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.
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, assets for the portion of environmental costs that are probable of future recovery and liabilities, evaluation of goodwill and other assets for impairment, income taxes including deferred income taxes, fair value measurements and contingencies.
Revenue Recognition – The majority of our net sales are generated from long-term contracts with the U.S. Government and international customers (including foreign military sales (FMS) contracted through the U.S. Government) for the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals. In these cases, we recognize revenue based on the likelihood of obtaining regulatory approvals based upon all known facts and circumstances. We provide our products and services under fixed-price and cost-reimbursable contracts.
Under fixed-price contracts, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded. Typically, we enter into three types of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e., incentive based on performance). The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs.
We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary, we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services). Our contracts with the U.S. Government, including FMS contracts, are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. Government and FMS contracts are typically equal to the selling price stated in the contract.
For non-U.S. Government contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. We primarily sell customized solutions unique to a customer’s specifications. When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We occasionally sell standard products or services with observable standalone sales transactions. In these situations, the observable standalone sales transactions are used to determine the standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over time as we perform under the contract because control of the work in process transfers continuously to the customer. For most contracts with the U.S. Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that give the customer ownership of work in process and allow the customer to unilaterally terminate the contract for convenience and pay us for costs incurred plus a reasonable profit. For most non-U.S. Government contracts, primarily international direct commercial contracts, continuous transfer of control to our customer is supported because we deliver products that do not have an alternative use to us and if our customer were to terminate the contract for reasons other than our non-performance we would have the right to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.
For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). For performance obligations to provide services to the customer, revenue is recognized over time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of December 31, 2019, our ending backlog was $144.0 billion. We expect to recognize approximately 39% of our backlog over the next 12 months and approximately 65% over the next 24 months as revenue, with the remainder recognized thereafter.
For arrangements with the U.S. Government and FMS contracts, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price contracts with the U.S. Government provide that the customer pays either performance-based payments (PBPs) based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. For the majority of our international direct commercial contracts to deliver complex systems, we typically receive advance payments prior to commencement of work, as well as milestone payments that are paid in accordance with the terms of our contract as we perform. We recognize a liability for payments in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.
Significant estimates and assumptions are made in estimating contract sales and costs, including the profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. When estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is determined.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring
charges, except for significant severance actions, which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other items, increased segment operating profit by approximately $1.9 billion in each of 2019 and 2018, and $1.6 billion in 2017. These adjustments increased net earnings by approximately $1.5 billion ($5.29 per share in 2019 and $5.23 per share in 2018), and $1.1 billion ($3.79 per share) in 2017. We recognized net sales from performance obligations satisfied in prior periods of approximately $2.2 billion, $2.0 billion and $1.8 billion in 2019, 2018 and 2017, which primarily relate to changes in profit booking rates that impacted revenue.
As previously disclosed, we are responsible for a program to design, develop and construct a ground-based radar at our RMS business segment. The program has experienced performance issues for which we have periodically accrued reserves. In 2019, we revised our estimated costs to complete the program and recorded a charge of approximately $60 million ($47 million, or $0.17 per share, after-tax) at our RMS business segment, which resulted in cumulative losses of approximately $205 million on this program as of December 31, 2019. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional charges. However, based on the losses previously recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition.
As previously disclosed, we have a program, EADGE-T, to design, integrate, and install an air missile defense command, control, communications, computers – intelligence (C4I) system for an international customer that has experienced performance issues and for which we have periodically accrued reserves. In 2017, we revised our estimated costs to complete the EADGE-T contract as a consequence of ongoing performance matters and recorded an additional charge of $120 million ($74 million, or $0.25 per share, after-tax) at our Rotary and Mission Systems (RMS) business segment, which resulted in cumulative losses of approximately $260 million on this program. As of December 31, 2019, cumulative losses remained at approximately $260 million. We continue to monitor program requirements and our performance. At this time, we do not anticipate additional charges that would be material to our operating results or financial condition.
As previously disclosed, we have two commercial satellite programs at our Space business segment for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These programs are for the delivery of three satellites in total, including one that launched in February 2019 and one that launched in April 2019. We have periodically revised our estimated costs to complete these developmental commercial programs. As of December 31, 2019, cumulative losses remained at approximately $410 million for these programs. While these losses reflect our estimated total losses on the programs, we will continue to incur unrecoverable general and administrative costs each period until we complete the contract for the third satellite. We have launched two satellites from one program, and the third satellite has completed development and has been shipped to the launch site for a planned launch in the first quarter of 2020. Any new satellite anomalies discovered during launch preparation requiring repair or rework, or prolonged on orbit testing prior to customer handover, could require that we record additional loss reserves, which could be material to our operating results.
As previously disclosed, we are responsible for designing, developing and installing an upgraded turret for the Warrior Capability Sustainment Program. In 2018, we revised our estimated costs to complete the program as a consequence of performance issues, and recorded a charge of approximately $85 million ($64 million, or $0.22 per share, after-tax) at our Missiles and Fire Control (MFC) business segment, which resulted in cumulative losses of approximately $140 million on this program. As of December 31, 2019, cumulative losses remained at approximately $140 million. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional reserves. However, based on the losses already recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition.
Research and development and similar costs – We conduct research and development (R&D) activities using our own funds (referred to as company-funded R&D or independent research and development (IR&D)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies. R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. Company-funded R&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related customer contract. Substantially all R&D costs are charged to cost of sales as incurred. Company-funded R&D costs charged to cost of sales totaled $1.3 billion in each of 2019 and 2018 and $1.2 billion in 2017.
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.
Receivables – Receivables, net represent our unconditional right to consideration under the contract and include amounts billed and currently due from customers. The amounts are stated at their net estimated realizable value. There were no significant impairment losses related to our receivables in 2019, 2018, or 2017.
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third-party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. We sold approximately $387 million in 2019 and $532 million in 2018 of customer receivables. There were no gains or losses related to sales of these receivables.
Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Contract assets are classified as current based on our contract operating cycle.
Inventories – We record inventories at the lower of cost or estimated net realizable value. If events or changes in circumstances indicate that the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price or other causes, a loss is recognized in the period in which it occurs. We capitalize labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. In addition, we capitalize costs incurred to fulfill a contract in advance of contract award in inventories as work-in-process if we determine that contract award is probable. We determine the costs of other product and supply inventories by using the first-in first-out or average cost methods.
Contract liabilities – Contract liabilities (formerly referred to as customer advances and amounts in excess of costs incurred) include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.
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 $794 million in 2019, $759 million in 2018, and $760 million in 2017.
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, 2019 and 2018, capitalized software totaled $511 million and $447 million, net of accumulated amortization of $2.2 billion and $2.1 billion. No amortization expense is recorded until the software is ready for its intended use. Amortization expense related to capitalized software was $111 million in 2019, $106 million in 2018 and $123 million in 2017.
Goodwill and Intangible Assets – 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. Intangible assets from acquired businesses are recognized at fair value on the acquisition date 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 fair value, which ranges from nine to 20 years.
Our goodwill balance was $10.6 billion at December 31, 2019 and $10.8 billion at December 31, 2018. We perform an impairment test of our goodwill at least annually in the fourth quarter or more frequently whenever 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, U.S. Government budget restrictions 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 self-sustaining business for which discrete financial information is available and segment management regularly reviews the operating results.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. For selected reporting units where we use the qualitative approach, we perform a qualitative evaluation of events and circumstances impacting the 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 impairment test. We perform quantitative tests for most reporting units at least once every three years. However, for certain reporting units we may perform a quantitative impairment test every year.
For the quantitative impairment test we compare the fair value of a 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 the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in an amount equal to that excess. We generally 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 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 analysis 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 unit’s 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. The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and allocations of certain assets and liabilities held at the business segment and corporate levels.
During the fourth quarters of 2019, 2018 and 2017, we performed our annual goodwill impairment test for each of our reporting units. The results of our annual impairment tests of goodwill indicated that no impairment existed.
Acquired intangible assets 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. We perform an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired.
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), 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 over a period of years to the extent they exceed 10% of the greater of plan assets or benefit obligations. This amortization period extended (approximately doubled from the prior nine years) in 2020 due to the freeze of our salaried pension plans 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. The GAAP funded status is measured as the difference between the fair value of the plan’s 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 assets for the portion of environmental costs that are probable of future recovery 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 assets for the portion of environmental costs that are probable of future recovery 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 which are recorded at fair value. As of December 31, 2019 and 2018, the fair value of our investments totaled $1.8 billion and $1.3 billion and was included in other noncurrent assets on our consolidated balance sheets. Our investments are held in a separate trust, which includes investments to fund our deferred compensation plan liabilities. Net gains on these securities were $233 million and $150 million in 2019 and 2017 compared to net losses on these securities of $67 million in 2018. 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 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, 2019 and 2018, our equity method investments totaled $1.2 billion, which primarily are composed of our investment in the United Launch Alliance (ULA) joint venture and the Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) joint venture. Our share of net earnings related to our equity method investees was $154 million in 2019, $119 million in 2018 and $207 million in 2017, of which approximately $145 million, $210 million and $205 million was included in our Space business segment operating profit.
During the year ended December 31, 2018, equity earnings included a non-cash asset impairment charge of $110 million ($83 million, or $0.29 per share, after-tax) related to our equity method investee, AMMROC. During the year ended December 31, 2017, equity earnings included a charge recorded in the first quarter of 2017 of approximately $64 million ($40 million, or $0.14 per share, after-tax), which represented our portion of a non-cash asset impairment related to certain long-lived assets held by AMMROC. Substantially all of AMMROC’s current business is dependent on one contract that is currently up for re-competition and if AMMROC is not successful in securing such business on favorable terms or at all, the carrying value of our investment would be adversely affected. We are continuing to monitor this investment in light of ongoing performance, business base and
economic issues and we may have to record our portion of additional charges, or an impairment of our investment, or both, should the carrying value of our investment exceed its fair value. These charges could adversely affect our results of operations.
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 highly effective 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 not highly effective, if any, are immediately recognized in earnings. The aggregate notional amount of our outstanding interest rate swaps at December 31, 2019 and 2018 was $750 million and $1.3 billion. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2019 and 2018 was $3.8 billion and $3.5 billion. The fair values of our outstanding interest rate swaps and foreign currency hedges at December 31, 2019 and 2018 were not significant. Derivative instruments did not have a material impact on net earnings and comprehensive income during the years ended December 31, 2019, 2018 and 2017. The impact of derivative instruments on our consolidated statements of cash flows is included in net cash provided by operating activities. 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
Leases
Effective January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), as amended, which requires lessees to recognize a right-of-use (ROU) asset and lease liability on the balance sheet for most lease arrangements and expands disclosures about leasing arrangements, among other items. We adopted ASU 2016-02 using the optional transition method whereby we applied the new lease requirements under ASU 2016-02 through a cumulative-effect adjustment, which after completing our implementation analysis, resulted in no adjustment to our January 1, 2019 beginning retained earnings balance. On January 1, 2019, we recognized approximately $1.0 billion of ROU operating lease assets and approximately $1.1 billion of operating lease liabilities, including noncurrent operating lease liabilities of approximately $830 million, as a result of adopting this standard. The difference between ROU operating lease assets and operating lease liabilities was primarily due to previously accrued rent expense relating to periods prior to January 1, 2019. As part of our adoption, we elected the package of practical expedients, which among other things, permits the carry forward of historical lease classifications. We did not elect to use the practical expedient permitting the use of hindsight in determining the lease term and in assessing impairment of our ROU assets. The adoption of the standard did not have a material impact on our operating results or cash flows. Financial information for periods prior to January 1, 2019, has not been restated for the adoption of ASU 2016-02.
