10-Q 1 gd-2016070310q.htm 10-Q Document



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 July 3, 2016
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
305,278,868 shares of the registrant’s common stock, $1 par value per share, were outstanding on July 3, 2016.

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. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
July 3, 2016
 
July 5, 2015
Revenue:
 
 
 
Products
$
4,848

 
$
5,138

Services
2,817

 
2,744

 
7,665

 
7,882

Operating costs and expenses:
 
 
 
Products
3,747

 
4,031

Services
2,362

 
2,303

General and administrative (G&A)
486

 
467

 
6,595

 
6,801

Operating earnings
1,070

 
1,081

Interest, net
(23
)
 
(20
)
Other, net
1

 

Earnings before income tax
1,048

 
1,061

Provision for income tax, net
290

 
309

Net earnings
$
758

 
$
752

 
 
 
 
Earnings per share
 
 
 
Basic
$
2.49

 
$
2.31

Diluted
$
2.44

 
$
2.27

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


3



CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

 
Six Months Ended
(Dollars in millions, except per-share amounts)
July 3, 2016
 
July 5, 2015
Revenue:
 
 
 
Products
$
9,712

 
$
10,070

Services
5,677

 
5,596

 
15,389

 
15,666

Operating costs and expenses:
 
 
 
Products
7,530

 
7,850

Services
4,790

 
4,738

G&A
946

 
970

 
13,266

 
13,558

Operating earnings
2,123

 
2,108

Interest, net
(45
)
 
(41
)
Other, net
11

 
3

Earnings from continuing operations before income tax
2,089

 
2,070

Provision for income tax, net
601

 
602

Earnings from continuing operations
1,488

 
1,468

Discontinued operations
(13
)
 

Net earnings
$
1,475

 
$
1,468

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
4.86

 
$
4.48

Discontinued operations
(0.04
)
 

Net earnings
$
4.82

 
$
4.48

Diluted:
 
 
 
Continuing operations
$
4.77

 
$
4.41

Discontinued operations
(0.04
)
 

Net earnings
$
4.73

 
$
4.41

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


4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
 
Six Months Ended
(Dollars in millions)
July 3, 2016
 
July 5, 2015
 
July 3, 2016
July 5, 2015
Net earnings
$
758

 
$
752

 
$
1,475

$
1,468

(Losses) gains on cash flow hedges
(24
)
 
(1
)
 
158

(384
)
Unrealized gains (losses) on securities
5

 
(2
)
 
(4
)

Foreign currency translation adjustments
(56
)
 
69

 
125

(35
)
Change in retirement plans' funded status
66

 
91

 
126

188

Other comprehensive (loss) income, pretax
(9
)
 
157

 
405

(231
)
Provision (benefit) for income tax, net
15

 
33

 
84

(71
)
Other comprehensive (loss) income, net of tax
(24
)
 
124

 
321

(160
)
Comprehensive income
$
734

 
$
876

 
$
1,796

$
1,308

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


5



CONSOLIDATED BALANCE SHEETS

 
(Unaudited)
 
 
(Dollars in millions)
July 3, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
1,899

 
$
2,785

Accounts receivable
3,539

 
3,446

Contracts in process
4,996

 
4,357

Inventories
3,520

 
3,366

Other current assets
432

 
617

Total current assets
14,386

 
14,571

Noncurrent assets:
 
 
 
Property, plant and equipment, net
3,440

 
3,466

Intangible assets, net
733

 
763

Goodwill
11,572

 
11,443

Other assets
1,638

 
1,754

Total noncurrent assets
17,383

 
17,426

Total assets
$
31,769

 
$
31,997

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
537

 
$
501

Accounts payable
2,128

 
1,964

Customer advances and deposits
5,365

 
5,674

Other current liabilities
4,105

 
4,306

Total current liabilities
12,135

 
12,445

Noncurrent liabilities:
 
 
 
Long-term debt
2,899

 
2,898

Other liabilities
5,740

 
5,916

Commitments and contingencies (See Note L)


 


Total noncurrent liabilities
8,639

 
8,814

Shareholders' equity:
 
 
 
Common stock
482

 
482

Surplus
2,756

 
2,730

Retained earnings
24,213

 
23,204

Treasury stock
(13,491
)
 
(12,392
)
Accumulated other comprehensive loss
(2,965
)
 
(3,286
)
Total shareholders' equity
10,995

 
10,738

Total liabilities and shareholders' equity
$
31,769

 
$
31,997

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


6



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Six Months Ended
(Dollars in millions)
July 3, 2016
 
