10-Q 1 gd-2014062910q.htm 10-Q GD-2014.06.29 10Q



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3671

GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-1673581
State or other jurisdiction of incorporation or organization
 
I.R.S. employer identification no.
 
 
 
2941 Fairview Park Drive, Suite 100
Falls Church, Virginia
 
22042-4513
Address of principal executive offices
 
Zip code
(703) 876-3000
Registrant’s telephone number, including area code
    
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ü Accelerated Filer __ Non-Accelerated Filer __ Smaller Reporting Company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü
334,315,950 shares of the registrant’s common stock, $1 par value per share, were outstanding on June 29, 2014.

1



INDEX

 
 
 
PART I -
PAGE
Item 1 -
 
 
 
 
 
 
 
 
Item 2 -
Item 3 -
Item 4 -
 
PART II -
Item 1 -
Item 1A -
Item 2 -
Item 6 -
 
            

2



PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
June 30, 2013
 
June 29, 2014
Revenues:
 
 
 
Products
$
4,838

 
$
4,659

Services
2,996

 
2,815

 
7,834

 
7,474

Operating costs and expenses:
 
 
 
Products
3,805

 
3,637

Services
2,554

 
2,402

General and administrative (G&A)
514

 
486

 
6,873

 
6,525

Operating earnings
961

 
949

Interest, net
(18
)
 
(24
)
Earnings from continuing operations before income taxes
943

 
925

Provision for income taxes, net
303

 
279

Earnings from continuing operations
640

 
646

Discontinued operations, net of taxes of ($38) in 2014

 
(105
)
Net earnings
$
640

 
$
541

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
1.82

 
$
1.92

Discontinued operations

 
(0.31
)
Net earnings
$
1.82

 
$
1.61

Diluted:
 
 
 
Continuing operations
$
1.81

 
$
1.88

Discontinued operations

 
(0.30
)
Net earnings
$
1.81

 
$
1.58

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.


3



CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

 
Six Months Ended
(Dollars in millions, except per-share amounts)
June 30, 2013
 
June 29, 2014
Revenues:
 
 
 
Products
$
9,229

 
$
9,096

Services
5,919

 
5,643

 
15,148

 
14,739

Operating costs and expenses:
 
 
 
Products
7,279

 
7,102

Services
5,056

 
4,837

G&A
1,009

 
977

 
13,344

 
12,916

Operating earnings
1,804

 
1,823

Interest, net
(41
)
 
(46
)
Other, net

 
1

Earnings from continuing operations before income taxes
1,763

 
1,778

Provision for income taxes, net
553

 
536

Earnings from continuing operations
1,210

 
1,242

Discontinued operations, net of taxes of $3 in 2013 and ($39) in 2014
1

 
(106
)
Net earnings
$
1,211

 
$
1,136

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
3.45

 
$
3.66

Discontinued operations

 
(0.31
)
Net earnings
$
3.45

 
$
3.35

Diluted:
 
 
 
Continuing operations
$
3.43

 
$
3.60

Discontinued operations

 
(0.31
)
Net earnings
$
3.43

 
$
3.29

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
Six Months Ended
(Dollars in millions)
June 30, 2013
 
June 29, 2014
June 30, 2013
 
June 29, 2014
Net earnings
$
640

 
$
541

$
1,211

 
$
1,136

Losses on cash flow hedges

 
(13
)
(12
)
 
(9
)
Unrealized gains on securities
3

 
3

7

 
6

Foreign currency translation adjustments
(66
)
 
74

(244
)
 
9

Change in retirement plans' funded status
104

 
55

204

 
116

Other comprehensive income (loss) before tax
41

 
119

(45
)
 
122

Provision for income tax, net
36

 
20

69

 
41

Other comprehensive income (loss), net of tax
5

 
99

(114
)
 
81

Comprehensive income
$
645

 
$
640

$
1,097

 
$
1,217

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.


4



CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions)
December 31, 2013
 
June 29, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
5,301

 
$
3,841

Accounts receivable
4,370

 
4,474

Contracts in process
4,780

 
4,934

Inventories
2,890

 
3,158

Other current assets
821

 
776

Total current assets
18,162

 
17,183

Noncurrent assets:
 
 
 
Property, plant and equipment, net
3,359

 
3,327

Intangible assets, net
1,044

 
983

Goodwill
11,932

 
11,927

Other assets
997

 
912

Total noncurrent assets
17,332

 
17,149

Total assets
$
35,494

 
$
34,332

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1

 
$
501

Accounts payable
2,216

 
2,486

Customer advances and deposits
6,584

 
6,694

Other current liabilities
3,458

 
3,541

Total current liabilities
12,259

 
13,222

Noncurrent liabilities:
 
 
 
Long-term debt
3,908

 
3,409

Other liabilities
4,826

 
4,582

Commitments and contingencies (See Note L)


 


Total noncurrent liabilities
8,734

 
7,991

Shareholders' equity:
 
 
 
Common stock
482

 
482

Surplus
2,226

 
2,415

Retained earnings
19,428

 
20,142

Treasury stock
(6,450
)
 
(8,816
)
Accumulated other comprehensive loss
(1,185
)
 
(1,104
)
Total shareholders' equity
14,501

 
13,119

Total liabilities and shareholders' equity
$
35,494

 
$
34,332

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.