Derivatives and Hedging
Effective January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815), which eliminates the requirement to separately measure and report hedge ineffectiveness among other items. The adoption of this standard did not have a significant impact on our operating results, financial position or cash flows.
Compensation—Retirement Benefits—Defined Benefit Plans—General
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements For Defined Benefit Plans. The new standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The effective date is our fiscal year ending December 31, 2020 with early adoption permitted and requires application on a retrospective basis. The adoption will not have a material effect on the Company’s consolidated financial statements.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. Upon adoption of the new standard on January 1, 2020, we began recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to our financial assets. We do not anticipate that the adoption of the new standard will have a significant impact on our operating results, financial position or cash flows.
Note 2 – Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Weighted average common shares outstanding for basic computations
|
|
282.0
|
|
|
284.5
|
|
|
287.8
|
|
Weighted average dilutive effect of equity awards
|
|
1.8
|
|
|
2.3
|
|
|
2.8
|
|
Weighted average common shares outstanding for diluted computations
|
|
283.8
|
|
|
286.8
|
|
|
290.6
|
|
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 (RSUs), performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards for the years ended December 31, 2019, 2018 and 2017.
Note 3 – Goodwill and Acquired Intangibles
Changes in the carrying amount of goodwill by segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
|
MFC
|
|
|
RMS
|
|
|
Space
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
171
|
|
|
$
|
2,265
|
|
|
$
|
6,784
|
|
|
$
|
1,587
|
|
|
$
|
10,807
|
|
Other
|
|
—
|
|
|
(3
|
)
|
|
(33
|
)
|
|
(2
|
)
|
|
(38
|
)
|
Balance at December 31, 2018
|
|
171
|
|
|
2,262
|
|
|
6,751
|
|
|
1,585
|
|
|
10,769
|
|
Distributed Energy Solutions divestiture
|
|
—
|
|
|
(175
|
)
|
|
—
|
|
|
—
|
|
|
(175
|
)
|
Other
|
|
—
|
|
|
2
|
|
|
7
|
|
|
1
|
|
|
10
|
|
Balance at December 31, 2019
|
|
$
|
171
|
|
|
$
|
2,089
|
|
|
$
|
6,758
|
|
|
$
|
1,586
|
|
|
$
|
10,604
|
|
On November 18, 2019, we divested our Distributed Energy Solutions business, a commercial energy service provider included in our MFC business segment. As a result of the divestiture, MFC’s goodwill decreased by the $175 million allocated to the Distributed Energy Solutions business.
The gross carrying amounts and accumulated amortization of our acquired intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Finite-Lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer programs
|
|
$
|
3,184
|
|
|
$
|
(967
|
)
|
|
|
$
|
2,217
|
|
|
|
$
|
3,184
|
|
|
$
|
(735
|
)
|
|
|
$
|
2,449
|
|
Customer relationships
|
|
344
|
|
|
(243
|
)
|
|
|
101
|
|
|
|
344
|
|
|
(199
|
)
|
|
|
145
|
|
Other
|
|
53
|
|
|
(45
|
)
|
|
|
8
|
|
|
|
53
|
|
|
(40
|
)
|
|
|
13
|
|
Total finite-lived intangibles
|
|
3,581
|
|
|
(1,255
|
)
|
|
|
2,326
|
|
|
|
3,581
|
|
|
(974
|
)
|
|
|
2,607
|
|
Indefinite-Lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
887
|
|
|
—
|
|
|
|
887
|
|
|
|
887
|
|
|
—
|
|
|
|
887
|
|
Total acquired intangibles
|
|
$
|
4,468
|
|
|
$
|
(1,255
|
)
|
|
|
$
|
3,213
|
|
|
|
$
|
4,468
|
|
|
$
|
(974
|
)
|
|
|
$
|
3,494
|
|
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; and other intangibles, from three to 10 years.
Amortization expense for acquired finite-lived intangible assets was $284 million, $296 million and $312 million in 2019, 2018 and 2017. Estimated future amortization expense is as follows: $263 million in 2020; $256 million in 2021; $253 million in 2022; $250 million in 2023; $247 million in 2024 and $1.1 billion thereafter.
With the acquisition of Sikorsky Aircraft Corporation (Sikorsky), we recorded customer contractual obligations of $507 million. Customer contractual obligations represent liabilities on certain development programs where the expected costs exceed the expected sales under contract. These liabilities are 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. As of December 31, 2019, we have recognized approximately $390 million in net sales related to customer contractual obligations. As of December 31, 2019, the estimated liquidation of the customer contractual obligation is approximated as follows: $55 million in 2020, $25 million in 2021, $5 million in 2022, $20 million in 2023, $5 million in 2024 and $7 million thereafter.
Note 4 – Information on Business Segments
We operate in four business segments: Aeronautics, MFC, RMS and Space. 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.
|
|
|
•
|
Rotary and Mission Systems – Provides design, manufacture, service and support for a variety of military and commercial 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 (LCS); the Multi-Mission Surface Combatant; 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.
|
|
|
•
|
Space – Engaged in the research and development, design, engineering and production of satellites, space transportation systems, and strategic, advanced strike, and defensive systems. Space provides network-enabled situational awareness and integrates complex space and ground global systems to help our customers gather, analyze and securely distribute critical intelligence data. Space is also responsible for various classified systems and services in support of vital national security systems. Operating profit for our Space business segment also includes our share of earnings for our 50% ownership interest in ULA, which provides expendable launch services to the U.S. Government. Our investment in ULA totaled $709 million and $687 million at December 31, 2019 and 2018.
|
Net sales of our business segments in the following tables 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. ULA, results of which are included in our Space business segment, is our primary equity method investee. Operating profit of our business segments excludes the FAS/CAS operating adjustment for our qualified defined benefit pension plans (described below); the adjustment from CAS to FAS service cost component for all other postretirement benefit plans; expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance and restructuring actions (see “Note 15 – Severance and Restructuring Charges”) and goodwill impairments; gains or losses from significant 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. Our consolidated operating profit in our consolidated financial statements must present the service cost component of FAS pension and other postretirement benefit plan expense calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS operating adjustment represents the difference between the service cost component of FAS pension expense and the CAS pension cost recorded in our business segments’ results of operations. The non-service FAS pension and other postretirement benefit plan cost component is included in other non-operating expenses, net on our consolidated statement of earnings.
Selected Financial Data by Business Segment
Summary operating results for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
23,693
|
|
|
$
|
21,242
|
|
|
$
|
19,410
|
|
Missiles and Fire Control
|
|
10,131
|
|
|
8,462
|
|
|
7,282
|
|
Rotary and Mission Systems
|
|
15,128
|
|
|
14,250
|
|
|
13,663
|
|
Space
|
|
10,860
|
|
|
9,808
|
|
|
9,605
|
|
Total net sales
|
|
$
|
59,812
|
|
|
$
|
53,762
|
|
|
$
|
49,960
|
|
Operating profit
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
2,521
|
|
|
$
|
2,272
|
|
|
$
|
2,176
|
|
Missiles and Fire Control
|
|
1,441
|
|
|
1,248
|
|
|
1,034
|
|
Rotary and Mission Systems
|
|
1,421
|
|
|
1,302
|
|
|
902
|
|
Space
|
|
1,191
|
|
|
1,055
|
|
|
980
|
|
Total business segment operating profit
|
|
6,574
|
|
|
5,877
|
|
|
5,092
|
|
Unallocated items
|
|
|
|
|
|
|
FAS/CAS operating adjustment (a)
|
|
2,049
|
|
|
1,803
|
|
|
1,613
|
|
Stock-based compensation
|
|
(189
|
)
|
|
(173
|
)
|
|
(158
|
)
|
Severance and restructuring charges (b)
|
|
—
|
|
|
(96
|
)
|
|
—
|
|
Other, net (c)
|
|
111
|
|
|
(77
|
)
|
|
197
|
|
Total unallocated, net
|
|
1,971
|
|
|
1,457
|
|
|
1,652
|
|
Total consolidated operating profit
|
|
$
|
8,545
|
|
|
$
|
7,334
|
|
|
$
|
6,744
|
|
|
|
(a)
|
The FAS/CAS operating adjustment represents the difference between the service cost component of FAS pension expense and total pension costs recoverable on U.S. Government contracts as determined in accordance with CAS. For a detail of the FAS/CAS operating adjustment and the total net FAS/CAS pension adjustment, see the table below.
|
|
|
(b)
|
See “Note 15 – Severance and Restructuring Charges” for information on charges related to certain severance actions at our business segments. Severance and restructuring charges for initiatives that are not significant are included in business segment operating profit.
|
|
|
(c)
|
Other, net in 2019 includes a previously deferred non-cash gain of $51 million related to properties sold in 2015 as a result of completing our remaining obligations and a gain of $34 million for the sale of its Distributed Energy Solutions business. Other, net in 2018 includes a non-cash asset impairment charge of $110 million related to our equity method investee, AMMROC (see “Note 1 – Significant Accounting Policies”). Other, net in 2017 includes a previously deferred non-cash gain of $198 million related to properties sold in 2015 as a result of completing our remaining obligations (see “Note 7 – Property, Plant and Equipment, net”) and a $64 million charge, which represents our portion of a non-cash asset impairment charge recorded by AMMROC. (see “Note 1 – Significant Accounting Policies”).
|
Total net FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension expense, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Total FAS expense and CAS costs
|
|
|
|
|
|
|
FAS pension expense
|
|
$
|
(1,093
|
)
|
|
$
|
(1,431
|
)
|
|
$
|
(1,372
|
)
|
Less: CAS pension cost
|
|
2,565
|
|
|
2,433
|
|
|
2,248
|
|
Net FAS/CAS pension adjustment
|
|
$
|
1,472
|
|
|
$
|
1,002
|
|
|
$
|
876
|
|
|
|
|
|
|
|
|
Service and non-service cost reconciliation
|
|
|
|
|
|
|
FAS pension service cost
|
|
(516
|
)
|
|
(630
|
)
|
|
(635
|
)
|
Less: CAS pension cost
|
|
2,565
|
|
|
2,433
|
|
|
2,248
|
|
FAS/CAS operating adjustment
|
|
2,049
|
|
|
1,803
|
|
|
1,613
|
|
Non-operating FAS pension expense (a)
|
|
(577
|
)
|
|
(801
|
)
|
|
(737
|
)
|
Net FAS/CAS pension adjustment
|
|
$
|
1,472
|
|
|
$
|
1,002
|
|
|
$
|
876
|
|
|
|
(a)
|
We record the non-service cost components of net periodic benefit cost as part of other non-operating expense, net in the consolidated statement of earnings. The non-service cost components in the table above relate only to our qualified defined benefit pension plans. We incurred total non-service costs for our qualified defined benefit pension plans in the table above, along with similar costs for our other postretirement benefit plans of $116 million, $67 million, and $109 million for the years ended 2019, 2018 and 2017.