July 5, 2015
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
1,475

 
$
1,468

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
182

 
184

Amortization of intangible assets
50

 
59

Equity-based compensation expense
51

 
71

Deferred income tax provision
62

 
21

Discontinued operations
13

 

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
(83
)
 
455

Contracts in process
(619
)
 
330

Inventories
(150
)
 
(149
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
157

 
222

Customer advances and deposits
(423
)
 
(1,252
)
Other, net
158

 
24

Net cash provided by operating activities
873

 
1,433

Cash flows from investing activities:
 
 
 
Capital expenditures
(134
)
 
(190
)
Maturities of held-to-maturity securities

 
500

Proceeds from sales of assets
4

 
259

Other, net
(55
)
 
(18
)
Net cash (used) provided by investing activities
(185
)
 
551

Cash flows from financing activities:
 
 
 
Purchases of common stock
(1,189
)
 
(1,565
)
Dividends paid
(447
)
 
(432
)
Proceeds from stock option exercises
92

 
198

Repayment of fixed-rate notes

 
(500
)
Other, net
4

 
(25
)
Net cash used by financing activities
(1,540
)
 
(2,324
)
Net cash used by discontinued operations
(34
)
 
(16
)
Net decrease in cash and equivalents
(886
)
 
(356
)
Cash and equivalents at beginning of period
2,785

 
4,388

Cash and equivalents at end of period
$
1,899

 
$
4,032

Supplemental cash flow information:
 
 
 
Cash payments for:
 
 
 
Income taxes
$
460

 
$
530

Interest
$
42

 
$
45

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


7



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 
Common Stock
 
Retained
 
Treasury
 
Accumulated
Other 
Comprehensive
 
Total
Shareholders’    
(Dollars in millions)
Par
 
Surplus
 
Earnings
 
Stock
 
Loss
 
Equity
December 31, 2015
$
482

 
$
2,730

 
$
23,204

 
$
(12,392
)
 
$
(3,286
)
 
$
10,738

Net earnings

 

 
1,475

 

 

 
1,475

Cash dividends declared

 

 
(466
)
 

 

 
(466
)
Equity-based awards

 
26

 

 
90

 

 
116

Shares purchased

 

 

 
(1,189
)
 

 
(1,189
)
Other comprehensive income

 

 

 

 
321

 
321

July 3, 2016
$
482

 
$
2,756

 
$
24,213

 
$
(13,491
)
 
$
(2,965
)
 
$
10,995

 
 
 
 
 
 
 
 
 
 
 


December 31, 2014
$
482

 
$
2,548

 
$
21,127

 
$
(9,396
)
 
$
(2,932
)
 
$
11,829

Net earnings

 

 
1,468

 

 

 
1,468

Cash dividends declared

 

 
(452
)
 

 

 
(452
)
Equity-based awards

 
109

 

 
175

 

 
284

Shares purchased

 

 

 
(1,693
)
 

 
(1,693
)
Other comprehensive loss

 

 

 

 
(160
)
 
(160
)
July 5, 2015
$
482

 
$
2,657

 
$
22,143

 
$
(10,914
)
 
$
(3,092
)
 
$
11,276

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


8



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. Some prior-year amounts have been reclassified among financial statement accounts to conform to the current-year presentation.
Consistent with defense industry practice, we classify assets and liabilities related to long-term 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 July 3, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
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 July 3, 2016, and July 5, 2015.
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, 2015.
Revenue Recognition. We account for revenue 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 expected 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-related estimates regularly. We recognize adjustments in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of an adjustment in estimate is recognized prospectively over the remaining contract term. The net impact of adjustments in contract estimates on our operating earnings (and on a diluted per-share basis) totaled favorable changes of $83 ($0.17) and $187 ($0.39) for the three- and six-month periods ended July 3, 2016, and $45 ($0.09) and $108 ($0.21) for the three- and six-month periods ended July 5, 2015, respectively. No adjustment on any one contract was material to our unaudited Consolidated Financial Statements in the second quarter and first six months of 2016 or 2015.

