10-Q 1 gd-2017040210q.htm 10-Q Document



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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 April 2, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ü Accelerated filer ___ Non-accelerated filer ___
Smaller reporting company ___ Emerging growth company ___
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No ü
301,685,448 shares of the registrant’s common stock, $1 par value per share, were outstanding on April 2, 2017.





INDEX

            

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)
April 2, 2017
 
April 3, 2016
Revenue:
 
 
 
Products
$
4,467

 
$
4,582

Services
2,974

 
2,894

 
7,441

 
7,476

Operating costs and expenses:
 
 
 
Products
3,436

 
3,635

Services
2,489

 
2,456

General and administrative (G&A)
481

 
461

 
6,406

 
6,552

Operating earnings
1,035

 
924

Interest, net
(25
)
 
(22
)
Other, net

 
10

Earnings from continuing operations before income tax
1,010

 
912

Provision for income tax, net
247

 
258

Earnings from continuing operations
763

 
654

Discontinued operations

 
(13
)
Net earnings
$
763

 
$
641

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
2.53

 
$
2.12

Discontinued operations

 
(0.04
)
Net earnings
$
2.53

 
$
2.08

Diluted:
 
 
 
Continuing operations
$
2.48

 
$
2.08

Discontinued operations

 
(0.04
)
Net earnings
$
2.48

 
$
2.04

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


3



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
(Dollars in millions)
April 2, 2017
 
April 3, 2016
Net earnings
$
763

 
$
641

Gains on cash flow hedges
13

 
182

Unrealized gains (losses) on securities
5

 
(9
)
Foreign currency translation adjustments
82

 
180

Change in retirement plans’ funded status
69

 
60

Other comprehensive income, pretax
169

 
413

Provision for income tax, net
44

 
69

Other comprehensive income, net of tax
125

 
344

Comprehensive income
$
888

 
$
985

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


4



CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions)
April 2, 2017
 
December 31, 2016
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
2,168

 
$
2,334

Accounts receivable
3,483

 
3,399

Unbilled receivables
4,557

 
4,212

Inventories
5,822

 
5,817

Other current assets
584

 
772

Total current assets
16,614

 
16,534

Noncurrent assets:
 
 
 
Property, plant and equipment, net
3,412

 
3,477

Intangible assets, net
679

 
678

Goodwill
11,532

 
11,445

Other assets
974

 
1,038

Total noncurrent assets
16,597

 
16,638

Total assets
$
33,211

 
$
33,172

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
901

 
$
900

Accounts payable
2,466

 
2,538

Customer advances and deposits
6,686

 
6,827

Other current liabilities
3,112

 
3,185

Total current liabilities
13,165

 
13,450

Noncurrent liabilities:
 
 
 
Long-term debt
2,988

 
2,988

Other liabilities
6,475

 
6,433

Commitments and contingencies (See Note M)


 


Total noncurrent liabilities
9,463

 
9,421

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
2,762

 
2,819

Retained earnings
25,049

 
24,543

Treasury stock
(14,448
)
 
(14,156
)
Accumulated other comprehensive loss
(3,262
)
 
(3,387
)
Total shareholders’ equity
10,583

 
10,301

Total liabilities and shareholders equity
$
33,211

 
$
33,172

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


5



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Three Months Ended
(Dollars in millions)
April 2, 2017
 
April 3, 2016
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
763

 
$
641

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 

Depreciation of property, plant and equipment
92

 
89

Amortization of intangible assets
19

 
27

Equity-based compensation expense
22

 
27

Deferred income tax provision (benefit)
45

 
(18
)
Discontinued operations

 
13

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
(84
)
 
(210
)
Unbilled receivables
(338
)
 
(276
)
Inventories
2

 
(221
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(72
)
 
179

Customer advances and deposits
(95
)
 
(18
)
Income taxes payable
202

 
253

Other current liabilities
(76
)
 
(52
)
Other, net
53

 
46

Net cash provided by operating activities
533

 
480

Cash flows from investing activities:
 
 
 
Capital expenditures
(62
)
 
(65
)
Other, net
(23
)
 
(53
)
Net cash used by investing activities
(85
)
 