|
We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension expense and total CAS pension cost. The non-service FAS pension cost component is included in other non-operating expense, net in our consolidated statements of earnings. The net FAS/CAS pension adjustment increases or decreases CAS pension cost to equal total FAS pension expense (both service and non-service).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Intersegment sales
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
217
|
|
|
$
|
120
|
|
|
$
|
122
|
|
Missiles and Fire Control
|
|
515
|
|
|
423
|
|
|
355
|
|
Rotary and Mission Systems (a)
|
|
1,872
|
|
|
1,759
|
|
|
1,801
|
|
Space
|
|
352
|
|
|
237
|
|
|
111
|
|
Total intersegment sales
|
|
$
|
2,956
|
|
|
$
|
2,539
|
|
|
$
|
2,389
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
318
|
|
|
$
|
304
|
|
|
$
|
311
|
|
Missiles and Fire Control
|
|
124
|
|
|
105
|
|
|
99
|
|
Rotary and Mission Systems
|
|
464
|
|
|
458
|
|
|
468
|
|
Space
|
|
213
|
|
|
229
|
|
|
245
|
|
Total business segment depreciation and amortization
|
|
1,119
|
|
|
1,096
|
|
|
1,123
|
|
Corporate activities
|
|
70
|
|
|
65
|
|
|
72
|
|
Total depreciation and amortization
|
|
$
|
1,189
|
|
|
$
|
1,161
|
|
|
$
|
1,195
|
|
Capital expenditures
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
526
|
|
|
$
|
460
|
|
|
$
|
371
|
|
Missiles and Fire Control
|
|
300
|
|
|
244
|
|
|
156
|
|
Rotary and Mission Systems
|
|
272
|
|
|
255
|
|
|
308
|
|
Space
|
|
258
|
|
|
255
|
|
|
179
|
|
Total business segment capital expenditures
|
|
1,356
|
|
|
1,214
|
|
|
1,014
|
|
Corporate activities
|
|
128
|
|
|
64
|
|
|
163
|
|
Total capital expenditures
|
|
$
|
1,484
|
|
|
$
|
1,278
|
|
|
$
|
1,177
|
|
|
|
(a)
|
During 2019 a program within our RMS business segment, which primarily performed work for our Aeronautics business segment, was realigned under Aeronautics. The 2018 and 2017 RMS intersegment sales have been adjusted to reflect the current program structure.
|
Net Sales by Type
Net sales by total products and services, contract type, customer category and geographic region for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
Aeronautics
|
|
MFC
|
|
RMS
|
|
Space
|
|
Total
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
20,319
|
|
|
$
|
8,424
|
|
|
$
|
12,206
|
|
|
$
|
9,104
|
|
|
$
|
50,053
|
|
Services
|
|
3,374
|
|
|
1,707
|
|
|
2,922
|
|
|
1,756
|
|
|
9,759
|
|
Total net sales
|
|
$
|
23,693
|
|
|
$
|
10,131
|
|
|
$
|
15,128
|
|
|
$
|
10,860
|
|
|
$
|
59,812
|
|
Net sales by contract type
|
|
|
|
|
|
|
|
|
|
|
Fixed-price
|
|
$
|
17,239
|
|
|
$
|
6,449
|
|
|
$
|
10,382
|
|
|
$
|
2,135
|
|
|
$
|
36,205
|
|
Cost-reimbursable
|
|
6,454
|
|
|
3,682
|
|
|
4,746
|
|
|
8,725
|
|
|
23,607
|
|
Total net sales
|
|
$
|
23,693
|
|
|
$
|
10,131
|
|
|
$
|
15,128
|
|
|
$
|
10,860
|
|
|
$
|
59,812
|
|
Net sales by customer
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
14,776
|
|
|
$
|
7,524
|
|
|
$
|
10,803
|
|
|
$
|
9,322
|
|
|
$
|
42,425
|
|
International (a)
|
|
8,733
|
|
|
2,465
|
|
|
3,822
|
|
|
1,511
|
|
|
16,531
|
|
U.S. commercial and other
|
|
184
|
|
|
142
|
|
|
503
|
|
|
27
|
|
|
856
|
|
Total net sales
|
|
$
|
23,693
|
|
|
$
|
10,131
|
|
|
$
|
15,128
|
|
|
$
|
10,860
|
|
|
$
|
59,812
|
|
Net sales by geographic region
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,960
|
|
|
$
|
7,666
|
|
|
$
|
11,306
|
|
|
$
|
9,349
|
|
|
$
|
43,281
|
|
Asia Pacific
|
|
3,882
|
|
|
420
|
|
|
1,451
|
|
|
73
|
|
|
5,826
|
|
Europe
|
|
3,224
|
|
|
516
|
|
|
769
|
|
|
1,419
|
|
|
5,928
|
|
Middle East
|
|
1,465
|
|
|
1,481
|
|
|
979
|
|
|
19
|
|
|
3,944
|
|
Other
|
|
162
|
|
|
48
|
|
|
623
|
|
|
—
|
|
|
833
|
|
Total net sales
|
|
$
|
23,693
|
|
|
$
|
10,131
|
|
|
$
|
15,128
|
|
|
$
|
10,860
|
|
|
$
|
59,812
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Aeronautics
|
|
MFC
|
|
RMS
|
|
Space
|
|
Total
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
18,207
|
|
|
$
|
6,945
|
|
|
$
|
11,714
|
|
|
$
|
8,139
|
|
|
$
|
45,005
|
|
Services
|
|
3,035
|
|
|
1,517
|
|
|
2,536
|
|
|
1,669
|
|
|
8,757
|
|
Total net sales
|
|
$
|
21,242
|
|
|
$
|
8,462
|
|
|
$
|
14,250
|
|
|
$
|
9,808
|
|
|
$
|
53,762
|
|
Net sales by contract type
|
|
|
|
|
|
|
|
|
|
|
Fixed-price
|
|
$
|
15,719
|
|
|
$
|
5,653
|
|
|
$
|
9,975
|
|
|
$
|
1,892
|
|
|
$
|
33,239
|
|
Cost-reimbursable
|
|
5,523
|
|
|
2,809
|
|
|
4,275
|
|
|
7,916
|
|
|
20,523
|
|
Total net sales
|
|
$
|
21,242
|
|
|
$
|
8,462
|
|
|
$
|
14,250
|
|
|
$
|
9,808
|
|
|
$
|
53,762
|
|
Net sales by customer
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
13,321
|
|
|
$
|
6,088
|
|
|
$
|
10,083
|
|
|
$
|
8,224
|
|
|
$
|
37,716
|
|
International (a)
|
|
7,735
|
|
|
2,190
|
|
|
3,693
|
|
|
1,538
|
|
|
15,156
|
|
U.S. commercial and other
|
|
186
|
|
|
184
|
|
|
474
|
|
|
46
|
|
|
890
|
|
Total net sales
|
|
$
|
21,242
|
|
|
$
|
8,462
|
|
|
$
|
14,250
|
|
|
$
|
9,808
|
|
|
$
|
53,762
|
|
Net sales by geographic region
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
13,507
|
|
|
$
|
6,272
|
|
|
$
|
10,557
|
|
|
$
|
8,270
|
|
|
$
|
38,606
|
|
Asia Pacific
|
|
3,335
|
|
|
427
|
|
|
1,433
|
|
|
85
|
|
|
5,280
|
|
Europe
|
|
2,837
|
|
|
321
|
|
|
829
|
|
|
1,416
|
|
|
5,403
|
|
Middle East
|
|
1,380
|
|
|
1,404
|
|
|
781
|
|
|
37
|
|
|
3,602
|
|
Other
|
|
183
|
|
|
38
|
|
|
650
|
|
|
—
|
|
|
871
|
|
Total net sales
|
|
$
|
21,242
|
|
|
$
|
8,462
|
|
|
$
|
14,250
|
|
|
$
|
9,808
|
|
|
$
|
53,762
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
Aeronautics
|
|
MFC
|
|
RMS
|
|
Space
|
|
Total
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
16,981
|
|
|
$
|
5,940
|
|
|
$
|
11,398
|
|
|
$
|
8,183
|
|
|
$
|
42,502
|
|
Services
|
|
2,429
|
|
|
1,342
|
|
|
2,265
|
|
|
1,422
|
|
|
7,458
|
|
Total net sales
|
|
$
|
19,410
|
|
|
$
|
7,282
|
|
|
$
|
13,663
|
|
|
$
|
9,605
|
|
|
$
|
49,960
|
|
Net sales by contract type
|
|
|
|
|
|
|
|
|
|
|
Fixed-price
|
|
$
|
13,828
|
|
|
$
|
5,102
|
|
|
$
|
10,059
|
|
|
$
|
2,058
|
|
|
$
|
31,047
|
|
Cost-reimbursable
|
|
5,582
|
|
|
2,180
|
|
|
3,604
|
|
|
7,547
|
|
|
18,913
|
|
Total net sales
|
|
$
|
19,410
|
|
|
$
|
7,282
|
|
|
$
|
13,663
|
|
|
$
|
9,605
|
|
|
$
|
49,960
|
|
Net sales by customer
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
12,609
|
|
|
$
|
4,467
|
|
|
$
|
9,715
|
|
|
$
|
8,088
|
|
|
$
|
34,879
|
|
International (a)
|
|
6,641
|
|
|
2,672
|
|
|
3,575
|
|
|
1,446
|
|
|
14,334
|
|
U.S. commercial and other
|
|
160
|
|
|
143
|
|
|
373
|
|
|
71
|
|
|
747
|
|
Total net sales
|
|
$
|
19,410
|
|
|
$
|
7,282
|
|
|
$
|
13,663
|
|
|
$
|
9,605
|
|
|
$
|
49,960
|
|
Net sales by geographic region
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,769
|
|
|
$
|
4,610
|
|
|
$
|
10,088
|
|
|
$
|
8,159
|
|
|
$
|
35,626
|
|
Asia Pacific
|
|
2,823
|
|
|
516
|
|
|
1,344
|
|
|
92
|
|
|
4,775
|
|
Europe
|
|
2,331
|
|
|
305
|
|
|
927
|
|
|
1,270
|
|
|
4,833
|
|
Middle East
|
|
1,316
|
|
|
1,798
|
|
|
572
|
|
|
81
|
|
|
3,767
|
|
Other
|
|
171
|
|
|
53
|
|
|
732
|
|
|
3
|
|
|
959
|
|
Total net sales
|
|
$
|
19,410
|
|
|
$
|
7,282
|
|
|
$
|
13,663
|
|
|
$
|
9,605
|
|
|
$
|
49,960
|
|
|
|
(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 27% of our consolidated net sales during 2019 and 2018, and 26% during 2017.