9



In the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 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. Several ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09, are intended to promote a more consistent interpretation and application of the principles outlined in the standard. Once a final technical corrections and improvements update is issued by the FASB in 2016, the standard is expected to be final.
ASU 2014-09 is effective in the first quarter of 2018 for public companies. However, entities can elect to adopt one year earlier in the first quarter of 2017. The standard permits the use of either the retrospective or cumulative-effect transition method.
We are utilizing a bottom-up approach to analyze the standard’s impact on our contract portfolio, comparing our historical accounting policies and practices and identifying potential differences from applying the requirements of the new standard to our contracts. While this assessment continues, we have not yet completed our determination of the impacts of the standards or the effect of these impacts on our Consolidated Financial Statements. Consequently, we have not yet selected a transition date or method. We expect this determination will near completion in the second half of 2016. Because the new standard will impact our business processes, systems and controls, we have developed a comprehensive change management project plan to guide the implementation.
The required adoption of the ASU will preclude our use of the reallocation method of recognizing adjustments in estimated profit on contracts discussed above. As 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 the impact of adjustments 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.
Accounting Standards Updates. In the second quarter of 2016, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 impacted several aspects of the accounting for share-based payment transactions. The ASU requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statement of Earnings. Previously, these amounts were recognized directly to shareholders' equity. On the Consolidated Statement of Cash Flows, the excess tax benefit from equity-based compensation is classified as an operating activity. Additionally, cash paid when directly withholding shares for tax withholding purposes is classified as a financing activity.
As a result of adoption, we recognized a tax benefit in the second quarter of approximately $30 related to the first six months of 2016. The impact in the second half of 2016 will depend on the level of stock option exercise activity, but is expected to be less than the first half of 2016, which benefitted from the first-quarter release of restricted stock. As this area of the ASU permits only prospective adoption, there was no impact on our 2015 Consolidated Financial Statements.
On the Consolidated Statement of Cash Flows, the adoption of the ASU resulted in a $60 increase in net cash provided by operating activities and a corresponding $60 increase in net cash used by financing activities for the six months ended July 3, 2016. The areas of the ASU that relate to the Consolidated Statement of Cash Flows were adopted retrospectively. We have restated our prior-period Consolidated

10



Statements of Cash Flows accordingly, resulting in an $85 increase in net cash provided by operating activities and a corresponding $85 increase in net cash used by financing activities for the six months ended July 5, 2015, and a $108 increase in net cash provided by operating activities and a corresponding $108 increase in net cash used by financing activities for the year ended December 31, 2015. The other aspects of the ASU did not have a material impact on our results of operations, financial condition or cash flows.
There are several new accounting standards that have been issued by the FASB, but are not yet effective. New accounting standards issued prior to 2016 are included in our Annual Report on Form 10-K for the year ended December 31, 2015. In 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. The ASU also requires disclosure of key information about leasing arrangements. ASU 2016-02 is effective on January 1, 2019, using the modified retrospective method of adoption, with early adoption permitted. We have not yet determined the effect of the ASU on our Consolidated Financial Statements nor have we selected a transition date.
Other ASUs issued by the FASB in 2016 but not yet effective are not expected to have a material effect on our Consolidated Financial Statements.

B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS
Acquisitions and Divestitures
In 2016, we acquired an aircraft management and charter services provider in our Aerospace group and a manufacturer of unmanned underwater vehicles (UUVs) in our Information Systems and Technology group. These amounts are included in other investing activities in the unaudited Consolidated Statement of Cash Flows. We did not acquire any businesses in 2015.
The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.
In 2015, we completed the sale of our axle business in the Combat Systems group and a commercial cyber security business in our Information Systems and Technology group. In the first quarter of 2016, we recognized a final adjustment to the loss on the sale of the axle business of $13 in discontinued operations.
Goodwill
The changes in the carrying amount of goodwill by reporting unit for the six months ended July 3, 2016, were as follows:
 
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Goodwill
December 31, 2015 (a)
$
2,542

 
$
2,591

 
$
6,021

 
$
289

 
$
11,443

Acquisitions (b)
19

 

 
5

 

 
24

Other (c)
44

 
56

 
5

 

 
105

July 3, 2016
$
2,605

 
$
2,647

 
$
6,031

 
$
289

 
$
11,572

(a)Goodwill on December 31, 2015, in the Information Systems and Technology reporting unit is net of $2 billion of accumulated impairment losses.
(b)Includes adjustments during the purchase price allocation period.
(c)Consists primarily of adjustments for foreign currency translation.

11



Intangible Assets
Intangible assets consisted of the following:
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
July 3, 2016
 
December 31, 2015
Contract and program intangible assets (b)
$
1,636

$
(1,255
)
$
381

 
$
1,626

$
(1,214
)
$
412

Trade names and trademarks
466

(136
)
330

 
455

(127
)
328

Technology and software
120

(98
)
22

 
119

(96
)
23

Other intangible assets
154

(154
)

 
154

(154
)

Total intangible assets
$
2,376

$
(1,643
)
$
733

 
$
2,354

$
(1,591
)
$
763

(a)
Change in gross carrying amounts consists primarily of adjustments for foreign currency translation and acquired intangible assets.
(b)
Consists of acquired backlog and probable follow-on work and associated customer relationships.
Amortization expense was $23 and $50 for the three- and six-month periods ended July 3, 2016, and $29 and $59 for the three- and six-month periods ended July 5, 2015.

