being lower than is required to protect public health. If the
standard remains at 10 ppb, it will not have a material impact on our existing remediation costs in California. The U.S. EPA is considering whether to regulate hexavalent chromium.
101
In addition, California is reevaluating its existing drinking water standard of 6
ppb for perchlorate, and the U.S. Environmental Protection Agency (U.S. EPA) is taking steps to regulate perchlorate in drinking water. If substantially lower standards are adopted, in either California or at the federal level for perchlorate or for
hexavalent chromium, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our products and services for the
U.S. Government. The amount that would be allocable to our
non-U.S.
Government contracts or that is determined to not be recoverable under U.S. Government contracts would be expensed, which may have a material
effect on our earnings in any particular interim reporting period.
Operating Leases
We rent certain equipment and facilities under operating leases. Certain major plant facilities and equipment are furnished by
the Government under short-term or cancelable arrangements. Our total rental expense under operating leases was $202 million, $195 million and $197 million for 2016, 2015 and 2014. Future minimum lease commitments at December 31,
2016 for long-term
non-cancelable
operating leases were $762 million ($179 million in 2017, $150 million in 2018, $131 million in 2019, $103 million in 2020, $78 million in 2021
and $121 million in later years).
Letters of Credit, Surety Bonds and Third-Party Guarantees
We have entered into standby letters of credit, surety bonds and third-party guarantees with financial institutions and other
third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some
cases, we may guarantee the contractual performance of third parties such as venture partners. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.7 billion at December 31, 2016 and
$3.8 billion at December 31, 2015.
At December 31, 2016 and 2015, third-party guarantees totaled
$709 million and $678 million, of which approximately 56% and 79% related to guarantees of contractual performance of ventures to which we currently are or previously were a party. This amount represents our estimate of the maximum amount
we would expect to incur upon the contractual
non-performance
of the venture partners. In addition, we generally have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf
of a venture partner. We believe our current and former venture partners will be able to perform their obligations, as they have done through December 31, 2016, and that it will not be necessary to make payments under the guarantees. In
determining our exposures, we evaluate the reputation, technical capabilities and credit quality of our current and former venture partners. There were no material amounts recorded in our consolidated financial statements related to third-party
guarantees.
United Launch Alliance
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide ULA an
additional capital contribution if ULA is unable to make required payments under its inventory supply agreement with Boeing. As of December 31, 2016, ULAs total remaining obligation to Boeing under the inventory supply agreement was
$120 million. The parties have agreed to defer the remaining payment obligation, as it is more than offset by other commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this agreement.
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance and
financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its obligations, as it has done through December 31, 2016, and that it will not be necessary to make payments under the
cross-indemnities or guarantees.
Our 50% ownership share of ULAs net assets initially exceeded the book value of
our investment by approximately $395 million (of which approximately $40 million remaining was amortized during 2016). This yearly amortization and our share of ULAs net earnings are reported as equity in net earnings (losses) of
equity investees in other income, net on our consolidated statements of earnings. Our investment in ULA totaled $788 million and $748 million at December 31, 2016 and 2015.
102
Note 15 Restructuring Charges
2016 Actions
During 2016, we recorded severance charges totaling approximately $80 million related to our Aeronautics business
segment. The charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees receive
lump-sum
severance payments primarily based on years of service, the majority of which are expected to be paid over the next several quarters. During 2016, we paid $70 million in severance payments
associated with these actions.
2015 Actions
During 2015, we recorded severance charges totaling $82 million, of which $67 million related to our RMS business
segment and $15 million related to businesses that were reported in our former IS&GS business prior to our fourth quarter 2015 program realignment. The charges consisted of severance costs associated with the planned elimination of certain
positions through either voluntary or involuntary actions. Upon separation, terminated employees receive
lump-sum
severance payments primarily based on years of service, the majority of which are expected to
be paid over the next several quarters. During 2016, we paid $64 million in severance payments associated with these actions.
In connection with the Sikorsky acquisition, we assumed obligations related to certain restructuring actions committed to by
Sikorsky in June 2015. Net of amounts we anticipate to recover through the pricing of our products and services to our customers, we incurred and paid $40 million of costs in 2016 related to these actions.