Total assets for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Assets (a)
|
|
|
|
|
Aeronautics
|
|
$
|
9,109
|
|
|
$
|
8,435
|
|
Missiles and Fire Control
|
|
5,030
|
|
|
5,017
|
|
Rotary and Mission Systems
|
|
18,751
|
|
|
18,333
|
|
Space
|
|
5,844
|
|
|
5,445
|
|
Total business segment assets
|
|
38,734
|
|
|
37,230
|
|
Corporate assets (b)
|
|
8,794
|
|
|
7,646
|
|
Total assets
|
|
$
|
47,528
|
|
|
$
|
44,876
|
|
|
|
(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, assets for the portion of environmental costs that are probable of future recovery and investments held in a separate trust.
|
Note 5 – Receivables, net, Contract Assets and Contract Liabilities
Receivables, net, contract assets and contract liabilities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Receivables, net
|
|
$
|
2,337
|
|
|
$
|
2,444
|
|
Contract assets
|
|
9,094
|
|
|
9,472
|
|
Contract liabilities
|
|
7,054
|
|
|
6,491
|
|
Receivables, net consist of approximately $1.7 billion from the U.S. Government and $648 million from other governments and commercial customers as of December 31, 2019.
Contract assets are net of $33.0 billion and $30.2 billion of customer advances and progress payments as of December 31, 2019 and 2018. Contract assets decreased $378 million during 2019, primarily due to billings related to the satisfaction or partial satisfaction of performance obligations during 2019 exceeding the revenue recognized. There were no significant impairment losses related to our contract assets during 2019 and 2018. We expect to bill our customers for the majority of the December 31, 2019 contract assets during 2020.
Contract liabilities increased $563 million during 2019, primarily due to payments received in excess of revenue recognized on these performance obligations. During 2019 and 2018, we recognized $3.9 billion of our contract liabilities at December 31, 2018 and 2017, respectively, as revenue. During 2017, we recognized $3.3 billion of our contract liabilities at December 31, 2016 as revenue.
Note 6 – Inventories
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Materials, spares and supplies
|
|
$
|
532
|
|
|
$
|
446
|
|
Work-in-process
|
|
2,783
|
|
|
2,161
|
|
Finished goods
|
|
304
|
|
|
390
|
|
Total inventories
|
|
$
|
3,619
|
|
|
$
|
2,997
|
|
Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. As of December 31, 2019 and 2018, $493 million and $443 million of pre-contract costs were included in inventories.
Note 7 – Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
136
|
|
|
$
|
135
|
|
Buildings
|
|
7,013
|
|
|
6,553
|
|
Machinery and equipment
|
|
8,128
|
|
|
7,871
|
|
Construction in progress
|
|
1,701
|
|
|
1,530
|
|
Total property, plant and equipment
|
|
16,978
|
|
|
16,089
|
|
Less: accumulated depreciation and amortization
|
|
(10,387
|
)
|
|
(9,965
|
)
|
Total property, plant and equipment, net
|
|
$
|
6,591
|
|
|
$
|
6,124
|
|
Note 8 – Leases
We evaluate whether our contractual arrangements contain leases at the inception of such arrangements. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Substantially all of our leases are long-term operating leases with fixed payment terms. We do not have significant financing leases. Our ROU operating lease assets represent our right to use an underlying asset for the lease term, and our operating lease liabilities represent our obligation to make lease payments. ROU operating lease assets are recorded in other noncurrent assets in our consolidated balance sheet. Operating lease liabilities are recorded in other current liabilities or other noncurrent liabilities in our consolidated balance sheet based on their contractual due dates.
Both the ROU operating lease asset and liability are recognized as of the lease commencement date at the present value of the lease payments over the lease term. Most of our leases do not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing rate, which is determined using our credit rating and information available as of the commencement date. ROU operating lease assets include lease payments made at or before the lease commencement date, net of any lease incentives.
Our operating lease agreements may include options to extend the lease term or terminate it early. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales on our consolidated statement of earnings.
We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a single component. Additionally, for certain equipment leases, we apply a portfolio approach to recognize operating lease ROU assets and liabilities. We evaluate ROU assets for impairment consistent with our property, plant and equipment policy (see Note 1 – Significant Accounting Policies).
We generally enter into operating lease agreements for facilities, land and equipment. Our ROU operating lease assets were $1.0 billion at December 31, 2019. Operating lease liabilities were $1.1 billion, of which $855 million were classified as noncurrent, at December 31, 2019. New ROU operating lease assets and liabilities entered into during 2019 were $209 million. The weighted average remaining lease term and discount rate for our operating leases were approximately 9 years and 3.2% at December 31, 2019.
We recognized operating lease expense of $239 million, $247 million and $169 million in 2019, 2018 and 2017. In addition, we made cash payments of $223 million for operating leases during 2019, which are included in cash flows from operating activities in our consolidated statement of cash flows.
Future minimum lease commitments at December 31, 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
Operating leases
|
$
|
1,287
|
|
|
$
|
280
|
|
|
$
|
190
|
|
|
$
|
154
|
|
|
$
|
119
|
|
|
$
|
98
|
|
|
$
|
446
|
|
|
Less: imputed interest
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9 – Income Taxes
Our provision for federal and foreign income tax expense for continuing operations consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Federal income tax expense (benefit):
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operations
|
|
$
|
698
|
|
|
$
|
975
|
|
|
$
|
(189
|
)
|
One-time charge due to tax legislation (a)
|
|
—
|
|
|
(6
|
)
|
|
43
|
|
Deferred
|
|
|
|
|
|
|
Operations
|
|
235
|
|
|
(194
|
)
|
|
1,607
|
|
One-time charge due to tax legislation (a)
|
|
—
|
|
|
(37
|
)
|
|
1,843
|
|
Total federal income tax expense
|
|
933
|
|
|
738
|
|
|
3,304
|
|
Foreign income tax expense (benefit):
|
|
|
|
|
|
|
Current
|
|
91
|
|
|
67
|
|
|
53
|
|
Deferred
|
|
(13
|
)
|
|
(13
|
)
|
|
(1
|
)
|
Total foreign income tax expense
|
|
78
|
|
|
54
|
|
|
52
|
|
Total income tax expense
|
|
$
|
1,011
|
|
|
$
|
792
|
|
|
$
|
3,356
|
|
|
|
(a)
|
Represents one-time charge in 2017 primarily due to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a deemed repatriation tax, and true-up to this charge in 2018.
|
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of December 31, 2017 by $2.0 billion to reflect the estimated impact of the Tax Act. We recorded a corresponding net one-time charge of $2.0 billion ($6.77 per share), substantially all of which was non-cash, primarily related to enactment of the Tax Act, the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate, a
deemed repatriation tax, and a reduction in the U.S. manufacturing benefit as a result of our decision to accelerate contributions to our pension fund in 2018 in order to receive a tax deduction in 2017.
We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, we had substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate in 2017 of such effects. During 2018, we refined our calculations, evaluated changes in interpretations and assumptions that we had made, applied additional guidance issued by the U.S. Government, and evaluated actions and related accounting policy decisions we have made. As of December 22, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and did not identify any material changes to the provisional, net, one-time charge for the year ended December 31, 2017, related to the Tax Act.
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 $96 million for 2019, $83 million for 2018, and $103 million for 2017.
Our reconciliation of the U.S. federal statutory income tax rate (21% in 2019 and 2018 and 35% in 2017) to actual income tax expense for continuing operations is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
Income tax expense at the U.S. federal statutory tax rate
|
|
$
|
1,521
|
|
|
21.0
|
%
|
|
$
|
1,226
|
|
|
21.0
|
%
|
|
$
|
1,836
|
|
|
35.0
|
%
|
Research and development tax credit
|
|
(148
|
)
|
|
(2.0
|
)
|
|
(138
|
)
|
|
(2.4
|
)
|
|
(115
|
)
|
|
(2.2
|
)
|
Foreign derived intangible income deduction
|
|
(122
|
)
|
|
(1.7
|
)
|
|
(61
|
)
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
Excess tax benefits for share-based payment awards
|
|
(63
|
)
|
|
(0.9
|
)
|
|
(55
|
)
|
|
(0.9
|
)
|
|
(106
|
)
|
|
(2.0
|
)
|
Tax deductible dividends
|
|
(62
|
)
|
|
(0.9
|
)
|
|
(59
|
)
|
|
(1.0
|
)
|
|
(94
|
)
|
|
(1.8
|
)
|
Tax accounting method change (a)
|
|
(15
|
)
|
|
(0.2
|
)
|
|
(61
|
)
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
Deferred tax write-down and transition tax (b)
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
(0.7
|
)
|
|
1,886
|
|
|
35.9
|
|
U.S. manufacturing deduction benefit (c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(0.1
|
)
|
Other, net (d)
|
|
(100
|
)
|
|
(1.3
|
)
|
|
(17
|
)
|
|
(0.4
|
)
|
|
(44
|
)
|
|
(0.8
|
)
|
Income tax expense
|
|
$
|
1,011
|
|
|
14.0
|
%
|
|
$
|
792
|
|
|
13.6
|
%
|
|
$
|
3,356
|
|
|
64.0
|
%
|
|
|
(a)
|
Recognized tax benefit of $15 million and $61 million in 2019 and 2018, from our change in a tax accounting method related to restoration of tax basis.
|
|
|
(b)
|
Includes a deferred tax re-measurement and transition tax true-up in 2018 and one-time charge in 2017 primarily due to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a deemed repatriation tax.
|
|
|
(c)
|
Includes a reduction in our 2017 manufacturing benefit as a result of our decision to accelerate contributions to our pension funds in 2018. The Tax Act repealed the manufacturing benefit for years after 2017.
|
|
|
(d)
|
Includes additional $98 million deduction for foreign derived intangible income related to prior year recognized in 2019 reflecting proposed tax regulations released on March 4, 2019.
|
We recognized a tax benefit of $220 million in 2019 and $61 million in 2018 from the deduction for foreign derived intangible income enacted by the Tax Act. The rate for 2019 benefited from $98 million additional tax deductions for the prior year, primarily due to proposed tax regulations released on March 4, 2019. The Tax Act repealed the U.S. manufacturing deduction for years after 2017. Therefore, there was no U.S. manufacturing benefit in 2019 or 2018. Tax benefits from the U.S. manufacturing deduction were not significant in 2017.
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 benefit of the tax deduction has declined in both 2019 and 2018 from 2017, principally due to the lower tax rate enacted by the Tax Act.