C. 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 2016 and 2015 due to share repurchases. See Note J for additional details of our share repurchases. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs). The dilutive effect of stock options and restricted stock/RSUs increased because of the adoption of ASU 2016-09 during the second quarter of 2016. See Note A for additional detail of our adoption of this accounting standard.
Basic and diluted weighted average shares outstanding were as follows (in thousands):
 
Three Months Ended
Six Months Ended
 
July 3, 2016
July 5, 2015
July 3, 2016
July 5, 2015
Basic weighted average shares outstanding
304,470

326,153

306,199

327,653

Dilutive effect of stock options and restricted stock/RSUs*
5,738

5,273

5,610

5,396

Diluted weighted average shares outstanding
310,208

331,426

311,809

333,049

* Excludes outstanding options to purchase shares of common stock because these options had exercise prices in excess of the average market price of our common stock during the period and therefore the effect of including these options would be antidilutive. These options totaled 4,664 and 3,792 for the three- and six-month periods ended July 3, 2016, and 2,091 and 1,387 for the three- and six-month periods ended July 5, 2015, respectively.

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:

12



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.
We did not have any significant non-financial assets or liabilities measured at fair value on July 3, 2016, or December 31, 2015.
Our financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and payable; short- and long-term debt; and derivative financial instruments. The carrying values of cash and equivalents, accounts receivable and payable and short-term debt on the Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on July 3, 2016, and December 31, 2015, 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) (b)
Financial Assets (Liabilities) (a)
July 3, 2016
Available-for-sale securities
$
185

 
$
185

 
$
101

 
$
84

Derivatives
(506
)
 
(506
)
 

 
(506
)
Long-term debt, including current portion
(3,460
)
 
(3,578
)
 

 
(3,578
)
 
 
 
 
 
 
 
 
 
December 31, 2015
Available-for-sale securities
186

 
186

 
124

 
62

Derivatives
(673
)
 
(673
)
 

 
(673
)
Long-term debt, including current portion
(3,425
)
 
(3,381
)
 

 
(3,381
)
(a)We had no Level 3 financial instruments on July 3, 2016, or December 31, 2015.
(b)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.

E. INCOME TAXES
Net Deferred Tax Asset. Our net deferred tax asset was included on the Consolidated Balance Sheet in other assets and liabilities as follows:
 
July 3, 2016
 
December 31, 2015
Current deferred tax asset
$
9

 
$
3

Current deferred tax liability
(826
)
 
(829
)
Noncurrent deferred tax asset
1,135

 
1,272

Noncurrent deferred tax liability
(86
)
 
(75
)
Net deferred tax asset
$
232

 
$
371

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

13



incurred in connection with income taxes as part of income tax expense. The total amount of these tax liabilities on July 3, 2016, is not material to our results of operations, financial condition or cash flow.
We participate in the Internal Revenue Service (IRS) Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2014. 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 any unrecognized tax benefits on July 3, 2016, 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. In addition, 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 less associated advances and progress payments. These amounts have been inventoried until the customer is billed, generally in accordance with the agreed-upon billing terms or upon shipment of products or rendering of services. Contracts in process consisted of the following:
 
July 3, 2016
 
December 31, 2015
Contract costs and estimated profits
$
25,649

 
$
20,742

Other contract costs
868

 
965

 
26,517

 
21,707

Advances and progress payments
(21,521
)
 
(17,350
)
Total contracts in process
$
4,996

 
$
4,357

Contract costs include primarily labor, material, overhead and, when appropriate, G&A expenses. Contract costs also may include estimated contract recoveries for matters such as contract changes and claims for unanticipated contract costs. We record revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable.
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-

14



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.
Inventories consisted of the following:
 
July 3, 2016
 
December 31, 2015
Work in process
$
2,079

 
$
1,889

Raw materials
1,335

 
1,376

Finished goods
26

 
28

Pre-owned aircraft
80

 
73

Total inventories
$
3,520

 
$
3,366


H. DEBT
Debt consisted of the following:
 
 
July 3, 2016
 
December 31, 2015
Fixed-rate notes due:
Interest rate
 
 
 