(118
)
Cash flows from financing activities:
 
 
 
Purchases of common stock
(354
)
 
(1,026
)
Dividends paid
(230
)
 
(215
)
Other, net
(22
)
 
7

Net cash used by financing activities
(606
)
 
(1,234
)
Net cash used by discontinued operations
(8
)
 
(6
)
Net decrease in cash and equivalents
(166
)
 
(878
)
Cash and equivalents at beginning of period
2,334

 
2,785

Cash and equivalents at end of period
$
2,168

 
$
1,907

Supplemental cash flow information:
 
 
 
Total income tax (refunds) payments
$
(4
)
 
$
21

Total interest payments
$
20

 
$
16

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial 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
December 31, 2016
$
482

 
$
2,819

 
$
24,543

 
$
(14,156
)
 
$
(3,387
)
 
$
10,301

Cumulative-effect adjustment (see Note A)

 

 
(3
)
 

 

 
(3
)
Net earnings

 

 
763

 

 

 
763

Cash dividends declared

 

 
(254
)
 

 

 
(254
)
Equity-based awards

 
(57
)
 

 
63

 

 
6

Shares purchased

 

 

 
(355
)
 

 
(355
)
Other comprehensive income

 

 

 

 
125

 
125

April 2, 2017
$
482

 
$
2,762

 
$
25,049

 
$
(14,448
)
 
$
(3,262
)
 
$
10,583

 
 
 
 
 
 
 
 
 
 
 


December 31, 2015
$
482

 
$
2,730

 
$
22,903

 
$
(12,392
)
 
$
(3,283
)
 
$
10,440

Net earnings

 

 
641

 

 

 
641

Cash dividends declared

 

 
(234
)
 

 

 
(234
)
Equity-based awards

 
(5
)
 

 
45

 

 
40

Shares purchased

 

 

 
(1,039
)
 

 
(1,039
)
Other comprehensive income

 

 

 

 
344

 
344

April 3, 2016
$
482

 
$
2,725

 
$
23,310

 
$
(13,386
)
 
$
(2,939
)
 
$
10,192

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial 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. Some prior-year amounts have been reclassified among financial statement accounts or disclosures to conform to the current-year presentation.
Consistent with 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.
Further discussion of our significant accounting policies is contained in the other notes to these financial statements.
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-month period ended April 2, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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-month periods ended April 2, 2017, and April 3, 2016.
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, 2016.
Accounting Standards Updates. Since the first quarter of 2016, we have adopted the following accounting standards issued by the Financial Accounting Standards Board (FASB) that have impacted our prior-period financial statements:
Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
See Note Q for further discussion of each of these accounting standards.
We also adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, on January 1, 2017. We recognized the cumulative effect of this standard as a $3 decrease to retained earnings on the date of adoption. ASU 2016-16 requires recognition of the current and deferred income tax effects of an intra-entity asset transfer, other than inventory, when the transfer occurs, as opposed

8



to former GAAP, which required companies to defer the income tax effects of intra-entity asset transfers until the asset was sold to an outside party. The income tax effects of intra-entity inventory transfers will continue to be deferred until the inventory is sold.
There are several new accounting standards that have been issued by the FASB but are not yet effective, including ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires the service cost component of net benefit cost to be reported separately from the other components of net benefit cost in the income statement. The ASU also allows only the service cost component of net benefit cost to be eligible for capitalization. We intend to adopt the standard on the effective date of January 1, 2018. We have not yet determined the effect of the ASU on our results of operations, financial condition or cash flows.
For a discussion of other accounting standards that have been issued by the FASB but are not yet effective, refer to the Accounting Standards Updates section in our Annual Report on Form 10-K for the year ended December 31, 2016.

B. REVENUE
The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements.
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.
Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 70 percent and 73 percent of our revenue for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. Substantially all of our revenue in the defense groups is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.  
Revenue from goods and services transferred to customers at a single point in time accounted for 30 percent and 27 percent for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace group. Revenue on these contracts is recognized when the customer accepts the fully outfitted aircraft.