5



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended
(Dollars in millions)
June 30, 2013
 
June 29, 2014
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
1,211

 
$
1,136

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
186

 
191

Amortization of intangible assets
79

 
61

Stock-based compensation expense
61

 
64

Excess tax benefit from stock-based compensation
(16
)
 
(54
)
Deferred income tax provision
47

 
64

Discontinued operations, net of taxes
(1
)
 
106

Increase in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
(102
)
 
(104
)
Contracts in process
(125
)
 
(130
)
Inventories
(161
)
 
(278
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(10
)
 
270

Customer advances and deposits
(54
)
 
25

Income taxes payable
50

 
188

Other current liabilities
(149
)
 
(81
)
Other, net
71

 
(164
)
Net cash provided by operating activities
1,087

 
1,294

Cash flows from investing activities - continuing operations:
 
 
 
Capital expenditures
(165
)
 
(162
)
Other, net
4

 
17

Net cash used by investing activities
(161
)
 
(145
)
Cash flows from financing activities - continuing operations:
 
 
 
Purchases of common stock
(485
)
 
(2,691
)
Proceeds from option exercises
212

 
415

Dividends paid
(198
)
 
(411
)
Excess tax benefit from stock-based compensation
16

 
54

Net cash used by financing activities
(455
)
 
(2,633
)
Net cash (used) provided by discontinued operations
(10
)
 
24

Net increase (decrease) in cash and equivalents
461

 
(1,460
)
Cash and equivalents at beginning of period
3,296

 
5,301

Cash and equivalents at end of period
$
3,757

 
$
3,841

Supplemental cash flow information:
 
 
 
Cash payments for:
 
 
 
Income taxes
$
468

 
$
281

Interest
$
46

 
$
44

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.

6



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 
Common Stock
 
Retained
 
Treasury
 
Accumulated
Other 
Comprehensive
 
Total
Shareholders’    
(Dollars in millions)
Par
 
Surplus
 
Earnings
 
Stock
 
Loss
 
Equity
Balance, December 31, 2012
$
482

 
$
1,988

 
$
17,860

 
$
(6,165
)
 
$
(2,775
)
 
$
11,390

Net earnings

 

 
1,211

 

 

 
1,211

Cash dividends declared

 

 
(394
)
 

 

 
(394
)
Stock-based awards

 
55

 

 
193

 

 
248

Shares purchased

 

 

 
(585
)
 

 
(585
)
Other comprehensive loss

 

 

 

 
(114
)
 
(114
)
Balance, June 30, 2013
$
482

 
$
2,043

 
$
18,677

 
$
(6,557
)
 
$
(2,889
)
 
$
11,756

 
 
 
 
 
 
 
 
 
 
 


Balance, December 31, 2013
$
482

 
$
2,226

 
$
19,428

 
$
(6,450
)
 
$
(1,185
)
 
$
14,501

Net earnings

 

 
1,136

 

 

 
1,136

Cash dividends declared

 

 
(422
)
 

 

 
(422
)
Stock-based awards

 
189

 

 
325

 

 
514

Shares purchased

 

 

 
(2,691
)
 

 
(2,691
)
Other comprehensive income

 

 

 

 
81

 
81

Balance, June 29, 2014
$
482

 
$
2,415

 
$
20,142

 
$
(8,816
)
 
$
(1,104
)
 
$
13,119

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.


7



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share amounts or unless otherwise noted)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the unaudited Consolidated Financial Statements.
Consistent with defense industry practice, we classify assets and liabilities related to long-term production contracts as current, even though some of these amounts may not be realized within one year.
Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These rules and regulations permit some of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three- and six-month periods ended June 29, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three- and six-month periods ended June 30, 2013, and June 29, 2014.
These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013. The unaudited Consolidated Financial Statements have been restated to reflect the results of operations of our axle business in discontinued operations (see further discussion below).
Revenue Recognition. We account for revenues and earnings using the percentage-of-completion method. Under this method, contract costs and revenues are recognized as the work progresses, either as the products are produced or as services are rendered. We estimate the profit on a contract as the difference between the total estimated revenue and costs to complete a contract and recognize that profit over the life of the contract. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the loss in the quarter it is identified.
We review and update our contract estimates regularly. We recognize changes in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of a revision in estimate is recognized prospectively over the remaining contract term. The net increase in our operating earnings (and on a per-share basis) from the favorable impact of revisions in contract estimates totaled $83 ($0.15) and $191 ($0.35) for the three- and six-month periods ended June 30, 2013, and $62 ($0.12) and $100 ($0.19) for the three- and six-month periods ended June 29, 2014, respectively. While no revisions on any one contract were material to our unaudited Consolidated Financial Statements in the second quarter and first six months of 2014, the amount decreased compared with the prior-year periods as 2013 included higher favorable revisions in contract estimates on several programs nearing completion in the Combat Systems and Information Systems and Technology groups.