July 2016
2.250%
$
500

 
$
500

November 2017
1.000%
900

 
900

July 2021
3.875%
500

 
500

November 2022
2.250%
1,000

 
1,000

November 2042
3.600%
500

 
500

Other
Various
60

 
25

Total debt - principal
 
3,460

 
3,425

Less unamortized debt issuance costs and discounts
 
24

 
26

Total debt
 
3,436

 
3,399

Less current portion
 
537

 
501

Long-term debt
 
$
2,899

 
$
2,898

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.
On July 3, 2016, 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 for general corporate purposes and working capital needs. These credit facilities include a $1 billion multi-year facility expiring in July 2018 and a $1 billion multi-year facility expiring in November 2020. 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 bank credit facilities are guaranteed by several of our 100-percent-owned subsidiaries. We also have an effective shelf registration on file with the SEC that allows us to access the debt markets.
Subsequent to the end of the second quarter of 2016, we repaid $500 of fixed-rate notes on their maturity date with cash on hand.

15



Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants on July 3, 2016.

I. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 
July 3, 2016
 
December 31, 2015
Deferred income taxes
$
826

 
$
829

Salaries and wages
649

 
648

Fair value of cash flow hedges
545

 
780

Workers' compensation
387

 
369

Retirement benefits
299

 
304

Other (a)
1,399

 
1,376

Total other current liabilities
$
4,105

 
$
4,306

 
 
 
 
Retirement benefits
$
4,149

 
$
4,251

Customer deposits on commercial contracts 
394

 
506

Deferred income taxes
86

 
75

Other (b)
1,111

 
1,084

Total other liabilities
$
5,740

 
$
5,916

(a)Consists primarily of dividends payable, taxes payable, environmental remediation reserves, warranty reserves, deferred revenue and supplier contributions in the Aerospace group, 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
Share Repurchases. Our board of directors authorizes management’s repurchase of shares of common stock on the open market from time to time. On March 2, 2016, the board of directors authorized management to repurchase up to 10 million additional shares. In the first six months of 2016, we repurchased 8.9 million of our outstanding shares for $1.2 billion. On July 3, 2016, 10.7 million shares remained authorized by our board of directors for repurchase, approximately 4 percent of our total shares outstanding. We repurchased 12.1 million shares for $1.7 billion in the first six months of 2015.
Dividends per Share. Dividends declared per share were $0.76 and $1.52 for the three- and six-month periods ended July 3, 2016, and $0.69 and $1.38 for the three- and six-month periods ended July 5, 2015, respectively. Cash dividends paid were $232 and $447 for the three- and six-month periods ended July 3, 2016, and $226 and $432 for the three- and six-month periods ended July 5, 2015, respectively.

16



Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of accumulated other comprehensive loss (AOCL) consisted of the following:
 
Losses on Cash Flow Hedges
Unrealized Gains on Securities
Foreign Currency Translation Adjustments
Changes in Retirement Plans’ Funded Status
AOCL
December 31, 2015
$
(487
)
$
20

$
178

$
(2,997
)
$
(3,286
)
Other comprehensive income, pretax
158

(4
)
125

126

405

Provision for income tax, net
37

(2
)
3

46

84

Other comprehensive income, net of tax
121

(2
)
122

80

321

July 3, 2016
$
(366
)
$
18

$
300

$
(2,917
)
$
(2,965
)
December 31, 2014
$
(173
)
$
22

$
541

$
(3,322
)
$
(2,932
)
Other comprehensive loss, pretax
(384
)

(35
)
188

(231
)
Benefit for income tax, net
(135
)
1

(3
)
66

(71
)
Other comprehensive loss, net of tax
(249
)
(1
)
(32
)
122

(160
)
July 5, 2015
$
(422
)
$
21

$
509

$
(3,200
)
$
(3,092
)
Amounts reclassified out of AOCL related primarily to changes in retirement plans' funded status and consisted of pretax recognized net actuarial losses of $166 and $222 for the six-month periods ended July 3, 2016, and July 5, 2015, respectively. This was offset partially by pretax amortization of prior service credit of $37 and $36 for the six-month periods ended July 3, 2016, and July 5, 2015, 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 had $7.4 billion in notional forward exchange contracts outstanding on July 3, 2016, and $7.2 billion on December 31, 2015. We do not use derivatives for trading or speculative purposes. We recognize derivative financial instruments on the Consolidated Balance Sheet at fair value. See Note D for additional details.
Foreign Currency Risk and Hedging Activities. Our foreign currency exchange rate risk relates 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 three-year average maturity of these instruments generally matches the duration of the activities that are at risk.
We record changes in the fair value of derivative financial instruments in operating costs and expenses in the Consolidated Statement of Earnings or in other comprehensive loss (OCL) within the Consolidated Statement 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