We expect to recover a substantial amount of the restructuring charges through the pricing of our products and services to the
U.S. Government and other customers in future periods, with the impact included in the respective business segments results of operations.
Note 16 Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
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December 31, 2016
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December 31, 2015
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Total
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Level 1
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Level 2
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Total
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Level 1
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Level 2
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Assets
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|
|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Equity securities
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$
|
79
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|
|
$ 79
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|
$
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|
$
|
89
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|
$ 89
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|
|
|
$
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|
Mutual funds
|
|
|
856
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|
|
|
856
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|
|
|
|
|
|
|
745
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|
|
|
745
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|
|
|
|
|
U.S. Government securities
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|
|
113
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|
|
|
|
|
|
|
113
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|
|
|
119
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|
|
|
|
|
|
|
119
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|
Other securities
|
|
|
151
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|
|
|
|
|
|
|
151
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|
|
|
147
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|
|
|
|
|
|
147
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Derivatives
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|
27
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|
|
|
|
|
|
|
27
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|
|
|
15
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|
|
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|
|
|
15
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|
Liabilities
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
85
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|
|
|
|
|
|
|
85
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|
|
|
35
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|
|
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35
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Substantially all assets measured at fair value, other than derivatives, represent investments
classified as trading securities held in a separate trust to fund certain of our
non-qualified
deferred compensation plans and are recorded in other noncurrent assets on our consolidated balance sheets. The
fair values of equity securities and mutual funds are determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair values of U.S. Government
and other securities are determined using pricing models that use observable inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or quoted prices of securities with similar
characteristics. The fair values of derivative instruments, which consist of foreign currency exchange forward and interest rate swap contracts, primarily are determined based on the present value of future cash flows using model-derived valuations
that use observable inputs such as interest rates, credit spreads and foreign currency exchange rates. We did not have any transfers of assets or liabilities between levels of the fair value hierarchy during 2016.
In addition to the financial instruments listed in the table above, we hold other financial instruments, including cash and
cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The estimated fair value of our outstanding debt was $16.2 billion
and $16.6 billion at December 31, 2016 and 2015 and the outstanding principal amount was $15.3 billion and $16.3 billion at December 31, 2016 and 2015, excluding $1.0 billion of unamortized discounts and issuance costs
at the end of each of those years. The estimated fair values of our outstanding debt were determined based on quoted prices for similar instruments in active markets (Level 2).
103
In connection with the Sikorsky acquisition, we recorded the assets acquired and
liabilities assumed at fair value. See Note 3 Acquisitions and Divestitures for further information about the fair values assigned and amounts subject to adjustment.
Note 17 Summary of Quarterly Information (Unaudited)
A summary of quarterly information is as follows (in millions, except per share data):
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2016 Quarters
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First