8



In the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-9 prescribes a single, common revenue standard that replaces most existing revenue recognition guidance in GAAP. The standard outlines a five-step model, whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. ASU 2014-9 is effective in the first quarter of 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method nor have we determined the effect of the standard on our consolidated financial statements.
The required adoption of the ASU in 2017 will preclude our use of the reallocation method of recognizing revisions in estimated profit on contracts discussed above. Because changes in estimated profit will be recognized in the period they are identified (cumulative catch-up method), rather than prospectively over the remaining contract term, we expect that the impact of revisions of contract estimates may be larger and potentially more variable from period to period. Anticipated losses on contracts will continue to be recognized in the quarter they are identified.
Discontinued Operations. In June 2014, we committed to a plan to sell our axle business in the Combat Systems group. Accordingly, the assets and liabilities of the business, including an allocation of goodwill, were reported as held for sale and included in other current assets and liabilities on the unaudited Consolidated Balance Sheets. When a business is held for sale, management is required to evaluate the net assets of the business for impairment based on its fair value less cost to sell. Based on this analysis, we recognized a $106 after-tax loss in the second quarter.
In late 2013, we settled our litigation with the U.S. Navy related to a terminated contract in the company’s former tactical military aircraft business. Under the terms of the settlement agreement, the Navy received a $198 credit that will be utilized over several years as the company renders design and construction services on the DDG-1000 program. This activity will be reported in net cash from discontinued operations on the Consolidated Statements of Cash Flows.
Subsequent Events. We have evaluated material events and transactions that have occurred after June 29, 2014, and concluded that no subsequent events have occurred that require adjustment to or disclosure in this Form 10-Q.

B. ACQUISITIONS, INTANGIBLE ASSETS AND GOODWILL
We did not acquire any businesses in 2013 or 2014.

The changes in the carrying amount of goodwill by reporting unit for the six months ended
June 29, 2014, were as follows:

 
Aerospace
 
Combat Systems
 
Marine Systems
 
Information Systems and Technology
 
Total Goodwill
December 31, 2013 (a)
$
2,741

 
$
2,849

 
$
289

 
$
6,053

 
$
11,932

Other (b)
(2
)
 
(5
)
 

 
2

 
(5
)
June 29, 2014
$
2,739

 
$
2,844

 
$
289

 
$
6,055

 
$
11,927

(a)Goodwill on December 31, 2013, in the Information Systems and Technology reporting unit is net of $1,994 of accumulated impairment losses.
(b)Consists primarily of adjustments for foreign currency translation.

9



Intangible assets consisted of the following:
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
December 31, 2013
 
June 29, 2014
Contract and program intangible assets*
$
1,790

$
(1,189
)
$
601

 
$
1,629

$
(1,076
)
$
553

Trade names and trademarks
507

(103
)
404

 
505

(111
)
394

Technology and software
130

(92
)
38

 
130

(95
)
35

Other intangible assets
155

(154
)
1

 
155

(154
)
1

Total intangible assets
$
2,582

$
(1,538
)
$
1,044

 
$
2,419

$
(1,436
)
$
983

* Consists of acquired backlog and probable follow-on work and related customer relationships. The decrease in the gross carrying amount and accumulated amortization of contract and program intangible assets from December 31, 2013, to June 29, 2014, is primarily due to the write-off of fully amortized assets in the Information Systems and Technology group.
Amortization expense was $37 and $79 for the three- and six-month periods ended June 30, 2013, and $31 and $61 for the three- and six-month periods ended June 29, 2014, respectively. We expect to record amortization expense of $121 in 2014.


C. EARNINGS PER SHARE
Earnings per Share. We compute basic earnings per share (EPS) using net earnings for the period and the weighted average number of common shares outstanding during the period. Basic weighted average shares outstanding have decreased throughout 2013 and 2014 due to share repurchases. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted shares and restricted stock units (RSUs). Diluted EPS also includes contingently issuable shares associated with the settlement of our accelerated share repurchase (ASR) program that expires later in 2014. See Note J for additional details of our share repurchases and the ASR.
Basic and diluted weighted average shares outstanding were as follows (in thousands):

 
Three Months Ended
Six Months Ended
 
June 30, 2013
June 29, 2014
June 30, 2013
June 29, 2014
Basic weighted average shares outstanding
351,110

336,692

351,492

339,462

Dilutive effect of other securities*
1,822

6,093

1,732

5,905

Diluted weighted average shares outstanding
352,932

342,785

353,224

345,367

* Excludes the following outstanding options to purchase shares of common stock and nonvested restricted stock/RSUs because the effect of including these securities would be antidilutive: 2013 - 16,484 and 2014 - 2,922.

D. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly; and
Level 3 – unobservable inputs significant to the fair value measurement.