9



On April 2, 2017, we had $60.4 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 30 percent of our remaining performance obligations as revenue in 2017, an additional 45 percent by 2019 and the balance thereafter.
Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, 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.
Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue and operating earnings (and diluted earnings per share) by $72 and $50 ($0.11) for the three-month period ended April 2, 2017, and $68 and $58 ($0.12) for the three-month period ended April 3, 2016, respectively. No adjustment on any one contract was material to our unaudited Consolidated Financial Statements for the three-month periods ended April 2, 2017, and April 3, 2016.
Revenue by Category. Our portfolio of products and services consists of over 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

10



Revenue by major product line was as follows:
Three Months Ended
April 2, 2017
 
April 3, 2016
Aircraft manufacturing, outfitting and completions
$
1,629

 
$
1,376

Aircraft services
435

 
401

Pre-owned aircraft
10

 
4

Total Aerospace
2,074

 
1,781

Wheeled combat vehicles
560

 
563

Weapons systems, armament and munitions
346

 
341

Tanks and tracked vehicles
247

 
192

Engineering and other services
134

 
149

Total Combat Systems
1,287

 
1,245

C4ISR* solutions

1,088

 
1,186

Information technology (IT) services
1,058

 
1,142

Total Information Systems and Technology
2,146

 
2,328

Nuclear-powered submarines
1,204

 
1,387

Surface combatants
247

 
273

Auxiliary and commercial ships
143

 
149

Repair and other services
340

 
313

Total Marine Systems
1,934

 
2,122

Total revenue
$
7,441

 
$
7,476

* Command, control, communications, computers, intelligence, surveillance and reconnaissance.
Revenue by contract type was as follows:
Three Months Ended April 2, 2017
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Revenue
Fixed-price
$
1,902

 
$
1,073

 
$
930

 
$
1,130

 
$
5,035

Cost-reimbursement

 
207

 
1,010

 
801

 
2,018

Time-and-materials
172

 
7

 
206

 
3

 
388

Total revenue
$
2,074

 
$
1,287

 
$
2,146

 
$
1,934

 
$
7,441

Three Months Ended April 3, 2016
 
 
 
 
 
 
 
 
 
Fixed-price
$
1,641

 
$
1,024

 
$
1,077

 
$
1,321

 
$
5,063

Cost-reimbursement

 
216

 
1,049

 
800

 
2,065

Time-and-materials
140

 
5

 
202

 
1

 
348

Total revenue
$
1,781

 
$
1,245

 
$
2,328

 
$
2,122

 
$
7,476

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.

11



Revenue by customer was as follows:
Three Months Ended April 2, 2017
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
Department of Defense (DoD)
$
40

 
$
587

 
$
1,175

 
$
1,837

 
$
3,639

Non-DoD

 
24

 
665

 

 
689

Foreign Military Sales (FMS)
9

 
108

 
12

 
58

 
187

Total U.S. government
49

 
719

 
1,852

 
1,895

 
4,515

U.S. commercial
936

 
61

 
89

 
33

 
1,119

Non-U.S. government
5

 
502

 
176

 
4

 
687

Non-U.S. commercial
1,084

 
5

 
29

 
2

 
1,120

Total revenue
$
2,074

 
$
1,287

 
$
2,146

 
$
1,934

 
$
7,441

Three Months Ended April 3, 2016
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
DoD
$
46

 
$
514

 
$
1,306

 
$
1,992

 
$
3,858

Non-DoD

 
20

 
718

 
2

 
740

FMS
45

 
75

 
12

 
37

 
169

Total U.S. government
91

 
609

 
2,036

 
2,031

 
4,767

U.S. commercial
973

 
55

 
87

 
85

 
1,200

Non-U.S. government
77

 
547

 
160

 
6

 
790

Non-U.S. commercial
640

 
34

 
45

 

 
719

Total revenue
$
1,781

 
$
1,245

 
$
2,328

 
$
2,122

 
$
7,476

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense groups, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace group, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the three-month period ended April 2, 2017, were not materially impacted by any other factors.
Revenue recognized for the three-month periods ended April 2, 2017, and April 3, 2016, that was included in the contract liability balance at the beginning of each year was $1.7 billion and $1.4 billion, respectively, and represented primarily revenue from the sale of business-jet aircraft.

C. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS
Acquisitions and Divestitures
In the first quarter of 2017, we acquired a fixed-base-operations (FBO) facility in our Aerospace group. In 2016, we acquired an aircraft management and charter services provider in our Aerospace group and a

12



manufacturer of unmanned underwater vehicles (UUVs) in our Information Systems and Technology group. As the purchase prices of these acquisitions are not material, they are included in other investing activities in the unaudited Consolidated Statement of Cash Flows.
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.
We did not have any divestitures in 2017 or 2016. In 2015, we completed the sale of our axle business in our Combat Systems group. In the first quarter of 2016, we recognized in discontinued operations a final adjustment of $13 to the loss on the sale of this business.
Goodwill
The changes in the carrying amount of goodwill by reporting unit for the three-month period ended April 2, 2017, were as follows:
 
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Goodwill
December 31, 2016 (a)
$
2,537

 
$
2,598

 
$
6,013

 
$
297

 
$
11,445

Acquisitions (b)
33

 

 

 

 
33

Other (c)
35

 
15

 
4

 

 
54

April 2, 2017
$
2,605

 
$
2,613

 
$
6,017

 
$
297

 
$
11,532

(a)Goodwill on December 31, 2016, 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.
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
 
April 2, 2017
 
December 31, 2016
Contract and program intangible assets (b)
$
1,626

$
(1,273
)
$
353

 
$
1,633

$
(1,281
)
$
352

Trade names and trademarks
455

(146
)
309

 
446

(139
)
307

Technology and software
120

(103
)
17

 
121

(102
)
19

Other intangible assets
154

(154
)

 
154

(154
)

Total intangible assets
$
2,355

$
(1,676
)
$
679

 
$
2,354

$
(1,676
)
$
678

(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 $19 and $27 for the three-month periods ended April 2, 2017, and April 3, 2016, respectively.

D. 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 in 2017 and 2016 due to share repurchases. See Note K for further discussion 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).
Basic and diluted weighted average shares outstanding were as follows (in thousands):
Three Months Ended
April 2, 2017
April 3, 2016 (a)
Basic weighted average shares outstanding
301,771

307,928

Dilutive effect of stock options and restricted stock/RSUs (b)
5,511

5,571

Diluted weighted average shares outstanding
307,282

313,499

(a)Prior-period information has been restated for the adoption of ASU 2016-09, which we adopted in the second quarter of 2016, resulting in an increased dilutive effect of stock options and restricted stock/RSUs. See Note Q for further discussion of our adoption of this accounting standard.
(b)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 681 and 2,948 for the three-month periods ended April 2, 2017, and April 3, 2016, respectively.

E. 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.
We did not have any significant non-financial assets or liabilities measured at fair value on April 2, 2017, or December 31, 2016.
Our financial instruments include cash and equivalents 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 unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on April 2, 2017, and December 31, 2016, and the basis for determining their fair values:

13



 
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)
April 2, 2017
Available-for-sale securities
$
178

 
$
178

 
$
56

 
$
122

Cash flow hedges
(468
)
 
(468
)
 

 
(468
)
Long-term debt, including current portion
(3,925
)
 
(3,850
)
 

 
(3,850
)
 
 
 
 
 
 
 
 
 
December 31, 2016
Available-for-sale securities
$
177

 
$
177

 
$
59

 
$
118

Cash flow hedges
(477
)
 
(477
)
 

 
(477
)
Long-term debt, including current portion
(3,924
)
 
(3,849
)
 

 
(3,849
)
(a)We had no Level 3 financial instruments on April 2, 2017, or December 31, 2016.
(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.

F. INCOME TAXES
Net Deferred Tax Asset. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax asset consisted of the following:
 
April 2, 2017
 
December 31, 2016
Deferred tax asset
$
487

 
$
564

Deferred tax liability
(187
)
 
(183
)
Net deferred tax asset
$
300

 
$
381

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. The total amount of these tax liabilities on April 2, 2017, was not material to our results of operations, financial condition or cash flows.
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 2015. 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.