We recognized a tax benefit of $15 million in 2019 and $61 million in 2018 from our change in a tax accounting method reflecting a 2012 Court of Federal Claims decision, which held that the tax basis in certain assets should be increased and realized upon the assets’ disposition.
We participate in the IRS Compliance Assurance Process program. Examinations of the years 2018 and 2019 remain under IRS review. We are also subject to taxation in various states and foreign jurisdictions including Australia, Canada, India, Italy,
Japan, Poland, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities.
The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets related to:
|
|
|
|
|
Accrued compensation and benefits
|
|
$
|
659
|
|
|
$
|
584
|
|
Pensions
|
|
3,057
|
|
|
2,623
|
|
Other postretirement benefit obligations
|
|
71
|
|
|
148
|
|
Contract accounting methods
|
|
349
|
|
|
539
|
|
Foreign company operating losses and credits
|
|
49
|
|
|
38
|
|
Other (a)
|
|
345
|
|
|
160
|
|
Valuation allowance (b)
|
|
(28
|
)
|
|
(20
|
)
|
Deferred tax assets, net
|
|
4,502
|
|
|
4,072
|
|
Deferred tax liabilities related to:
|
|
|
|
|
Goodwill and purchased intangibles
|
|
330
|
|
|
296
|
|
Property, plant and equipment
|
|
340
|
|
|
296
|
|
Exchanged debt securities and other (a)
|
|
525
|
|
|
294
|
|
Deferred tax liabilities
|
|
1,195
|
|
|
886
|
|
Net deferred tax assets
|
|
$
|
3,307
|
|
|
$
|
3,186
|
|
|
|
(a)
|
Includes deferred tax assets and liabilities related to lease liability and ROU asset.
|
|
|
(b)
|
A valuation allowance was provided against certain foreign company deferred tax assets arising from carryforwards of unused tax benefits.
|
As of December 31, 2019, 2018, and 2017, our liabilities associated with unrecognized tax benefits were 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 for these jurisdictions is no longer open for U.S. federal or non-U.S. income tax examinations for the years before 2015, other than with respect to refunds.
Our federal and foreign income tax payments, net of refunds, were $940 million in 2019 and $1.1 billion in 2017. We received net federal and foreign income tax refunds of $41 million in 2018, primarily due to a 2017 net operating loss carryback arising from our accelerated pension contributions.
Note 10 – Debt
Our total debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Notes
|
|
|
|
|
4.25% due 2019
|
|
$
|
—
|
|
|
$
|
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
|
|
1,054
|
|
|
1,054
|
|
4.07% due 2042
|
|
1,336
|
|
|
1,336
|
|
3.80% due 2045
|
|
1,000
|
|
|
1,000
|
|
4.70% due 2046
|
|
1,326
|
|
|
1,326
|
|
4.09% due 2052
|
|
1,578
|
|
|
1,578
|
|
Other notes with rates from 4.85% to 9.13%, due 2022 to 2041
|
|
1,618
|
|
|
1,618
|
|
Commercial paper
|
|
—
|
|
|
600
|
|
Total debt
|
|
13,812
|
|
|
15,312
|
|
Less: unamortized discounts and issuance costs
|
|
(1,158
|
)
|
|
(1,208
|
)
|
Total debt, net
|
|
12,654
|
|
|
14,104
|
|
Less: current portion
|
|
(1,250
|
)
|
|
(1,500
|
)
|
Long-term debt, net
|
|
$
|
11,404
|
|
|
$
|
12,604
|
|
Revolving Credit Facilities
At December 31, 2019, we had a $2.5 billion revolving credit facility (the 5-year Facility) with various banks that is available for general corporate purposes. Effective August 24, 2019, we extended the expiration date of the 5-year Facility from August 24, 2023 to August 24, 2024. The undrawn portion of the 5-year Facility also serves as a backup facility for the issuance of commercial paper. The total amount outstanding at any point in time under the combination of our commercial paper program and the credit facility cannot exceed the amount of the 5-year Facility. 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. There were no borrowings outstanding under the 5-year Facility as of December 31, 2019 and 2018.
Borrowings under the 5-year Facility are unsecured and bear interest at rates based, at our option, on a Eurodollar Rate or a Base Rate, as defined in the 5-year Facility’s agreement. Each bank’s 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, 2019 and 2018, 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 November 2019, we repaid $900 million of long-term notes with a fixed interest rate of 4.25% according to their scheduled maturities. In November 2018, we repaid $750 million of long-term notes with a fixed interest rate of 1.85% according to their scheduled maturities.
In September 2017, we issued notes totaling approximately $1.6 billion with a fixed interest rate of 4.09% maturing in September 2052 (the New Notes) in exchange for outstanding notes totaling approximately $1.4 billion with fixed interest rates ranging from 4.70% to 8.50% maturing 2029 to 2046 (the Old Notes). In connection with the exchange of principal, we paid a premium of $237 million, substantially all of which was in the form of New Notes. This premium will be amortized as additional interest expense over the term of the New Notes using the effective interest method. We may, at our option, redeem some or all of the New Notes at any time by paying the principal amount of notes being redeemed plus a make-whole premium and accrued and unpaid interest. Interest on the New Notes is payable on March 15 and September 15 of each year and began on March 15, 2018.
The New Notes are unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness.
We made interest payments of approximately $625 million, $635 million and $610 million during the years ended December 31, 2019, 2018 and 2017, respectively.
Short-Term Debt and Commercial Paper
As of December 31, 2019, we had $1.3 billion of short-term borrowings due within one year, which are scheduled to mature in November 2020. As of December 31, 2018, we had $1.5 billion of short-term borrowings due within one year, of which $900 million was composed of a scheduled debt maturity due in November 2019 and $600 million was composed of commercial paper with a weighted-average rate of 2.89% outstanding.
We have agreements in place with financial institutions to provide for the issuance of commercial paper. The outstanding balance of commercial paper can fluctuate daily and the amount outstanding during the period may be greater or less than the amount reported at the end of the period. During 2019, we borrowed and fully repaid amounts under our commercial paper program. There were no commercial paper borrowings outstanding as of December 31, 2019. All of our commercial paper borrowings had maturities of up to three months or less from the date of issuance. We may, as conditions warrant, continue to issue commercial paper backed by our revolving credit facility to manage the timing of cash flows.
Note 11 – Postretirement Benefit 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 31, 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. We completed the final step of the previously announced planned freeze of our qualified and nonqualified defined benefit pension plans for salaried employees effective January 1, 2020. The freeze took effect in two stages. Effective January 1, 2016, the pay-based component of the formula used to determine retirement benefits was frozen. Effective January 1, 2020, the service-based component of the formula was frozen. As a result of these changes, the qualified defined benefit pension plans for salaried employees are fully frozen effective January 1, 2020. With the freeze complete, the majority of our salaried employees participate in an enhanced defined contribution retirement savings plan.
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. The funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan.
The net periodic benefit cost recognized for our qualified defined benefit pension plans and our retiree medical and life insurance plans each year included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined
Benefit Pension Plans (a)
|
|
|
Retiree Medical and
Life Insurance Plans
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
516
|
|
|
$
|
630
|
|
|
$
|
635
|
|
|
|
$
|
14
|
|
|
$
|
19
|
|
|
$
|
19
|
|
Interest cost
|
|
1,806
|
|
|
1,740
|
|
|
1,835
|
|
|
|
97
|
|
|
91
|
|
|
103
|
|
Expected return on plan assets
|
|
(2,300
|
)
|
|
(2,395
|
)
|
|
(2,249
|
)
|
|
|
(110
|
)
|
|
(135
|
)
|
|
(128
|
)
|
Recognized net actuarial losses
|
|
1,404
|
|
|
1,777
|
|
|
1,506
|
|
|
|
2
|
|
|
5
|
|
|
19
|
|
Amortization of net prior service (credit) cost
|
|
(333
|
)
|
|
(321
|
)
|
|
(355
|
)
|
|
|
42
|
|
|
15
|
|
|
15
|
|
Total net periodic benefit cost
|
|
$
|
1,093
|
|
|
$
|
1,431
|
|
|
$
|
1,372
|
|
|
|
$
|
45
|
|
|
$
|
(5
|
)
|
|
$
|
28
|
|
|
|
(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 service cost and CAS pension cost, referred to as the FAS/CAS operating adjustment, as a component of other unallocated, net on our consolidated statements of earnings (see Note 4 – Information on Business Segments).
|
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
|
|
|
2019
|
|
|
2018
|
|
|
|
2019
|
|
|
2018
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
43,305
|
|
|
$
|
48,686
|
|
|
|
$
|
2,348
|
|
|
$
|
2,602
|
|
Service cost
|
|
516
|
|
|
630
|
|
|
|
14
|
|
|
19
|
|
Interest cost
|
|
1,806
|
|
|
1,740
|
|
|
|
97
|
|
|
91
|
|
Benefits paid
|
|
(2,294
|
)
|
|
(2,379
|
)
|
|
|
(229
|
)
|
|
(224
|
)
|
Settlements
|
|
(1,933
|
)
|
|
(1,821
|
)
|
|
|
—
|
|
|
—
|
|
Actuarial losses (gains)
|
|
6,403
|
|
|
(3,281
|
)
|
|
|
(1
|
)
|
|
(311
|
)
|
Changes in longevity assumptions
|
|
860
|
|
|
(162
|
)
|
|
|
(70
|
)
|
|
(8
|
)
|
Plan amendments and curtailments (a)
|
|
11
|
|
|
(108
|
)
|
|
|
(6
|
)
|
|
101
|
|
Medicare Part D subsidy
|
|
—
|
|
|
—
|
|
|
|
2
|
|
|
9
|
|
Participants’ contributions
|
|
—
|
|
|
—
|
|
|
|
71
|
|
|
69
|
|
Ending balance
|
|
$
|
48,674
|
|
|
$
|
43,305
|
|
|
|
$
|
2,226
|
|
|
$
|
2,348
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
Beginning balance at fair value
|
|
$
|
32,002
|
|
|
$
|
33,095
|
|
|
|
$
|
1,644
|
|
|
$
|
1,883
|
|
Actual return on plan assets
|
|
6,667
|
|
|
(1,893
|
)
|
|
|
342
|
|
|
(94
|
)
|
Benefits paid
|
|
(2,294
|
)
|
|
(2,379
|
)
|
|
|
(229
|
)
|
|
(224
|
)
|
Settlements
|
|
(1,933
|
)
|
|
(1,821
|
)
|
|
|
—
|
|
|
—
|
|
Company contributions
|
|
1,000
|
|
|
5,000
|
|
|
|
59
|
|
|
1
|
|
Medicare Part D subsidy
|
|
—
|
|
|
—
|
|
|
|
2
|
|
|
9
|
|
Participants’ contributions
|
|
—
|
|
|
—
|
|
|
|
71
|
|
|
69
|
|
Ending balance at fair value
|
|
$
|
35,442
|
|
|
$
|
32,002
|
|
|
|
$
|
1,889
|
|
|
$
|
1,644
|
|
Unfunded status of the plans
|
|
$
|
(13,232
|
)
|
|
$
|
(11,303
|
)
|
|
|
$
|
(337
|
)
|
|
$
|
(704
|
)
|
|
|
(a)
|
The 2018 qualified defined benefit pension plan includes a $119 million curtailment gain.
|
In December 2019, Lockheed Martin, through its master retirement trust, purchased an irrevocable group annuity contract from an insurance company (referred to as a buy-out contract) for $1.9 billion to transfer $1.9 billion of our outstanding defined benefit pension obligations related to certain U.S. retirees and beneficiaries. The group annuity contract was purchased using assets from the pension trust. As a result of this transaction, we were relieved of all responsibility for these pension obligations and the insurance company is now required to pay and administer the retirement benefits owed to approximately 20,000 U.S. retirees and
beneficiaries, with no change to the amount, timing or form of monthly retirement benefit payments. Although the transaction was treated as a settlement for accounting purposes, we did not recognize a loss on the settlement in earnings associated with the transaction because total settlements during 2019 for the affected pension plans were less than the plans’ service and interest cost in 2019. Accordingly, the transaction had no impact on our 2019 FAS pension expense or CAS pension cost, and the difference of approximately $45 million between the amount paid to the insurance company and the amount of the pension obligations settled was recognized in other comprehensive income and will be amortized to FAS pension expense in future periods.