10



We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2013, or June 29, 2014, except for our assets held for sale (discussed in Note A) that were measured at fair value using Level 3 inputs. Our estimate of fair value considered the discounted projected cash flows of the underlying operations and an evaluation of market prices for similar assets.
Our financial instruments include cash and equivalents and other investments; accounts receivable and accounts payable; short- and long-term debt; and derivative financial instruments. The carrying values of cash and equivalents, accounts receivable and accounts payable on the Consolidated Balance Sheets approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on December 31, 2013, and June 29, 2014, and the basis for determining their fair values:

 
Carrying
Value
 
Fair
Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2) (a)
Financial assets (liabilities) (b)
December 31, 2013
Other investments
$
183

 
$
183

 
$
134

 
$
49

Derivatives
10

 
10

 

 
10

Long-term debt,
     including current portion
(3,909
)
 
(3,758
)
 

 
(3,758
)
 
 
 
 
 
 
 
 
 
June 29, 2014
Other investments
$
173

 
$
173

 
$
108

 
$
65

Derivatives
9

 
9

 

 
9

Long-term debt,
     including current portion
(3,910
)
 
(3,869
)
 

 
(3,869
)
(a)Determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets and liabilities.
(b)We had no Level 3 financial instruments on December 31, 2013, or June 29, 2014.

E. INCOME TAXES
Deferred Taxes. Our net deferred tax asset (liability) was included on the Consolidated Balance Sheets in other assets and liabilities as follows:

 
December 31, 2013
 
June 29, 2014
Current deferred tax asset
$
35

 
$
34

Current deferred tax liability
(300
)
 
(321
)
Noncurrent deferred tax asset
462

 
373

Noncurrent deferred tax liability
(135
)
 
(91
)
Net deferred tax asset (liability)
$
62

 
$
(5
)
Tax Uncertainties. For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.

11



We participate in the Internal Revenue Service (IRS) Compliance Assurance Process, a real-time audit of our consolidated corporate federal income tax return. The IRS has examined our consolidated federal income tax returns through 2012. We do not expect the resolution of tax matters for open years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.
Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on June 29, 2014, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. We further believe that there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will significantly vary over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

F. CONTRACTS IN PROCESS
Contracts in process represent recoverable costs and, where applicable, accrued profit related to long-term contracts that have been inventoried until the customer is billed, and consisted of the following:
 
December 31, 2013
 
June 29, 2014
Contract costs and estimated profits
$
7,961

 
$
8,013

Other contract costs
1,178

 
1,100

 
9,139

 
9,113

Advances and progress payments
(4,359
)
 
(4,179
)
Total contracts in process
$
4,780

 
$
4,934

Contract costs consist primarily of labor, material, overhead and G&A expenses. Other contract costs represent amounts that are not currently allocable to government contracts, such as a portion of our estimated workers’ compensation obligations, other insurance-related assessments, pension and other post-retirement benefits and environmental expenses. These costs will become allocable to contracts generally after they are paid. We expect to recover these costs through ongoing business, including existing backlog and probable follow-on contracts. If the backlog in the future does not support the continued deferral of these costs, the profitability of our remaining contracts could be adversely affected.

G. INVENTORIES
Our inventories represent primarily business-jet components and are stated at the lower of cost or net realizable value. Work-in-process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost of the units in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value.

12



Inventories consisted of the following:
 
December 31, 2013
 
June 29, 2014
Work in process
$
1,633

 
$
1,906

Raw materials
1,210

 
1,181

Finished goods
29

 
26

Pre-owned aircraft
18

 
45

Total inventories
$
2,890

 
$
3,158


H. DEBT
Debt consisted of the following:
 
 
December 31, 2013
 
June 29, 2014
Fixed-rate notes due:
Interest Rate
 
 
 
January 2015
1.375%
$
500

 
$
500

July 2016
2.250%
500

 
500

November 2017
1.000%
896

 
896

July 2021
3.875%
499

 
499

November 2022
2.250%
991

 
992

November 2042
3.600%
498

 
498

Other
Various
25

 
25

Total debt
 
3,909

 
3,910

Less current portion
 
1

 
501

Long-term debt
 
$
3,908

 
$
3,409

Our fixed-rate notes are fully and unconditionally guaranteed by several of our 100-percent-owned subsidiaries (see Note O for condensed consolidating financial statements). We have the option to redeem the notes prior to their maturity in whole or part for the principal plus any accrued but unpaid interest and applicable make-whole amounts. As we approach the maturity date of the fixed-rate notes due in January 2015, we will determine whether to repay these notes with cash on hand or refinance the obligation.
On June 29, 2014, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. We have $2 billion in committed bank credit facilities that provide backup liquidity to our commercial paper program. These credit facilities include a $1 billion multi-year facility expiring in July 2016 and a $1 billion multi-year facility expiring in July 2018. These facilities are required by rating agencies to support our commercial paper issuances. We may renew or replace, in whole or part, these credit facilities at or prior to their expiration dates. Our commercial paper issuances and the bank credit facilities are guaranteed by several of our 100-percent-owned subsidiaries. In addition, we have approximately $280 in committed bank credit facilities to provide backup liquidity to our European businesses.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all material covenants on June 29, 2014.