14



Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on April 2, 2017, 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 vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

G. UNBILLED RECEIVABLES
Unbilled receivables represent revenue recognized on long-term contracts less associated advances and progress billings. These amounts will be billed in accordance with the agreed-upon contractual terms or upon shipment of products or rendering of services. Unbilled receivables consisted of the following:
 
April 2, 2017
 
December 31, 2016
Unbilled revenue
$
25,979

 
$
25,543

Advances and progress billings
(21,422
)
 
(21,331
)
Net unbilled receivables
$
4,557

 
$
4,212


H. INVENTORIES
The majority of our inventories are for business-jet aircraft. Our inventories 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.
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.
Inventories consisted of the following:
 
April 2, 2017
 
December 31, 2016
Work in process
$
3,775

 
$
3,643

Raw materials
1,383

 
1,429

Finished goods
25

 
24

Pre-owned aircraft
40

 
22

Other contract costs
599

 
699

Total inventories
$
5,822

 
$
5,817



15



I. DEBT
Debt consisted of the following:
 
 
April 2, 2017
 
December 31, 2016
Fixed-rate notes due:
Interest rate
 
 
 
November 2017
1.000%
$
900

 
$
900

July 2021
3.875%
500

 
500

November 2022
2.250%
1,000

 
1,000

August 2023
1.875%
500

 
500

August 2026
2.125%
500

 
500

November 2042
3.600%
500

 
500

Other
Various
25

 
24

Total debt - principal
 
3,925

 
3,924

Less unamortized debt issuance costs and discounts
 
36

 
36

Total debt
 
3,889

 
3,888

Less current portion
 
901

 
900

Long-term debt
 
$
2,988

 
$
2,988

Our fixed-rate notes are fully and unconditionally guaranteed by several of our 100-percent-owned subsidiaries. See Note P for condensed consolidating financial statements. We have the option to redeem the notes prior to their maturity in whole or in part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.
Fixed-rate notes of $900 mature in November of 2017. As we approach the maturity date of this debt, we will determine whether to repay these notes with cash on hand or refinance the obligation.
On April 2, 2017, 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 credit rating agencies to support our commercial paper issuances. We may renew or replace these credit facilities in whole or in part 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.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants on April 2, 2017.


16



J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 
April 2, 2017
 
December 31, 2016
 
 
 
 
Salaries and wages
$
639

 
$
693

Fair value of cash flow hedges
502

 
521

Workers’ compensation
334

 
337

Retirement benefits
293

 
303

Other (a)
1,344

 
1,331

Total other current liabilities
$
3,112

 
$
3,185

 
 
 
 
Retirement benefits
$
4,359

 
$
4,393

Customer deposits on commercial contracts 
765

 
719

Deferred income taxes
187

 
183

Other (b)
1,164

 
1,138

Total other liabilities
$
6,475

 
$
6,433

(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 warranty reserves, workers’ compensation liabilities and liabilities of discontinued operations.

K. SHAREHOLDERS EQUITY
Share Repurchases. Our board of directors authorizes management’s repurchase of outstanding shares of our common stock on the open market from time to time. On March 1, 2017, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the three-month period ended April 2, 2017, we repurchased 1.9 million of our outstanding shares for $355. On April 2, 2017, 13.5 million shares remained authorized by our board of directors for repurchase, approximately 4 percent of our total shares outstanding. We repurchased 7.8 million shares for $1 billion in the three-month period ended April 3, 2016.
Dividends per Share. Dividends declared per share were $0.84 and $0.76 for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. Cash dividends paid were $230 and $215 for the three-month periods ended April 2, 2017, and April 3, 2016, respectively.

17



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, 2016
$
(345
)
$
14

$
69

$
(3,125
)
$
(3,387
)
Other comprehensive income, pretax
13

5

82

69

169

Provision for income tax, net
4

1

15

24

44

Other comprehensive income, net of tax
9

4

67

45

125

April 2, 2017
$
(336
)
$
18

$
136

$
(3,080
)
$
(3,262
)
December 31, 2015
$
(487
)
$
20

$
181

$
(2,997
)
$
(3,283
)
Other comprehensive income, pretax
182

(9
)
180

60

413

Provision for income tax, net
45

(3
)
5

22

69

Other comprehensive income, net of tax
137

(6
)
175

38

344

April 3, 2016
$
(350
)
$
14

$
356

$
(2,959
)
$
(2,939
)
Amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and consisted of pretax recognized net actuarial losses of $85 and $83 for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. This was offset partially by pretax amortization of prior service credit of $18 and $19 for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note N for additional details.