Also, during December 2018, Lockheed Martin, through its master retirement trust, purchased two contracts from insurance companies for $2.6 billion related to our outstanding defined benefit pension obligations. One of the contracts we purchased was a buy-out contract, which relieved us of all responsibility for the pension obligations related to approximately 32,000 U.S. retirees and beneficiaries. The second contract was structured as a buy-in contract (that will reimburse the pension plan for all future benefit payments related to defined benefit obligations for approximately 9,000 U.S retirees and beneficiaries). The buy-in contract is accounted for at fair value as an investment of the trust.
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
|
|
|
2019
|
|
|
2018
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid pension asset
|
|
$
|
2
|
|
|
$
|
107
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued postretirement benefit liabilities
|
|
(13,234
|
)
|
|
(11,410
|
)
|
|
|
(337
|
)
|
|
(704
|
)
|
Accumulated other comprehensive loss (pre-tax) related to:
|
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
20,609
|
|
|
19,117
|
|
|
|
(69
|
)
|
|
236
|
|
Prior service (credit) cost
|
|
(1,586
|
)
|
|
(1,931
|
)
|
|
|
120
|
|
|
167
|
|
Total (a)
|
|
$
|
19,023
|
|
|
$
|
17,186
|
|
|
|
$
|
51
|
|
|
$
|
403
|
|
|
|
(a)
|
Accumulated other comprehensive loss related to postretirement benefit plans, after-tax, of $15.5 billion and $14.3 billion at December 31, 2019 and 2018 (see “Note 12 – Stockholders’ Equity”) includes $19.0 billion ($15.0 billion, net of tax) and $17.2 billion ($13.5 billion, net of tax) for qualified defined benefit pension plans, $51 million ($39 million, net of tax) and $403 million ($316 million, net of tax) for retiree medical and life insurance plans and $667 million ($527 million, net of tax) and $542 million ($428 million, net of tax) for other plans.
|
The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $48.6 billion and $43.3 billion at December 31, 2019 and 2018. The ABO represents benefits accrued without assuming future compensation increases to plan participants and is approximately equal to our projected benefit obligation. Plans where ABO was less than plan assets represent prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets. Plans where ABO was in excess of plan assets represent accrued pension liabilities, which are included on our consolidated balance sheets.
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, 2019 and 2018 were $1.4 billion and $1.2 billion, which also represent the plans’ unfunded status. We have set aside certain assets totaling $657 million and $425 million as of December 31, 2019 and 2018 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, 2019 and 2018 were $641 million and $505 million. The unrecognized prior service credit at December 31, 2019 and 2018 were $34 million and $48 million. The expense associated with these plans totaled $108 million in 2019, $123 million in 2018 and $126 million in 2017. We also sponsor a small number of other postemployment plans and foreign benefit plans. The aggregate liability for the other postemployment plans was $42 million and $46 million as of December 31, 2019 and 2018. 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, 2019, 2018 and 2017 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred but Not Yet
Recognized in Net
Periodic Benefit Cost
|
|
|
Recognition of
Previously
Deferred Amounts
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Gains (losses)
|
|
|
(Gains) losses
|
Actuarial gains and losses
|
|
|
|
|
|
|
|
|
|
|
|
Qualified defined benefit pension plans
|
|
$
|
(2,283
|
)
|
|
$
|
(570
|
)
|
|
$
|
(1,172
|
)
|
|
|
$
|
1,104
|
|
|
$
|
1,396
|
|
|
$
|
974
|
|
Retiree medical and life insurance plans
|
|
238
|
|
|
71
|
|
|
77
|
|
|
|
2
|
|
|
4
|
|
|
12
|
|
Other plans
|
|
(133
|
)
|
|
83
|
|
|
(66
|
)
|
|
|
42
|
|
|
55
|
|
|
44
|
|
|
|
(2,178
|
)
|
|
(416
|
)
|
|
(1,161
|
)
|
|
|
1,148
|
|
|
1,455
|
|
|
1,030
|
|
|
|
Credit (cost)
|
|
|
(Credit) cost
|
Net prior service credit and cost
|
|
|
|
|
|
|
|
|
|
|
|
Qualified defined benefit pension plans
|
|
(8
|
)
|
|
(6
|
)
|
|
(219
|
)
|
|
|
(263
|
)
|
|
(255
|
)
|
|
(229
|
)
|
Retiree medical and life insurance plans
|
|
4
|
|
|
(79
|
)
|
|
—
|
|
|
|
33
|
|
|
12
|
|
|
10
|
|
Other plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(10
|
)
|
|
(10
|
)
|
|
(9
|
)
|
|
|
(4
|
)
|
|
(85
|
)
|
|
(219
|
)
|
|
|
(240
|
)
|
|
(253
|
)
|
|
(228
|
)
|
|
|
$
|
(2,182
|
)
|
|
$
|
(501
|
)
|
|
$
|
(1,380
|
)
|
|
|
$
|
908
|
|
|
$
|
1,202
|
|
|
$
|
802
|
|
We expect that approximately $559 million, or about $441 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 2019 to be recognized in net periodic benefit cost during 2020. Of this amount, $507 million, or $399 million net of tax, relates to our qualified defined benefit plans and is included in our expected 2020 pension income of $115 million.
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
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Weighted average discount rate
|
|
3.250
|
%
|
|
4.250
|
%
|
|
3.625
|
%
|
|
|
3.250
|
%
|
|
4.250
|
%
|
|
3.625
|
%
|
Expected long-term rate of return on assets
|
|
7.00
|
%
|
|
7.00
|
%
|
|
7.50
|
%
|
|
|
7.00
|
%
|
|
7.00
|
%
|
|
7.50
|
%
|
Health care trend rate assumed for next year
|
|
|
|
|
|
|
|
|
8.00
|
%
|
|
8.25
|
%
|
|
8.50
|
%
|
Ultimate health care trend rate
|
|
|
|
|
|
|
|
|
4.50
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
Year that the ultimate health care trend rate is reached
|
|
|
|
|
|
|
|
|
2034
|
|
|
2032
|
|
|
2032
|
|
The decrease in the discount rate from December 31, 2018 to December 31, 2019 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $5.8 billion at December 31, 2019. The increase in the discount rate from December 31, 2017 to December 31, 2018 resulted in a decrease in the projected benefit obligations of our qualified defined benefit pension plans of approximately $3.5 billion at December 31, 2018.
In October 2019, the Society of Actuaries published revised longevity assumptions that refined its prior studies. We used the revised assumptions in our December 31, 2019 re-measurement of benefit obligation. We reflected a longevity basis specific to the demographics of the underlying population (e.g., the nature of the work), versus the prior basis which was blended for all types of work, resulting in an approximate $860 million increase in the projected benefit obligations of our qualified defined benefit pension plans.
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. The actual investment return for our qualified defined benefit
plans during 2019 of $6.7 billion based on an actual rate of approximately 21% improved plan assets more than the $2.3 billion expected return based on our 7.00% long-term rate of return assumption.
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. LMIMCo’s 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.
LMIMCo’s 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
|
0-15%
|
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 separately presented 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 uncertainty 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 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 the fund’s shares outstanding. We recognize transfers between levels of the fair value hierarchy as of the date of the change in circumstances that causes the transfer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (a)
|
$
|
1,961
|
|
|
$
|
1,961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
1,727
|
|
|
$
|
1,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equity securities
|
7,189
|
|
|
7,182
|
|
|
—
|
|
|
7
|
|
|
|
3,936
|
|
|
3,927
|
|
|
3
|
|
|
6
|
|
International equity securities
|
7,244
|
|
|
7,217
|
|
|
23
|
|
|
4
|
|
|
|
5,406
|
|
|
5,400
|
|
|
—
|
|
|
6
|
|
Commingled equity funds
|
1,933
|
|
|
582
|
|
|
1,351
|
|
|
—
|
|
|
|
3,587
|
|
|
1,436
|
|
|
2,151
|
|
|
—
|
|
Fixed income (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
5,208
|
|
|
—
|
|
|
5,206
|
|
|
2
|
|
|
|
4,890
|
|
|
—
|
|
|
4,888
|
|
|
2
|
|
U.S. Government securities
|
2,260
|
|
|
—
|
|
|
2,260
|
|
|
—
|
|
|
|
3,399
|
|
|
—
|
|
|
3,399
|
|
|
—
|
|
U.S. Government-sponsored enterprise securities
|
530
|
|
|
—
|
|
|
530
|
|
|
—
|
|
|
|
571
|
|
|
—
|
|
|
571
|
|
|
—
|
|
Other fixed income investments (b)
|
3,134
|
|
|
35
|
|
|
2,135
|
|
|
964
|
|
|
|
2,926
|
|
|
—
|
|
|
1,988
|
|
|
938
|
|
Total
|
$
|
29,459
|
|
|
$
|
16,977
|
|
|
$
|
11,505
|
|
|
$
|
977
|
|
|
|
$
|
26,442
|
|
|
$
|
12,490
|
|
|
$
|
13,000
|
|
|
$
|
952
|
|
Investments measured at NAV (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled equity funds
|
181
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
Other fixed income investments
|
32
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
Private equity funds
|
4,019
|
|
|
|
|
|
|
|
|
|
4,014
|
|
|
|
|
|
|
|
Real estate funds
|
2,493
|
|
|
|
|
|
|
|
|
|
2,117
|
|
|
|
|
|
|
|
Hedge funds
|
1,069
|
|
|
|
|
|
|
|
|
|
828
|
|
|
|
|
|
|
|
Total investments measured at NAV
|
7,794
|
|
|
|
|
|
|
|
|
|
7,132
|
|
|
|
|
|
|
|
Receivables, net
|
78
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
Total
|
$
|
37,331
|
|
|
|
|
|
|
|
|
|
$
|
33,646
|
|
|
|
|
|
|
|
|
|
(a)
|
Cash and cash equivalents, equity securities and fixed income securities included derivative assets and liabilities whose fair values were not material as of December 31, 2019 and 2018. LMIMCo’s investment policies restrict the use of derivatives to either establish long or short exposures for purposes consistent with applicable investment mandate guidelines or to hedge risks to the extent of a plan’s current exposure to such risks. Most derivative transactions are settled on a daily basis.
|
|
|
(b)
|
Level 3 investments include $857 million at December 31, 2019 and $810 million at December 31, 2018 related to the buy-in contract discussed above.
|
|
|
(c)
|
Certain investments that are valued using the NAV 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, 2019 and 2018, the assets associated with our foreign defined benefit pension plans were not material and have not been included in the table above. Changes in the fair value of plan assets categorized as Level 3 during 2019 and 2018 were insignificant.