13




I. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:

 
December 31, 2013
 
June 29, 2014
Salaries and wages
$
801

 
$
698

Workers' compensation
497

 
478

Retirement benefits
303

 
304

Deferred income taxes
300

 
321

Income taxes payable
36

 
173

Other (a)
1,521

 
1,567

Total other current liabilities
$
3,458

 
$
3,541

 
 
 
 
Retirement benefits
$
3,064

 
$
2,915

Customer deposits on commercial contracts 
677

 
592

Deferred income taxes
135

 
91

Other (b)
950

 
984

Total other liabilities
$
4,826

 
$
4,582

(a)Consists primarily of dividends payable, environmental remediation reserves, warranty reserves, liabilities of discontinued operations and insurance-related costs.
(b)Consists primarily of liabilities for warranty reserves and workers' compensation and liabilities of discontinued operations.

J. SHAREHOLDERS' EQUITY
Dividends per Share. Dividends declared per share were $0.56 and $1.12 for the three- and six-month periods ended June 30, 2013, and $0.62 and $1.24 for the three- and six-month periods ended June 29, 2014, respectively. Cash dividends paid were $198 for the six-month period ended June 30, 2013, and $213 and $411 for the three- and six-month periods ended June 29, 2014. In advance of possible tax increases, we accelerated our first quarter 2013 dividend payments to December 2012.
Share Repurchases. In the first six months of 2014, we repurchased approximately 25 million of our outstanding shares. Of this amount, 11.4 million shares were repurchased on January 24, 2014, for $1.2 billion under an ASR program facilitated through a financial institution. Our final cost of the ASR program will be determined based on the weighted-average daily market price of our stock during the term of the agreement, which expires later in 2014. On February 5, 2014, with shares from the prior authorization largely exhausted by the ASR program, the board of directors authorized management to repurchase 20 million additional shares of common stock on the open market. Subsequently, we repurchased an additional 13.6 million shares at an average price of $112 per share. On June 29, 2014, 6.4 million shares remain authorized by our board of directors for repurchase, approximately 2 percent of our total shares outstanding. We repurchased 7.6 million shares at an average price of $77 per share in the first six months of 2013.

14



Accumulated Other Comprehensive Loss. The changes, before tax and net of tax, in each component of accumulated other comprehensive loss (AOCL) consisted of the following:
 
Gains (losses) on Cash Flow Hedges
Unrealized Gains on Securities
Foreign Currency Translation Adjustments
Changes in Retirement Plans’ Funded Status
AOCL
Balance, December 31, 2012
$
6

$
7

$
1,092

$
(3,880
)
$
(2,775
)
Other comprehensive (loss) income before tax
(12
)
7

(244
)
204

(45
)
Provision for income tax, net
4

(2
)
3

(74
)
(69
)
Other comprehensive (loss) income net of tax
(8
)
5

(241
)
130

(114
)
Balance, June 30, 2013
$
(2
)
$
12

$
851

$
(3,750
)
$
(2,889
)

 
Gains (losses) on Cash Flow Hedges
Unrealized Gains on Securities
Foreign Currency Translation Adjustments
Changes in Retirement Plans’ Funded Status
AOCL
Balance, December 31, 2013
$
9

$
15

$
974

$
(2,183
)
$
(1,185
)
Other comprehensive (loss) income before tax
(9
)
6

9

116

122

Provision for income tax, net
3

(2
)
(1
)
(41
)
(41
)
Other comprehensive (loss) income net of tax
(6
)
4

8

75

81

Balance, June 29, 2014
$
3

$
19

$
982

$
(2,108
)
$
(1,104
)

Amounts reclassified out of AOCL related primarily to changes in retirement plans' funded status and consisted of recognized net actuarial losses (before tax) of $224 and $153 for the six-month periods ended June 30, 2013, and June 29, 2014, respectively. This was partially offset by amortization of prior service credit (before tax) of $26 and $35 for the six-month periods ended June 30, 2013, and June 29, 2014, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note M for additional details.

K. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivatives for trading or speculative purposes.
Foreign Currency Risk. Our foreign currency exchange rate risk related to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale contracts, designed to offset and minimize our risk. The one-year average maturity of these instruments matches the duration of the activities that are at risk.
Interest Rate Risk. Our financial instruments subject to interest rate risk include fixed-rate long-term debt obligations and variable-rate commercial paper. However, the risk associated with these instruments is not material.

15



Commodity Price Risk. We are subject to risk of rising labor and commodity prices, primarily on long-term fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Some of the protective terms included in our contracts are considered derivatives but are not accounted for separately because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On June 29, 2014, we held $3.8 billion in cash and equivalents, but held no marketable securities.
Hedging Activities. We had $1.7 billion in notional forward exchange contracts outstanding on December 31, 2013, and $1.4 billion on June 29, 2014. We recognize derivative financial instruments on the Consolidated Balance Sheets at fair value (see Note D).
We record changes in the fair value of derivative financial instruments in operating costs and expenses in the Consolidated Statements of Earnings or in other comprehensive loss (OCL) within the Consolidated Statements of Comprehensive Income depending on whether the derivative is designated and qualifies for hedge accounting. Gains and losses related to derivatives that qualify as cash flow hedges are deferred in OCL until the underlying transaction is reflected in earnings. We adjust derivative financial instruments not designated as cash flow hedges to market value each period and record the gain or loss in the Consolidated Statements of Earnings. The gains and losses on these instruments generally offset losses and gains on the assets, liabilities and other transactions being hedged. Gains and losses resulting from hedge ineffectiveness are recognized in the Consolidated Statements of Earnings for all derivative financial instruments, regardless of designation.
Net gains and losses recognized in earnings and OCL, including gains and losses related to hedge ineffectiveness, were not material to our results of operations for the three- and six-month periods ended June 30, 2013, and June 29, 2014. We do not expect the amount of gains and losses in OCL that will be reclassified to earnings during the next 12 months to be material.
We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2013, or June 29, 2014.
Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international businesses' functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and statements of earnings at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of OCL.
We do not hedge the fluctuation in reported revenues and earnings resulting from the translation of these international operations' results into U.S. dollars. The impact of translating our international operations’ revenues and earnings into U.S. dollars was not material to our results of operations for the three- and six-month periods ended June 30, 2013, or June 29, 2014. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in the first six months of either 2013 or 2014.