L. DERIVATIVE FINANCIAL 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 $6.2 billion in notional forward exchange contracts outstanding on April 2, 2017, and $6.3 billion on December 31, 2016. We do not use derivative financial instruments for trading or speculative purposes. We recognize derivative financial instruments on the Consolidated Balance Sheet at fair value. See Note E 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 derivative financial instruments 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

18



or loss in the Consolidated 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 on derivative financial instruments recognized in earnings, including gains and losses related to hedge ineffectiveness, were not material to our results of operations for the three-month periods ended April 2, 2017, and April 3, 2016. Net gains and losses reclassified to earnings from OCL were not material to our results of operations for the three-month periods ended April 2, 2017, and April 3, 2016, 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 April 2, 2017, or December 31, 2016.
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 derivative financial instruments 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 April 2, 2017, we held $2.2 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 was not material to our results of operations for the three-month periods ended April 2, 2017, or April 3, 2016. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the three-month periods ended April 2, 2017, and April 3, 2016.

M. 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

19



in a lawsuit related to this matter filed under seal in U.S. district court. Also in 2016, the Suspending and 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 U.S. government. 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 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 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
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 upon 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

20



carriers totaling approximately $1.1 billion on April 2, 2017. 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 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 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 three-month periods ended April 2, 2017, and April 3, 2016, were as follows:
Three Months Ended
April 2, 2017
 
April 3, 2016
Beginning balance
$
474

 
$
434

Warranty expense
35

 
23

Payments
(21
)
 
(22
)
Adjustments

 
(1
)
Ending balance
$
488

 
$
434


N. RETIREMENT PLANS
We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits.
Net periodic defined-benefit pension and other post-retirement benefit cost for the three-month periods ended April 2, 2017, and April 3, 2016, consisted of the following:
 
Pension Benefits
Other Post-retirement Benefits
Three Months Ended
April 2, 2017
 
April 3, 2016
April 2, 2017
 
April 3, 2016
Service cost
$
42

 
$
44

$
3

 
$
3

Interest cost
113

 
114

8

 
8

Expected return on plan assets
(169
)
 
(178
)
(8
)
 
(8
)
Recognized net actuarial loss (gain)
86

 
84

(1
)
 
(1
)
Amortization of prior service credit
(17
)
 
(17
)
(1
)
 
(2
)
Net periodic benefit cost
$
55

 
$
47

$
1

 
$


21



In 2017, we decreased the expected long-term rate of return on assets in our primary U.S. government and commercial pension plans by 75 basis points following an assessment of the historical and expected long-term returns of our various asset classes.
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 other 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 other contract costs in inventory on the Consolidated Balance Sheet until the cost is allocable to contracts. See Note H 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, classifying these deferrals against the plan assets on the Consolidated Balance Sheet.

O. 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.
Summary financial information for each of our business groups follows:
 
Revenue
Operating Earnings
Three Months Ended
April 2, 2017
April 3, 2016
April 2, 2017
April 3, 2016
Aerospace
$
2,074

$
1,781

$
443

$
332

Combat Systems
1,287

1,245

205

187

Information Systems and Technology
2,146

2,328

236

237

Marine Systems
1,934

2,122

161

184

Corporate*


(10
)
(16
)
Total
$
7,441

$
7,476

$
1,035

$
924

* Corporate operating results consist primarily of stock option expense.