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 as Level 3 when valuations using observable inputs are unavailable. The trustee typically obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager. In addition, certain other fixed income investments categorized as Level 3 are valued using a discounted cash flow approach. Significant inputs include projected annuity payments and the discount rate applied to those payments.
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.
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. We made contributions to our qualified defined benefit pension plans of $1.0 billion in 2019 and $5.0 billion in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect to make contributions to our qualified defined benefit pension plans in 2020.
The following table presents estimated future benefit payments, which reflect expected future employee service, as of December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025 – 2029
|
|
Qualified defined benefit pension plans
|
|
$
|
2,300
|
|
|
$
|
2,360
|
|
|
$
|
2,450
|
|
|
$
|
2,530
|
|
|
$
|
2,600
|
|
|
$
|
13,540
|
|
Retiree medical and life insurance plans
|
|
160
|
|
|
160
|
|
|
160
|
|
|
160
|
|
|
150
|
|
|
700
|
|
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 401(k) contributions are comprised of (i) company match, the majority of which was funded using our common stock, and (ii) company contributions. Total 401(k) contributions were $741 million in 2019, $658 million in 2018 and $613 million in 2017. Our defined contribution plans held approximately 31.9 million and 33.3 million shares of our common stock as of December 31, 2019 and 2018.
Note 12 – Stockholders’ Equity
At December 31, 2019 and 2018, our authorized capital was composed of 1.5 billion shares of common stock and 50 million shares of series preferred stock. Of the 281 million shares of common stock issued and outstanding as of December 31, 2019, 280 million shares were considered outstanding for consolidated balance sheet presentation purposes; the remaining shares were held in a separate trust. Of the 283 million shares of common stock issued and outstanding as of December 31, 2018, 281 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, 2019 or 2018.
Repurchases of Common Stock
During 2019, we repurchased 3.5 million shares of our common stock for $1.2 billion. During 2018 and 2017, we paid $1.5 billion and $2.0 billion to repurchase 4.7 million and 7.1 million shares of our common stock.
During the fourth quarter of 2019, we entered into an accelerated share repurchase (ASR) agreement to repurchase $350 million of our common stock. We paid $350 million and received an initial delivery of 658,886 shares on October 30, 2019. Upon final settlement of the ASR agreement on December 20, 2019, we received an additional delivery of 257,363 shares of our common stock based on the average price paid per share of $381.99, calculated with reference to the volume weighted average price per share of our common stock over the term of the agreement, less a negotiated discount. The transaction was accounted for as an equity transaction and recognized as a reduction of common stock and additional paid-in-capital, with the excess purchase price over par value recorded as a reduction of additional paid-in capital.
On September 26, 2019, our Board of Directors approved a $1.0 billion increase to our share repurchase program. Inclusive of this increase, the total remaining authorization for future common share repurchases under our program was $2.8 billion as of December 31, 2019. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. 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 $713.0 million, $1.1 billion and $1.6 billion recorded as a reduction of retained earnings in 2019, 2018 and 2017.
Dividends
We paid dividends totaling $2.6 billion ($9.00 per share) in 2019, $2.3 billion ($8.20 per share) in 2018 and $2.2 billion ($7.46 per share) in 2017. We paid quarterly dividends of $2.20 per share during each of the first three quarters of 2019 and $2.40 per share during the fourth quarter of 2019; $2.00 per share during each of the first three quarters of 2018 and $2.20 per share during the fourth quarter of 2018; and $1.82 per share during each of the first three quarters of 2017 and $2.00 per share during the fourth quarter of 2017.
Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of income taxes, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefit Plans (a)
|
|
Other, net
|
|
|
AOCL
|
|
Balance at December 31, 2016
|
|
$
|
(11,981
|
)
|
|
$
|
(121
|
)
|
|
$
|
(12,102
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(1,380
|
)
|
|
120
|
|
|
(1,260
|
)
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
Recognition of net actuarial losses
|
|
1,030
|
|
|
—
|
|
|
1,030
|
|
Amortization of net prior service credits
|
|
(228
|
)
|
|
—
|
|
|
(228
|
)
|
Other
|
|
—
|
|
|
21
|
|
|
21
|
|
Total reclassified from AOCL
|
|
802
|
|
|
21
|
|
|
823
|
|
Total other comprehensive (loss) income
|
|
(578
|
)
|
|
141
|
|
|
(437
|
)
|
Balance at December 31, 2017
|
|
(12,559
|
)
|
|
20
|
|
|
(12,539
|
)
|
Other comprehensive loss before reclassifications
|
|
(501
|
)
|
|
(105
|
)
|
|
(606
|
)
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
Recognition of net actuarial losses
|
|
1,455
|
|
|
—
|
|
|
1,455
|
|
Amortization of net prior service credits
|
|
(253
|
)
|
|
—
|
|
|
(253
|
)
|
Other
|
|
—
|
|
|
30
|
|
|
30
|
|
Total reclassified from AOCL
|
|
1,202
|
|
|
30
|
|
|
1,232
|
|
Total other comprehensive (loss) income
|
|
701
|
|
|
(75
|
)
|
|
626
|
|
Reclassification of income tax effects from tax reform(b)
|
|
(2,396
|
)
|
|
(12
|
)
|
|
(2,408
|
)
|
Balance at December 31, 2018
|
|
(14,254
|
)
|
|
(67
|
)
|
|
(14,321
|
)
|
Other comprehensive loss before reclassifications
|
|
(2,182
|
)
|
|
18
|
|
|
(2,164
|
)
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
Recognition of net actuarial losses
|
|
1,148
|
|
|
—
|
|
|
1,148
|
|
Amortization of net prior service credits
|
|
(240
|
)
|
|
—
|
|
|
(240
|
)
|
Other
|
|
—
|
|
|
23
|
|
|
23
|
|
Total reclassified from AOCL
|
|
908
|
|
|
23
|
|
|
931
|
|
Total other comprehensive income (loss)
|
|
(1,274
|
)
|
|
41
|
|
|
(1,233
|
)
|
Balance at December 31, 2019
|
|
$
|
(15,528
|
)
|
|
$
|
(26
|
)
|
|
$
|
(15,554
|
)
|
|
|
(a)
|
AOCL related to postretirement benefit plans is shown net of tax benefits of $4.2 billion at December 31, 2019, $3.9 billion at December 31, 2018 and $6.5 billion at December 31, 2017. 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 Benefit Plans” for more information on our income taxes and postretirement benefit plans.
|
|
|
(b)
|
During 2018, we reclassified the impact of the income tax effects related to the Tax Cuts and Jobs Act of 2017 (the Tax Act) from AOCL to retained earnings by the same amount with zero impact to total equity.
|
Note 13 – Stock-Based Compensation
During 2019, 2018 and 2017, we recorded non-cash stock-based compensation expense totaling $189 million, $173 million and $158 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 $149 million, $137 million and $103 million.
As of December 31, 2019, we had $129 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 $66 million, $43 million and $71 million during 2019, 2018 and 2017. In addition, our income tax liabilities for 2019, 2018 and 2017 were reduced by $103 million, $75 million and $203 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, RSUs, 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 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, 2019, inclusive of the shares reserved for outstanding stock options, RSUs and PSUs, we had approximately 7 million shares reserved for issuance under the plans. At December 31, 2019, approximately 4 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, 2016
|
|
788
|
|
|
|
$
|
183.00
|
|
|
Granted
|
|
519
|
|
|
|
254.58
|
|
|
Vested
|
|
(624
|
)
|
|
|
201.65
|
|
|
Forfeited
|
|
(32
|
)
|
|
|
223.23
|
|
|
Nonvested at December 31, 2017
|
|
651
|
|
|
|
$
|
220.21
|
|
|
Granted
|
|
406
|
|
|
|
353.99
|
|
|
Vested
|
|
(470
|
)
|
|
|
271.50
|
|
|
Forfeited
|
|
(24
|
)
|
|
|
282.07
|
|
|
Nonvested at December 31, 2018
|
|
563
|
|
|
|
$
|
271.23
|
|
|
Granted
|
|
581
|
|
|
|
305.30
|
|
|
Vested
|
|
(523
|
)
|
|
|
269.00
|
|
|
Forfeited
|
|
(21
|
)
|
|
|
302.78
|
|
|
Nonvested at December 31, 2019
|
|
600
|
|
|
|
$
|
305.06
|
|
|
In 2019, we granted certain employees approximately 0.6 million RSUs with a weighted average grant-date fair value of $305.30 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, 2019 and 2018, there were 1.0 million (weighted average exercise price of $80.29) and 1.8 million (weighted average exercise price of $79.76) stock options outstanding. All of the stock options outstanding are vested as of December 31, 2019 and have a weighted average remaining contractual life of approximately 1.5 years and an aggregate intrinsic value of $296 million. There were 0.8 million (weighted average exercise price of $79.16) stock options exercised during 2019. We have not granted stock options to employees since 2012. The intrinsic value of all stock options exercised was $223 million, $104 million, and $139 million in 2019, 2018 and 2017.
PSUs
In 2019, 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, 2019 through December 31, 2021. About half of the PSUs were valued at $303.59 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 $301.03 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, cost reimbursements or contributions, 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 two civil False Claims Act lawsuits pending in the U.S. District Court for the Eastern District of Wisconsin. In October 2014, the U.S. Government filed a complaint in intervention in the first suit, which was brought by qui tam relator Mary Patzer, a former Derco Aerospace (Derco) employee. In May 2017, the U.S. Government filed a complaint in intervention in the second suit, which was brought by qui tam relator Peter Cimma, a former Sikorsky Support Services, Inc. (SSSI) employee. In November 2017, the Court consolidated the cases into a single action for discovery and trial.
