NOTE 8 – OTHER

Changes in Estimates

Accounting for contracts under the percentage-of-completion method requires judgment relative to assessing risks, estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance), and making assumptions for schedule and technical issues. Due to the number of years it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and cost at completion is complicated and subject to many variables.

Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule, and costs aspects of the contract, and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events), and costs (e.g., material, labor, subcontractor, and overhead). 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 costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule, and costs aspects of the contract. Conversely, our profit booking rates may decrease if the estimated costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.

In any particular period, due to the nature of inception-to-date adjustments and other changes in estimates that can occur, such as the resolution of contractual matters, reserves for disputes, asset impairments, and insurance recoveries, among others, the comparability of our sales, segment operating profit, and segment operating margins may be affected. Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit, net of state income taxes, by approximately $470 million and $485 million for the quarters ended March 31, 2013 and March 25, 2012. These adjustments increased net earnings by approximately $305 million ($.93 per share) and $315 million ($.96 per share) for the quarters ended March 31, 2013 and March 25, 2012.

Stockholders’ Equity

Share Repurchases

Pursuant to a share repurchase program (the Program) approved by our Board of Directors, we are authorized to repurchase up to $6.5 billion of our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. During the quarter ended March 31, 2013, we paid $461 million to repurchase 5.1 million shares of our common stock. We reduced stockholders’ equity by $477 million, which represents the 5.3 million shares of common stock repurchases we committed to during the quarter ended March 31, 2013, a portion of which will settle in cash in the second quarter of 2013. As of March 31, 2013, we had repurchased a total of 59.6 million shares of our common stock under the Program for $4.7 billion, and had remaining authorization of $1.8 billion for future share repurchases. 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.

Restricted Stock Unit and Performance Stock Unit Grants

In January 2013, we granted certain employees 1.4 million restricted stock units (RSUs) with a grant-date fair value of $89.24 per RSU. The grant-date fair value of these RSUs is equal to the closing market price of our common stock on the date of grant less a discount to reflect the delay in payment of cash dividend-equivalents that are made only upon vesting. Substantially all of these RSUs vest at the end of three years from the date of grant. We recognize the grant-date fair value of these 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.

In January 2013, we also granted certain employees 0.3 million performance stock units (PSUs), which vest at the end of three years from the date of grant based on continuous service and whether we achieve certain financial and performance targets measured over the period from January 1, 2013 through December 31, 2015. About half of these awards were valued at $89.24 per PSU in a manner similar to the RSUs discussed above as the financial targets are based on our operations. 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 and, therefore, the associated compensation expense recognized could vary from period to period. The remaining PSUs were valued at $61.13 per PSU using a Monte Carlo model as the performance target is related to 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 regardless as to whether or not the performance target is achieved.

Dividends

During the quarters ended March 31, 2013 and March 25, 2012, we declared cash dividends totaling $371 million ($1.15 per share) and $328 million ($1.00 per share).

Accumulated Other Comprehensive Loss

Changes in the balance of accumulated other comprehensive loss (AOCL), net of income taxes, consisted of the following (in millions):


	Postretirement Benefit Plans				Other, net			AOCL
Balance at December 31, 2011		$	(11,186	)		$	(71)		$	(11,257)
Other comprehensive income before reclassifications			—				23			23
Amounts reclassified from AOCL
Net actuarial losses ^(a)			193				—			193
Prior service cost ^(a)			10				—			10
Other			—				1			1
Total reclassified from AOCL			203				1			204
Total other comprehensive income			203				24			227
Balance at March 25, 2012		$	(10,983	)		$	(47)		$	(11,030)

Balance at December 31, 2012		$	(13,532	)		$	39		$	(13,493)
Other comprehensive loss before reclassifications			—				(40)			(40)
Amounts reclassified from AOCL
Net actuarial losses ^(a)			244				—			244
Prior service cost ^(a)			10				—			10
Other			—				(3)			(3)
Total reclassified from AOCL			254				(3)			251
Total other comprehensive income (loss)			254				(43)			211
Balance at March 31, 2013		$	(13,278	)		$	(4)		$	(13,282)

^(a)	Amounts related to our postretirement benefit plans that were reclassified from AOCL were recorded as a component of net periodic benefit cost for each period presented (Note 5).

Income Taxes

Our effective income tax rates were 25.8% for the quarter ended March 31, 2013 and 29.8% for the quarter ended March 25, 2012. The rates for both periods benefited from tax deductions for dividends paid to our defined contribution plans with an employee stock ownership plan feature and tax deductions for U.S. manufacturing activities.

The effective tax rate for the quarter ended March 31, 2013 also benefited from the impact of the U.S. research and development (R&D) tax credit. On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012, which retroactively reinstated the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. During the quarter ended March 31, 2013, we recognized tax benefits of $46 million ($.14 per share) related to the R&D tax credit. As the effects of tax law changes are recognized in the period in which new legislation is enacted, $37 million was attributable to 2012 with the remainder attributable to the quarter ended March 31, 2013.

We received net federal and foreign income tax refunds of approximately $540 million during the quarter ended March 31, 2013, which included a refund of $550 million from the Internal Revenue Service primarily attributable to our tax-deductible pension contribution and debt exchange transaction during the fourth quarter of 2012. We made net federal and foreign income tax payments of $150 million during the quarter ended March 25, 2012.

Severance Activities

During the quarter ended March 31, 2013, we recorded severance charges totaling $30 million, net of state tax benefits, related to our IS&GS business segment, which reduced our net earnings by $19 million ($.06 per share). These severance actions resulted from a strategic review of this business segment to better align our cost structure with changing economic conditions and also reflect changes in program lifecycles. The charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service, which are expected to be paid in 2013.

During the quarter ended March 31, 2013, we made approximately half of the severance payments associated with severance actions initiated in 2012, the remainder of which are expected to be paid in the second quarter of 2013. The 2012 actions, for which we recorded charges in the third and fourth quarters of 2012 totaling $48 million, related to the elimination of certain positions at our Aeronautics business segment and our former Electronic Systems business segment.