(b)
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Second
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|
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Third
(c)(d)
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Fourth
(d)
|
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Net sales
(a)
|
|
|
$10,368
|
|
|
|
$11,577
|
|
|
|
$11,551
|
|
|
|
$13,752
|
|
Operating profit
(a)
|
|
|
1,158
|
|
|
|
1,375
|
|
|
|
1,588
|
|
|
|
1,428
|
|
Net earnings from continuing operations
|
|
|
806
|
|
|
|
899
|
|
|
|
1,089
|
|
|
|
959
|
|
Net earnings from discontinued operations
|
|
|
92
|
|
|
|
122
|
|
|
|
1,306
|
|
|
|
29
|
|
Net earnings
|
|
|
898
|
|
|
|
1,021
|
|
|
|
2,395
|
|
|
|
988
|
|
|
|
|
|
|
Earnings per common share from continuing operations
(f)
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
2.65
|
|
|
|
2.97
|
|
|
|
3.64
|
|
|
|
3.29
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|
Diluted
|
|
|
2.61
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|
|
|
2.93
|
|
|
|
3.61
|
|
|
|
3.25
|
|
|
|
|
|
|
Earnings per common share from discontinued operations
(f)
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.30
|
|
|
|
0.40
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|
|
|
4.38
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|
|
|
0.10
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|
Diluted
|
|
|
0.30
|
|
|
|
0.39
|
|
|
|
4.32
|
|
|
|
0.10
|
|
Basic earnings per common share
(f)
|
|
|
2.95
|
|
|
|
3.37
|
|
|
|
8.02
|
|
|
|
3.39
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|
Diluted earnings per common share
(f)
|
|
|
2.91
|
|
|
|
3.32
|
|
|
|
7.93
|
|
|
|
3.35
|
|
|
|
|
|
2015 Quarters
|
|
|
|
First
|
|
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Second
|
|
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Third
|
|
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Fourth
(e)
|
|
Net sales
(a)
|
|
|
$8,721
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|
|
|
$10,235
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|
|
|
$10,060
|
|
|
|
$11,520
|
|
Operating profit
(a)
|
|
|
1,147
|
|
|
|
1,273
|
|
|
|
1,192
|
|
|
|
1,100
|
|
Net earnings from continuing operations
|
|
|
738
|
|
|
|
815
|
|
|
|
756
|
|
|
|
817
|
|
Net earnings from discontinued operations
|
|
|
140
|
|
|
|
114
|
|
|
|
109
|
|
|
|
116
|
|
Net earnings
(g)
|
|
|
878
|
|
|
|
929
|
|
|
|
865
|
|
|
|
933
|
|
|
|
|
|
|
Earnings per common share from continuing operations
(f)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.34
|
|
|
|
2.61
|
|
|
|
2.45
|
|
|
|
2.67
|
|
Diluted
|
|
|
2.30
|
|
|
|
2.58
|
|
|
|
2.42
|
|
|
|
2.63
|
|
|
|
|
|
|
Earnings per common share from discontinued operations
(f)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.44
|
|
|
|
0.37
|
|
|
|
0.35
|
|
|
|
0.38
|
|
Diluted
|
|
|
0.44
|
|
|
|
0.36
|
|
|
|
0.35
|
|
|
|
0.38
|
|
Basic earnings per common share
(f)
|
|
|
2.78
|
|
|
|
2.98
|
|
|
|
2.80
|
|
|
|
3.05
|
|
Diluted earnings per common share
(f)
|
|
|
2.74
|
|
|
|
2.94
|
|
|
|
2.77
|
|
|
|
3.01
|
|
(a)
|
Net sales and operating profit vary from the amounts previously reported on Form
10-Q
as a result of our former IS&GS business being classified as discontinued operations in the third quarter of 2016, which is reflected for all periods presented.
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(b)
|
The first quarter of 2016 varies from the amounts previously reported on Form
10-Q
as a result of adopting ASU
No. 2016-09
(see Note 1 Significant Accounting Policies).
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(c)
|
The third quarter of 2016 includes a net gain of $1.2 billion related to the divestiture of our former
IS&GS business.
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(d)
|
The third quarter of 2016 includes the results of AWE from August 26, 2016, the date we obtained
controlling interest, including approximately $103 million in net sales and $104 million in net earnings. Third quarter net earnings includes a
non-cash
gain on the step acquisition of AWE (see
Note 3 Acquisitions and Divestitures). The fourth quarter of 2016 includes the results of AWE for the entire quarter, including approximately $307 million in net sales and $2.9 million in net earnings.
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(e)
|
The fourth quarter of 2015 includes the results of Sikorsky since the November 6, 2015 acquisition date
through December 31, 2015, including approximately $400 million in net sales and about $45 million in operating loss, inclusive of intangible amortization and adjustments required to account for the acquisition.
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(f)
|
The sum of the quarterly earnings per share amounts do not equal the earnings per share amounts included on our
consolidated statements of earnings, primarily due to the timing of our share repurchases during each respective year.
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(g)
|
The third and fourth quarters of 2015 include charges for workforce reductions of $15 million and
$67 million ($10 million and $44 million after tax). The fourth quarter of 2015 includes a tax benefit of about $71 million due to the retroactive reinstatement of the R&D tax credit in 2015.
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104