16



L. COMMITMENTS AND CONTINGENCIES
Litigation
Various claims and other legal proceedings incidental to the normal course of business are pending or threatened against us. These matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these matters. However, based on information currently available, we believe any potential liabilities in these proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.
Environmental
We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a Potentially Responsible Party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.
As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liabilities. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions, will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.
Other
Portugal Program. In 2012, the Portuguese Ministry of National Defense notified our Combat Systems group's European Land Systems business that it was terminating the contract to provide 260 Pandur vehicles based on an alleged breach of contract. Subsequently, the customer drew $75 from bank guarantees for the contract. We have asserted that we are not in breach of the contract and that the termination of the contract was invalid, and we are currently in arbitration with the customer. As of June 29, 2014, we had approximately $145 outstanding under a bank guarantee for the program's offset requirements. The bank guarantee could be drawn upon by the customer through 2014.
Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government disputes and investigations will not have a material impact on our results of operations, financial condition or cash flows.
In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based upon the circumstances, we periodically file claims or requests for equitable adjustment (REAs). In some cases, these requests are disputed by our customer. We believe our outstanding modifications and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.

17



Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance carriers totaling approximately $1.1 billion on June 29, 2014. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance obligations of our subsidiaries arising under certain contracts.
Aircraft Trade-ins. In connection with orders for new aircraft in funded contract backlog, our Aerospace group has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are structured to establish the fair market value of the trade-in aircraft at a date generally 120 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is generally based on the number of months of warranty coverage remaining for products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business-jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheets.
The changes in the carrying amount of warranty liabilities for the six-month periods ended June 30, 2013, and June 29, 2014, were as follows:

Six Months Ended
June 30, 2013
 
June 29, 2014
Beginning balance
$
316

 
$
354

Warranty expense
52

 
62

Payments
(29
)
 
(29
)
Ending balance
$
339

 
$
387



18



M. RETIREMENT PLANS
We provide defined-contribution benefits, as well as defined-benefit pension and other post-retirement benefits, to eligible employees.
Net periodic cost associated with our defined-benefit pension and other post-retirement benefit plans for the three- and six-month periods ended June 30, 2013, and June 29, 2014, consisted of the following:

 
Pension Benefits
Other Post-retirement Benefits
Three Months Ended
June 30, 2013
 
June 29, 2014
June 30, 2013
 
June 29, 2014
Service cost
$
80

 
$
48

$
4

 
$
3

Interest cost
124

 
133

13

 
13

Expected return on plan assets
(148
)
 
(164
)
(7
)
 
(8
)
Recognized net actuarial loss
106

 
74

6

 
3

Amortization of prior service (credit) cost
(15
)
 
(17
)
2

 
(1
)
Net periodic cost
$
147

 
$
74

$
18

 
$
10

 
Pension Benefits
Other Post-retirement Benefits
Six Months Ended
June 30, 2013
 
June 29, 2014
June 30, 2013
 
June 29, 2014
Service cost
$
160

 
$
96

$
8

 
$
6

Interest cost
248

 
266

26

 
26

Expected return on plan assets
(296
)
 
(328
)
(14
)
 
(16
)
Recognized net actuarial loss
212

 
148

12

 
5

Amortization of prior service (credit) cost
(30
)
 
(34
)
4

 
(1
)
Net periodic cost
$
294

 
$
148

$
36

 
$
20

Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense business groups. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent recovery of the cost is considered probable based on our backlog and probable follow-on contracts, we defer the excess in contracts in process on the Consolidated Balance Sheets until the cost is allocable to contracts. See Note F for discussion of our deferred contract costs. For other plans, the amount allocated to contracts and included in revenues has exceeded the plans’ cumulative benefit cost. We have deferred recognition of these excess earnings to provide a better matching of revenues and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheets.
In 2011, changes were made to the CAS to harmonize the regulations with the Pension Protection Act of 2006 (PPA). For certain contracts awarded prior to February 27, 2012, we are entitled to recover additional pension costs from our customers resulting from the CAS harmonization with the PPA. We submitted REAs of approximately $165 for these contracts in 2012. These REAs remained outstanding on June 29, 2014, and are subject to negotiation with our customer, the U.S. Department of Defense.