The U.S. Government alleges that Sikorsky and two of its wholly-owned subsidiaries, Derco and SSSI, violated the civil False Claims Act and the Truth in Negotiations Act in connection with a contract the U.S. Navy awarded to SSSI in June 2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop training aircraft. SSSI subcontracted with Derco, primarily to procure and manage spare parts for the training aircraft. The U.S. Government contends that SSSI overbilled the Navy on the contract as the result of Derco’s use of prohibited cost-plus-percentage-of-cost pricing to add profit and overhead costs as a percentage of the price of the spare parts that Derco procured and then sold to SSSI. The U.S. Government also alleges that Derco’s claims to SSSI, SSSI’s claims to the Navy, and SSSI’s yearly Certificates of Final Indirect Costs from 2006 through 2012 were false and that SSSI
submitted inaccurate cost or pricing data in violation of the Truth in Negotiations Act for a sole-sourced, follow-on “bridge” contract. The U.S. Government’s complaints assert common law claims for breach of contract and unjust enrichment.
The U.S. Government further alleged violations of the Anti-Kickback Act and False Claims Act based on a monthly “chargeback,” through which SSSI billed Derco for the cost of certain SSSI personnel, allegedly in exchange for SSSI’s permitting a pricing arrangement that was “highly favorable” to Derco. On January 12, 2018, the Corporation filed a partial motion to dismiss intended to narrow the U.S. Government’s claims, including by seeking dismissal of the Anti-Kickback Act allegations. The Corporation also moved to dismiss Cimma as a party under the False Claims Act’s first-to-file rule, which permits only the first relator to recover in a pending case. The District Court granted these motions, in part, on July 20, 2018, dismissing the Government’s claims under the Anti-Kickback Act and dismissing Cimma as a party to the litigation.
The U.S. Government seeks damages of approximately $52 million, subject to trebling, plus statutory penalties. We believe that we have legal and factual defenses to the U.S. Government’s remaining 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 U.S. Government prevails in this matter and proves damages at or near $52 million and is successful in having such damages 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 February 8, 2019, the Department of Justice (DOJ) filed a complaint in the U.S. District Court for the Eastern District of Washington alleging, among other counts, civil False Claims Act and civil Anti-Kickback Act violations against Mission Support Alliance, LLC (MSA), Lockheed Martin, Lockheed Martin Services, Inc. (LMSI) and a current Lockheed Martin vice president. The dollar amount of damages sought is not specified but DOJ seeks treble damages with respect to the False Claims Act and penalties that are subject to doubling under the Anti-Kickback Act. The allegations relate primarily to information technology services performed by LMSI under a subcontract to MSA and the pricing by MSA and LMSI of those services as well as Lockheed Martin’s payment of standard incentive compensation to certain employees who were seconded to MSA, including the vice president. MSA is a joint venture that holds a prime contract to provide infrastructure support services at DOE’s Hanford facility. On April 23, 2019, the parties each filed partial motions to dismiss the U.S. Government’s False Claims Act and Anti-Kickback Act allegations. On January 13, 2020, the court dismissed the Anti-Kickback Act claim against all defendants with prejudice and denied the motions to dismiss the False Claims Act claims.
On August 16, 2016, we divested our former Information Systems & Global Solutions (IS&GS) business segment to Leidos Holdings, Inc. (Leidos) in a transaction that resulted in IS&GS becoming part of Leidos (the Transaction). In the Transaction, Leidos acquired IS&GS’ interest in MSA and the liabilities related to Lockheed Martin’s participation in MSA. Included within the liabilities assumed were those associated with this lawsuit. Lockheed Martin transferred to Leidos a reserve of approximately $38 million established by Lockheed Martin with respect to its potential liability and that of its affiliates and agreed to indemnify Leidos with respect to the liabilities assumed for damages to Leidos for 100% of amounts in excess of this reserve up to $64 million and 50% of amounts in excess of $64 million.
We cannot reasonably estimate our exposure at this time, but it is possible that a settlement by or judgment against any of the defendants could implicate Lockheed Martin’s indemnification obligations as described above. At present, in view of what we believe to be the strength of the defenses, our belief that Leidos assumed the liabilities, and our view of the structure of the indemnity, we do not believe it probable that we will incur a material loss and have not taken any reserve.
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 MTA’s 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 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 costs 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 MTA’s 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 MTA’s 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. We continue to await a decision from the District Court. Although this matter relates to our former IS&GS business, we retained the litigation when we divested IS&GS in 2016.
Environmental Matters
We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous substances, and other environmental matters at several of our current or former facilities, facilities for which we may have contractual responsibility, and 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 assets 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 continually evaluate the recoverability of our assets for the portion of environmental costs that are probable of future recovery 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 efforts by some U.S. Government representatives to limit such reimbursement. We include the portions of those environmental costs expected to be allocated to our non-U.S. Government contracts, or determined not to be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.
At December 31, 2019 and 2018, the aggregate amount of liabilities recorded relative to environmental matters was $810 million and $864 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded assets for the portion of environmental costs that are probable of future recovery totaling $703 million and $750 million at December 31, 2019 and 2018, 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 remediation activities usually span many 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 changing regulatory environmental standards. There are a number of former and present 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 or will occur 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 pursue claims for recovery of costs incurred or for contribution to site remediation costs against other PRPs, including the U.S. Government, and are conducting remediation activities under various consent decrees, orders, and agreements relating to soil, groundwater, sediment, or surface water contamination at certain sites of former or current operations. Under agreements related to certain sites in California, New York and Washington, the U.S. Government reimburses us an amount equal to a percentage, specific to each site, of expenditures for certain remediation activities in the U.S. Government’s capacity as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
In addition to the proceedings and potential proceedings discussed above, California previously established a maximum level of the contaminant hexavalent chromium in drinking water of 10 parts per billion (ppb). This standard was successfully challenged by the California Manufacturers and Technology Association (CMTA) for failure to conduct the required economic feasibility analysis. In response to the court’s ruling, the State Water Resources Control Board (State Board), a branch of the California Environmental Protection Agency, withdrew the hexavalent chromium standard from the published regulations, leaving only the 50 ppb standard for total chromium. The State Board has indicated it will work to re-establish a hexavalent chromium standard. Further, the U.S. Environmental Protection Agency (U.S. EPA) is considering whether to regulate hexavalent chromium.
California is also reevaluating its existing drinking water standard of 6 ppb for perchlorate, and the 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 not to 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.
Letters of Credit, Surety Bonds and Third-Party Guarantees
We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions, and we have directly issued guarantees to 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 joint venture partners. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.6 billion at December 31, 2019 and December 31, 2018. Third-party guarantees do not include guarantees to subsidiaries and other consolidated entities.
At December 31, 2019 and 2018, third-party guarantees totaled $996 million and $850 million, of which approximately 76% and 65% related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party. These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the joint venture, joint venture partners or divested businesses. Generally, we also have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a joint venture partner.
In determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former joint venture partners and the transferee under novation agreements all of which include a guarantee as required by the FAR. There were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
Note 15 – Severance and Restructuring Charges
During 2018, we recorded charges totaling $96 million ($76 million, or $0.26 per share, after-tax) related to certain severance and restructuring actions at our RMS business segment. As of December 31, 2019, we have paid substantially all of the severance payments associated with these actions. In addition, we have recovered a significant portion of these payments through the pricing of our products and services to the U.S. Government and other customers, which are included in RMS’ operating results.
Note 16 – Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
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December 31, 2019
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December 31, 2018
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Total
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Level 1
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Level 2
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Total
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Level 1
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Level 2
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Assets
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Mutual funds
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$
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1,363
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$
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1,363
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$
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—
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$
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978
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$
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978
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$
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—
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U.S. Government securities
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99
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—
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99
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105
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—
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105
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Other securities
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319
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171
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148
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144
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28
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116
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Derivatives
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18
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—
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18
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22
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—
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22
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Liabilities
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Derivatives
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23
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—
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23
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61
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—
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61
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Assets measured at NAV
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Other commingled funds
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19
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18
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Substantially all assets measured at fair value, other than derivatives, represent investments 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 mutual funds and certain other securities 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 forward contracts, including embedded derivatives, and interest rate swap contracts, are primarily 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.
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 and commercial paper. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The estimated fair value of our outstanding debt and commercial paper was $15.9 billion and $15.4 billion at December 31, 2019 and 2018. The outstanding principal amount was $13.8 billion and $15.3 billion at December 31, 2019 and 2018, respectively, excluding $1.2 billion of unamortized discounts and issuance
costs. The estimated fair values of our outstanding debt were determined based on quoted prices for similar instruments in active markets (Level 2).
Note 17 – Summary of Quarterly Information (Unaudited)
A summary of quarterly information is as follows (in millions, except per share data):
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2019 Quarters (a)
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First (c)
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Second
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Third (d)
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Fourth
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Net sales
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$
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14,336
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$
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14,427
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$
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15,171
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$
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15,878
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Operating profit
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2,283
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2,008
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2,105
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2,149
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Net earnings
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1,704
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1,420
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1,608
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1,498
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Basic earnings per common share (b)
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6.03
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5.03
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5.70
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5.32
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Diluted earnings per common share (b)
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5.99
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5.00
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5.66
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5.29
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2018 Quarters (a)
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First
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Second(e)
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Third
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Fourth(f)
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Net sales
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$
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11,635
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$
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13,398
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|
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$
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14,318
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|
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$
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14,411
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Operating profit
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1,725
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1,795
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1,963
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1,851
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Net earnings
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1,157
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1,163
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1,473
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1,253
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Basic earnings per common share (b)
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4.05
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4.08
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5.18
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4.43
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Diluted earnings per common share (b)
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4.02
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4.05
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5.14
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4.39
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(a)
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Quarters are typically 13 weeks in length but, due to our fiscal year ending on December 31, the number of weeks in a reporting period may vary slightly during the year and for comparable prior year periods.
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(b)
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The sum of the quarterly earnings per share amounts do not equal the earnings per share amounts included on our consolidated statements of earnings. The difference in 2019 and 2018 relates to the timing of our share repurchases.
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(c)
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The first quarter of 2019 includes a previously deferred gain of approximately $51 million ($38 million, or $0.13 per share, after-tax) related to properties sold in 2015 as a result of completing our remaining obligations. The first quarter of 2019 also includes benefits of $75 million, or $0.26 per share, from additional tax deductions, based on proposed tax regulations released on March 4, 2019, which clarified that foreign military sales qualify as foreign derived intangible income. Approximately $65 million, or $0.23 per share, of the total benefit was recorded discretely because it relates to the prior year.
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(d)
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The third quarter of 2019 includes benefits of $62 million, or $0.22 per share, for additional tax deductions for the prior year, primarily attributable to foreign derived intangible income treatment based on proposed tax regulations released on March 4, 2019 and our change in tax accounting method.
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(e)
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The second quarter of 2018 includes a $96 million ($76 million, or $0.26 per share, after-tax) severance and restructuring charge (see “Note 15 – Severance and Restructuring Charges”).
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(f)
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The fourth quarter of 2018 includes a non-cash asset impairment charge of $110 million ($83 million, or $0.29 per share, after-tax) related to our equity method investee, AMMROC (see “Note 1 – Significant Accounting Policies”).
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