17



Statement 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 Statement of Earnings for all derivative financial instruments, regardless of designation.
Net gains and losses recognized in earnings, including gains and losses related to hedge ineffectiveness, were not material to our results of operations for the three- and six-month periods ended July 3, 2016, and July 5, 2015. Net gains and losses reclassified to earnings from OCL were not material to our results of operations for the three- and six-month periods ended July 3, 2016, and July 5, 2015, and we do not expect the amount of these gains and losses 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 July 3, 2016, or December 31, 2015.
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.
Commodity Price Risk. We are subject to rising labor and commodity price risk, primarily on long-term fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from these risks. 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 July 3, 2016, we held $1.9 billion in cash and equivalents, but held no marketable securities.
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 end-of-period exchange rates, and statements of earnings at 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 revenue and earnings resulting from the translation of these international operations' results into U.S. dollars. The negative impact of translating our non-U.S. operations’ revenue into U.S. dollars of approximately $25 and $105 was not material to our results of operations for the three- and six-month periods ended July 3, 2016. 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 2016.

L. COMMITMENTS AND CONTINGENCIES
Litigation
In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter filed under seal in U.S. district court. In May 2016, the Suspending and

18



Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and has been engaged in discussions with the official. Given the current status of these matters, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on our results of operations, financial condition and cash flows.
Additionally, various other claims and legal proceedings incidental to the normal course of business are pending or threatened against us. These other 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 other matters. However, based on information currently available, we believe any potential liabilities in these other 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 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
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 audits 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 the 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 on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and claims will be resolved without material impact to our results of operations, financial condition or cash flows.
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 billion on July 3, 2016. In addition, from time to time and in the ordinary

19



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 45 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 outfitted 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 based generally on the number of months of warranty coverage remaining for the 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 Sheet.
The changes in the carrying amount of warranty liabilities for the six-month periods ended July 3, 2016, and July 5, 2015, were as follows:
Six Months Ended
July 3, 2016
 
July 5, 2015
Beginning balance
$
465

 
$
428

Warranty expense
55

 
68

Payments
(42
)
 
(58
)
Adjustments
(1
)
 

Ending balance
$
477

 
$
438


M. RETIREMENT PLANS
We provide defined-contribution benefits to eligible employees, as well as some defined-benefit pension and other post-retirement benefits.
Net periodic defined-benefit pension and other post-retirement benefit cost for the three- and six-month periods ended July 3, 2016, and July 5, 2015, consisted of the following:
 
Pension Benefits
Other Post-retirement Benefits
Three Months Ended
July 3, 2016
 
July 5, 2015
July 3, 2016
 
July 5, 2015
Service cost
$
44

 
$
57

$
2

 
$
3

Interest cost
114

 
133

9

 
11

Expected return on plan assets
(178
)
 
(174
)
(8
)
 
(8
)
Recognized net actuarial loss (gain)
84

 
109

(1
)
 
1

Amortization of prior service credit
(17
)
 
(17
)
(1
)
 
(1
)
Net periodic benefit cost
$
47

 
$
108

$
1

 
$
6


20



 
Pension Benefits
Other Post-retirement Benefits
Six Months Ended
July 3, 2016
 
July 5, 2015
July 3, 2016
 
July 5, 2015
Service cost
$
88

 
$
114

$
5

 
$
6

Interest cost
228

 
266

17

 
22

Expected return on plan assets
(356
)
 
(348
)
(16
)
 
(16
)
Recognized net actuarial loss (gain)
168

 
219

(2
)
 
3

Amortization of prior service credit
(34
)
 
(34
)
(3
)
 
(2
)
Net periodic benefit cost
$
94

 
$
217

$
1

 
$
13

Beginning in 2016, we refined the method used to determine the service and interest cost components of our net periodic benefit cost. Previously, the cost was determined using a single weighted-average discount rate derived from a yield curve developed from a portfolio of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. Under the refined method, known as the spot rate approach, we use individual spot rates along the yield curve that correspond with the timing of each benefit payment. We believe this change provides a more precise measurement of service and interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. Compared to the previous method the spot rate approach decreased the service and interest components of our benefit costs slightly in 2016. We accounted for this change prospectively as a change in accounting estimate.
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 Sheet 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 revenue has exceeded the plans’ cumulative benefit cost. We have deferred recognition of these excess earnings to provide a better matching of revenue and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheet.

N. BUSINESS GROUP INFORMATION
We operate in four business groups: Aerospace, Combat Systems, Information Systems and Technology, and Marine Systems. We organize our business groups in accordance with the nature of products and services offered. We measure each group’s profitability 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.