19



N. BUSINESS GROUP INFORMATION
We operate in four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. We organize our business groups in accordance with the nature of products and services offered. These business groups derive their revenues from business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding and related services; and communication and information technology systems and solutions, respectively. We measure each group’s profit based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our business groups.
Summary financial information for each of our business groups follows:
 
Revenues
Operating Earnings
Three Months Ended
June 30, 2013
June 29, 2014
June 30, 2013
June 29, 2014
Aerospace
$
2,053

$
1,995

$
389

$
384

Combat Systems
1,472

1,465

219

220

Marine Systems
1,759

1,851

178

174

Information Systems and Technology
2,550

2,163

198

188

Corporate*


(23
)
(17
)
 
$
7,834

$
7,474

$
961

$
949


 
Revenues
Operating Earnings
Six Months Ended
June 30, 2013
June 29, 2014
June 30, 2013
June 29, 2014
Aerospace
$
3,831

$
4,120

$
699

$
788

Combat Systems
2,935

2,723

430

359

Marine Systems
3,385

3,452

337

340

Information Systems and Technology
4,997

4,444

383

371

Corporate*


(45
)
(35
)
 
$
15,148

$
14,739

$
1,804

$
1,823

*Corporate operating results consist primarily of stock option expense.



20



O. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed-rate notes described in Note H are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain of our 100-percent-owned subsidiaries (the guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the guarantors on a combined basis (each guarantor together with its majority-owned subsidiaries) and all other subsidiaries on a combined basis.

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended June 30, 2013
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenues
$

$
6,932

$
902

$

$
7,834

Cost of sales
3

5,604

752


6,359

G&A
19

411

84


514

Operating earnings
(22
)
917

66


961

Interest, net
(23
)
5



(18
)
Other, net
(1
)

1



Earnings before income taxes
(46
)
922

67


943

Provision for income taxes
(11
)
283

31


303

Equity in net earnings of subsidiaries
675



(675
)

Net earnings
$
640

$
639

$
36

$
(675
)
$
640

Comprehensive income
$
645

$
637

$
(20
)
$
(617
)
$
645

Three Months Ended June 29, 2014
 
 
 
 
 
Revenues
$

$
6,437

$
1,037

$

$
7,474

Cost of sales
3

5,231

805


6,039

G&A
14

401

71


486

Operating earnings
(17
)
805

161


949

Interest, net
(25
)

1


(24
)
Other, net
(2
)
4

(2
)


Earnings before income taxes
(44
)
809

160


925

Provision for income taxes
(14
)
270

23


279

Discontinued operations, net of taxes
(105
)



(105
)
Equity in net earnings of subsidiaries
676



(676
)

Net earnings
$
541

$
539

$
137

$
(676
)
$
541

Comprehensive income
$
640

$
540

$
200

$
(740
)
$
640



21



CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)
Six Months Ended June 30, 2013
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenues
$

$
13,320

$
1,828

$

$
15,148

Cost of sales
6

10,830

1,499


12,335

G&A
39

816

154


1,009

Operating earnings
(45
)
1,674

175


1,804

Interest, net
(46
)
4

1


(41
)
Other, net
(1
)
1




Earnings before income taxes
(92
)
1,679

176


1,763

Provision for income taxes
(20
)
513

60


553

Discontinued operations, net of tax
1



 
1

Equity in net earnings of subsidiaries
1,282



(1,282
)

Net earnings
$
1,211

$
1,166

$
116

$
(1,282
)
$
1,211

Comprehensive income
$
1,097

$
1,185

$
(143
)
$
(1,042
)
$
1,097

Six Months Ended June 29, 2014
 
 
 
 
 
Revenues
$

$
12,830

$
1,909

$

$
14,739

Cost of sales
9

10,429

1,501


11,939

G&A
28

769

180


977

Operating earnings
(37
)
1,632

228


1,823

Interest, net
(47
)

1


(46
)
Other, net
(2
)
4

(1
)

1

Earnings before income taxes
(86
)
1,636

228


1,778

Provision for income taxes
(23
)
520

39


536

Discontinued operations, net of taxes
(106
)



(106
)
Equity in net earnings of subsidiaries
1,305



(1,305
)

Net earnings
$
1,136

$
1,116

$
189

$
(1,305
)
$
1,136

Comprehensive income
$
1,217

$
1,111

$
205

$
(1,316
)
$
1,217




22



CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
December 31, 2013
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
4,179

$

$
1,122

$

$
5,301

Accounts receivable

1,451

2,919


4,370

Contracts in process
571

3,124

1,085


4,780

Inventories
 
 
 
 
 
Work in process

1,623

10


1,633

Raw materials

1,172

38


1,210

Finished goods

24

5


29

Pre-owned aircraft

18



18

Other current assets
424

203

194


821

Total current assets
5,174

7,615

5,373


18,162

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment
156

5,827

1,169


7,152

Accumulated depreciation of PP&E
(64
)
(3,062
)
(667
)

(3,793
)
Intangible assets

1,614

968


2,582

Accumulated amortization of intangible assets

(1,111
)
(427
)