22



P. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed-rate notes described in Note I are fully and unconditionally guaranteed on an unsecured, joint and several basis by several 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 April 2, 2017
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue
$

$
6,544

$
897

$

$
7,441

Cost of sales
(3
)
5,241

687


5,925

G&A
11

394

76


481

Operating earnings
(8
)
909

134


1,035

Interest, net
(24
)

(1
)

(25
)
Earnings before income tax
(32
)
909

133


1,010

Provision for income tax, net
(67
)
293

21


247

Equity in net earnings of subsidiaries
728



(728
)

Net earnings
$
763

$
616

$
112

$
(728
)
$
763

Comprehensive income
$
888

$
617

$
207

$
(824
)
$
888

Three Months Ended April 3, 2016
 
 
 
 
 
Revenue
$

$
6,599

$
877

$

$
7,476

Cost of sales
4

5,391

696


6,091

G&A
11

379

71


461

Operating earnings
(15
)
829

110


924

Interest, net
(23
)

1


(22
)
Other, net
10




10

Earnings before income tax
(28
)
829

111


912

Provision for income tax, net
(28
)
262

24


258

Discontinued operations
(13
)



(13
)
Equity in net earnings of subsidiaries
654



(654
)

Net earnings
$
641

$
567

$
87

$
(654
)
$
641

Comprehensive income
$
985

$
565

$
400

$
(965
)
$
985



23



CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

April 2, 2017
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,051

$

$
1,117

$

$
2,168

Accounts receivable

1,156

2,327


3,483

Unbilled receivables

2,563

1,994


4,557

Inventories
238

5,485

99


5,822

Other current assets
142

195

247


584

Total current assets
1,431

9,399

5,784


16,614

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment, net
131

2,854

427


3,412

Intangible assets, net

255

424


679

Goodwill

8,052

3,480


11,532

Other assets
577

244

153


974

Investment in subsidiaries
41,618



(41,618
)

Total noncurrent assets
42,326

11,405

4,484

(41,618
)
16,597

Total assets
$
43,757

$
20,804

$
10,268

$
(41,618
)
$
33,211

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
898

$
3

$

$

$
901

Customer advances and deposits

4,053

2,633


6,686

Other current liabilities
599

3,406

1,573


5,578

Total current liabilities
1,497

7,462

4,206


13,165

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
2,966

22



2,988

Other liabilities
2,398

3,475

602


6,475

Total noncurrent liabilities
5,364

3,497

602


9,463

Intercompany
26,313

(26,259
)
(54
)


Shareholders’ equity:
 
 
 
 
 
Common stock
482

6

2,354

(2,360
)
482

Other shareholders’ equity
10,101

36,098

3,160

(39,258
)
10,101

Total shareholders’ equity
10,583

36,104

5,514

(41,618
)
10,583

Total liabilities and shareholders’ equity
$
43,757

$
20,804

$
10,268

$
(41,618
)
$
33,211



24



CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2016
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,254

$

$
1,080

$

$
2,334

Accounts receivable

1,155

2,244


3,399

Unbilled receivables

2,235

1,977


4,212

Inventories
304

5,417

96


5,817

Other current assets
330

204

238


772

Total current assets
1,888

9,011

5,635


16,534

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment, net
130

2,933

414


3,477

Intangible assets, net

265

413


678

Goodwill

8,050

3,395


11,445

Other assets
640

232

166


1,038

Investment in subsidiaries
41,956



(41,956
)

Total noncurrent assets
42,726

11,480

4,388

(41,956
)
16,638

Total assets
$
44,614

$
20,491

$
10,023

$
(41,956
)
$
33,172

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
898

$
2

$

$

$
900

Customer advances and deposits

4,339

2,488


6,827

Other current liabilities
564

3,465

1,694


5,723

Total current liabilities
1,462

7,806

4,182


13,450

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
2,966

22



2,988

Other liabilities
3,520

2,330

583


6,433

Total noncurrent liabilities
6,486

2,352

583


9,421

Intercompany
26,365

(25,827
)
(538
)


Shareholders’ equity:
 
 
 
 
 
Common stock
482

6

2,354

(2,360
)
482

Other shareholders’ equity
9,819

36,154

3,442

(39,596
)
9,819

Total shareholders’ equity
10,301

36,160

5,796

(41,956
)
10,301

Total liabilities and shareholders’ equity
$
44,614

$
20,491

$
10,023

$
(41,956
)
$
33,172



25



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended April 2, 2017
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Net cash provided by operating activities*
$
(9
)
$
442

$
100

$

$
533

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(3
)
(42
)
(17
)