21



Summary financial information for each of our business groups follows:
 
Revenue
Operating Earnings
Three Months Ended
July 3, 2016
July 5, 2015
July 3, 2016
July 5, 2015
Aerospace
$
2,134

$
2,258

$
434

$
439

Combat Systems
1,315

1,408

219

226

Information Systems and Technology
2,229

2,215

244

237

Marine Systems
1,987

2,001

181

187

Corporate*


(8
)
(8
)
Total
$
7,665

$
7,882

$
1,070

$
1,081

Six Months Ended
July 3, 2016
July 5, 2015
July 3, 2016
July 5, 2015
Aerospace
$
4,121

$
4,366

$
845

$
870

Combat Systems
2,588

2,771

436

430

Information Systems and Technology
4,562

4,585

492

454

Marine Systems
4,118

3,944

373

375

Corporate*


(23
)
(21
)
Total
$
15,389

$
15,666

$
2,123

$
2,108

* Corporate operating results consist primarily of stock option expense.



22



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 July 3, 2016
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue
$

$
6,693

$
972

$

$
7,665

Cost of sales
(2
)
5,360

751


6,109

G&A
9

403

74


486

Operating earnings
(7
)
930

147


1,070

Interest, net
(23
)



(23
)
Other, net
1




1

Earnings before income tax
(29
)
930

147


1,048

Provision for income tax, net
(39
)
300

29


290

Equity in net earnings of subsidiaries
748



(748
)

Net earnings
$
758

$
630

$
118

$
(748
)
$
758

Comprehensive income
$
734

$
624

$
70

$
(694
)
$
734

Three Months Ended July 5, 2015
 
 
 
 
 
Revenue
$

$
6,883

$
999

$

$
7,882

Cost of sales
(4
)
5,574

764


6,334

G&A
12

381

74


467

Operating earnings
(8
)
928

161


1,081

Interest, net
(20
)
(2
)
2


(20
)
Earnings before income tax
(28
)
926

163


1,061

Provision for income tax, net
(16
)
298

27


309

Equity in net earnings of subsidiaries
764



(764
)

Net earnings
$
752

$
628

$
136

$
(764
)
$
752

Comprehensive income
$
876

$
631

$
198

$
(829
)
$
876



23



CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)
Six Months Ended July 3, 2016
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue
$

$
13,509

$
1,880

$

$
15,389

Cost of sales
2

10,870

1,448


12,320

G&A
20

781

145


946

Operating earnings
(22
)
1,858

287


2,123

Interest, net
(46
)

1


(45
)
Other, net
10

1



11

Earnings before income tax
(58
)
1,859

288


2,089

Provision for income tax, net
(51
)
597

55


601

Discontinued operations
(13
)



(13
)
Equity in net earnings of subsidiaries
1,495



(1,495
)

Net earnings
$
1,475

$
1,262

$
233

$
(1,495
)
$
1,475

Comprehensive income
$
1,796

$
1,257

$
499

$
(1,756
)
$
1,796

Six Months Ended July 5, 2015
 
 
 
 
 
Revenue
$

$
13,651

$
2,015

$

$
15,666

Cost of sales
(3
)
11,036

1,555


12,588

G&A
24

797

149


970

Operating earnings
(21
)
1,818

311


2,108

Interest, net
(43
)
(1
)
3


(41
)
Other, net
1

2



3

Earnings before income tax
(63
)
1,819

314


2,070

Provision for income tax, net
(41
)
588

55


602

Equity in net earnings of subsidiaries
1,490



(1,490
)

Net earnings
$
1,468

$
1,231

$
259

$
(1,490
)
$
1,468

Comprehensive income
$
1,308

$
1,237

$
(26
)
$
(1,211
)
$
1,308




24



CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

July 3, 2016
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,011

$

$
888

$

$
1,899

Accounts receivable

1,248

2,291


3,539

Contracts in process
409

3,109

1,478


4,996

Inventories
 
 
 
 
 
Work in process

2,066

13


2,079

Raw materials

1,298

37


1,335

Finished goods

21

5


26

Pre-owned aircraft

80



80

Other current assets
44

196

192


432

Total current assets
1,464

8,018

4,904


14,386

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment (PP&E)
193

6,420

1,158


7,771

Accumulated depreciation of PP&E
(63
)
(3,546
)
(722
)

(4,331
)
Intangible assets

1,447

929


2,376

Accumulated amortization of intangible assets

(1,159
)
(484
)

(1,643
)
Goodwill

8,046

3,526


11,572

Other assets
1,236

239

163


1,638

Investment in subsidiaries
41,865



(41,865
)