(1,538
)
Goodwill

8,041

3,891


11,932

Other assets
600

483

398

(484
)
997

Investment in subsidiaries
35,071



(35,071
)

Total noncurrent assets
35,763

11,792

5,332

(35,555
)
17,332

Total assets
$
40,937

$
19,407

$
10,705

$
(35,555
)
$
35,494

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Customer advances and deposits
$

$
3,493

$
3,091

$

$
6,584

Other current liabilities
868

3,644

1,163


5,675

Total current liabilities
868

7,137

4,254


12,259

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
3,883

25



3,908

Other liabilities
2,333

2,007

486


4,826

Total noncurrent liabilities
6,216

2,032

486


8,734

Intercompany
19,352

(19,697
)
345



Shareholders' equity:
 
 
 
 
 
Common stock
482

6

3,570

(3,576
)
482

Other shareholders' equity
14,019

29,929

2,050

(31,979
)
14,019

Total shareholders' equity
14,501

29,935

5,620

(35,555
)
14,501

Total liabilities and shareholders' equity
$
40,937

$
19,407

$
10,705

$
(35,555
)
$
35,494



23



CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
June 29, 2014
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
2,882

$

$
959

$

$
3,841

Accounts receivable

1,340

3,134


4,474

Contracts in process
524

2,974

1,436


4,934

Inventories
 
 
 
 
 
Work in process

1,895

11


1,906

Raw materials

1,148

33


1,181

Finished goods

17

9


26

Pre-owned aircraft

45



45

Other current assets
262

304

210


776

Total current assets
3,668

7,723

5,792


17,183

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment
155

5,944

1,184


7,283

Accumulated depreciation of PP&E
(67
)
(3,196
)
(693
)

(3,956
)
Intangible assets

1,451

968


2,419

Accumulated amortization of intangible assets

(995
)
(441
)

(1,436
)
Goodwill

7,992

3,935


11,927

Other assets
533

400

330

(351
)
912

Investment in subsidiaries
36,489



(36,489
)

Total noncurrent assets
37,110

11,596

5,283

(36,840
)
17,149

Total assets
$
40,778

$
19,319

$
11,075

$
(36,840
)
$
34,332

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt
$
500

$
1

$

$

$
501

Customer advances and deposits

3,503

3,191


6,694

Other current liabilities
1,090

3,559

1,378


6,027

Total current liabilities
1,590

7,063

4,569


13,222

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
3,385

24



3,409

Other liabilities
2,122

2,027

433


4,582

Total noncurrent liabilities
5,507

2,051

433


7,991

Intercompany
20,562

(20,761
)
199



Shareholders' equity:
 
 
 
 
 
Common stock
482

6

2,043

(2,049
)
482

Other shareholders' equity
12,637

30,960

3,831

(34,791
)
12,637

Total shareholders' equity
13,119

30,966

5,874

(36,840
)
13,119

Total liabilities and shareholders' equity
$
40,778

$
19,319

$
11,075

$
(36,840
)
$
34,332



24



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 2013
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Net cash provided by operating activities *
$
(36
)
$
1,182

$
(59
)
$

$
1,087

Net cash used by investing activities *
2

(147
)
(16
)

(161
)
Cash flows from financing activities:
 
 
 
 
 
Purchases of common stock
(485
)



(485
)
Other, net
30




30

Net cash used by financing activities *
(455
)



(455
)
Net cash used by discontinued operations
(10
)



(10
)
Cash sweep/funding by parent
943

(1,035
)
92



Net increase in cash and equivalents
444


17


461

Cash and equivalents at beginning of period
2,300


996


3,296

Cash and equivalents at end of period
$
2,744

$

$
1,013

$

$
3,757

Six Months Ended June 29, 2014
 
 
 
 
 
Net cash provided by operating activities *
$
187

$
1,197

$
(90
)
$

$
1,294

Net cash used by investing activities *
1

(132
)
(14
)

(145
)
Cash flows from financing activities:
 
 
 
 
 
Purchases of common stock
(2,691
)



(2,691
)
Proceeds from option exercises
415




415

Dividends paid
(411
)



(411
)
Other, net
54




54

Net cash used by financing activities *
(2,633
)



(2,633
)
Net cash provided by discontinued operations
24




24

Cash sweep/funding by parent
1,124

(1,065
)
(59
)


Net decrease in cash and equivalents
(1,297
)

(163
)

(1,460
)
Cash and equivalents at beginning of period
4,179


1,122


5,301

Cash and equivalents at end of period
$
2,882

$

$
959

$

$
3,841


* Continuing operations only

25



(Dollars in millions, except per-share amounts or unless otherwise noted)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS OVERVIEW

General Dynamics is an aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding; and communication and information technology systems and solutions. We operate globally through four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. Our primary customers are the U.S. government, including the Department of Defense, intelligence community and other U.S. government customers; international governments; and a wide range of corporate and individual customers for business jets. The following discussion should be read in conjunction with our 2013 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q. The unaudited Consolidated Financial Statements have been restated to reflect the results of operations of our axle business in discontinued operations (for further discussion, see Note A to the unaudited Consolidated Financial Statements).

RESULTS OF OPERATIONS
INTRODUCTION