(62
)
Other, net
(1
)
29

(51
)

(23
)
Net cash used by investing activities
(4
)
(13
)
(68
)

(85
)
Cash flows from financing activities:
 
 
 
 
 
Purchases of common stock
(354
)



(354
)
Dividends paid
(230
)



(230
)
Other, net
(21
)
(1
)


(22
)
Net cash used by financing activities
(605
)
(1
)


(606
)
Net cash used by discontinued operations
(8
)



(8
)
Cash sweep/funding by parent
423

(428
)
5



Net decrease in cash and equivalents
(203
)

37


(166
)
Cash and equivalents at beginning of period
1,254


1,080


2,334

Cash and equivalents at end of period
$
1,051

$

$
1,117

$

$
2,168

Three Months Ended April 3, 2016
 
 
 
 
 
Net cash provided by operating activities*
$
102

$
314

$
64

$

$
480

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(1
)
(58
)
(6
)

(65
)
Other, net
6

(21
)
(38
)

(53
)
Net cash used by investing activities
5

(79
)
(44
)

(118
)
Cash flows from financing activities:
 
 
 
 

Purchases of common stock
(1,026
)



(1,026
)
Dividends paid
(215
)



(215
)
Other, net
7




7

Net cash used by financing activities
(1,234
)



(1,234
)
Net cash used by discontinued operations
(6
)



(6
)
Cash sweep/funding by parent
387

(235
)
(152
)


Net decrease in cash and equivalents
(746
)

(132
)

(878
)
Cash and equivalents at beginning of period
1,732


1,053


2,785

Cash and equivalents at end of period
$
986

$

$
921

$

$
1,907

* Continuing operations only.

26



Q. PRIOR-PERIOD FINANCIAL STATEMENTS
Our prior-period financial statements were restated for the adoption of three ASUs that are discussed below.
ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We adopted ASU 2016-09 in the second quarter of 2016. ASU 2016-09 impacted several aspects of our 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. While this area of the ASU permits only prospective adoption, because we adopted the standard in the second quarter of 2016, we were required to restate the first-quarter 2016 financial statements to reflect the adoption as of the beginning of the year.
In the Consolidated Statement of Cash Flows, the excess tax benefit from equity-based compensation, previously classified as a financing activity, is now classified as an operating activity. Additionally, cash paid when directly withholding shares on an employee’s behalf for tax withholding purposes is classified as a financing activity. These areas were adopted retrospectively.
ASC Topic 606. We adopted ASC Topic 606 on January 1, 2017, using the retrospective method. The adoption of ASC Topic 606 had two primary impacts on our Consolidated Financial Statements. The impact of adjustments on profit recorded to date is now recognized in the period identified (cumulative catch-up method), rather than prospectively over the remaining contract term. For our contracts for the manufacture of business-jet aircraft, we now recognize revenue at a single point in time when control is transferred to the customer, generally when the customer accepts the fully outfitted aircraft. Prior to the adoption of ASC Topic 606, we recognized revenue for these contracts at two contractual milestones: when green aircraft were completed and accepted by the customer and when the customer accepted final delivery of the fully outfitted aircraft. The cumulative effect of the adoption was recognized as a decrease to retained earnings of $372 on January 1, 2015.
We applied the standard's practical expedient that permits the omission of prior-period information about our remaining performance obligations. No other practical expedients were applied.
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. We adopted ASU 2015-17 on January 1, 2017, using the retrospective method. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the Consolidated Balance Sheet. The adoption of ASU 2015-17 resulted in reclassifications among accounts on the Consolidated Balance Sheet, but had no other impacts on our results of operations, financial condition or cash flows.
The following tables summarize the effects of adopting these accounting standards on our unaudited Consolidated Financial Statements.


27



CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Three Months Ended
 
Effect of the Adoption of
 
Three Months Ended
 
April 3, 2016
 
ASU
 
ASC
 
ASU
 
April 3, 2016
(Dollars in millions, except per-share amounts)
As Reported
 
2016-09
 
Topic 606
 
2015-17
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
 
 
Products
$
4,864

 
$

 
$
(282
)
 
$

 
$
4,582