Total noncurrent assets
43,231

11,447

4,570

(41,865
)
17,383

Total assets
$
44,695

$
19,465

$
9,474

$
(41,865
)
$
31,769

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

$
1

$
36

$

$
537

Customer advances and deposits

2,748

2,617


5,365

Other current liabilities
1,377

3,468

1,388


6,233

Total current liabilities
1,877

6,217

4,041


12,135

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
2,876

23



2,899

Other liabilities
3,276

1,952

512


5,740

Total noncurrent liabilities
6,152

1,975

512


8,639

Intercompany
25,671

(24,364
)
(1,307
)


Shareholders' equity:
 
 
 
 
 
Common stock
482

6

2,354

(2,360
)
482

Other shareholders' equity
10,513

35,631

3,874

(39,505
)
10,513

Total shareholders' equity
10,995

35,637

6,228

(41,865
)
10,995

Total liabilities and shareholders' equity
$
44,695

$
19,465

$
9,474

$
(41,865
)
$
31,769



25



CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2015
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,732

$

$
1,053

$

$
2,785

Accounts receivable

1,181

2,265


3,446

Contracts in process
514

2,795

1,048


4,357

Inventories
 
 
 
 
 
Work in process

1,882

7


1,889

Raw materials

1,344

32


1,376

Finished goods

23

5


28

Pre-owned aircraft

73



73

Other current assets
140

213

264


617

Total current assets
2,386

7,511

4,674


14,571

Noncurrent assets:
 
 
 
 
 
PP&E
189

6,386

1,101


7,676

Accumulated depreciation of PP&E
(59
)
(3,462
)
(689
)

(4,210
)
Intangible assets

1,445

909


2,354

Accumulated amortization of intangible assets

(1,122
)
(469
)

(1,591
)
Goodwill

8,040

3,403


11,443

Other assets
1,379

207

168


1,754

Investment in subsidiaries
40,062



(40,062
)

Total noncurrent assets
41,571

11,494

4,423

(40,062
)
17,426

Total assets
$
43,957

$
19,005

$
9,097

$
(40,062
)
$
31,997

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

$
1

$

$

$
501

Customer advances and deposits

3,038

2,636


5,674

Other current liabilities
1,331

3,309

1,630


6,270

Total current liabilities
1,831

6,348

4,266


12,445

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
2,874

24



2,898

Other liabilities
3,417

2,021

478


5,916

Total noncurrent liabilities
6,291

2,045

478


8,814

Intercompany
25,097

(23,816
)
(1,281
)


Shareholders' equity:
 
 
 
 
 
Common stock
482

6

2,354

(2,360
)
482

Other shareholders' equity
10,256

34,422

3,280

(37,702
)
10,256

Total shareholders' equity
10,738

34,428

5,634

(40,062
)
10,738

Total liabilities and shareholders' equity
$
43,957

$
19,005

$
9,097

$
(40,062
)
$
31,997



26



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended July 3, 2016
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Net cash provided by operating activities*
$
280

$
399

$
194

$

$
873

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(3
)
(111
)
(20
)

(134
)
Other, net
1

(15
)
(37
)

(51
)
Net cash used by investing activities
(2
)
(126
)
(57
)

(185
)
Cash flows from financing activities:
 
 
 
 
 
Purchases of common stock
(1,189
)



(1,189
)
Dividends paid
(447
)



(447
)
Proceeds from stock option exercises
92




92

Other, net
(31
)
(1
)
36


4

Net cash used by financing activities
(1,575
)
(1
)
36


(1,540
)
Net cash used by discontinued operations
(34
)



(34
)
Cash sweep/funding by parent
610

(272
)
(338
)


Net decrease in cash and equivalents
(721
)

(165
)

(886
)
Cash and equivalents at beginning of period
1,732


1,053


2,785

Cash and equivalents at end of period
$
1,011

$

$
888

$

$
1,899

Six Months Ended July 5, 2015
 
 
 
 
 
Net cash provided by operating activities*
$
103

$
1,133

$
197

$

$
1,433

Cash flows from investing activities:
 
 
 
 
 
Maturities of held-to-maturity securities
500




500

Proceeds from sales of assets
162

97



259

Capital expenditures
(2
)
(180
)
(8
)

(190
)
Other, net
2

(20
)


(18
)
Net cash provided by investing activities
662

(103
)
(8
)

551

Cash flows from financing activities:
 
 
 
 

Purchases of common stock
(1,565
)



(1,565
)
Repayment of fixed-rate notes
(500
)



(500
)
Dividends paid
(432
)



(432
)
Proceeds from stock option exercises
198




198