10-Q 1 gd-2018040110q.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 1, 2018
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
297,033,427 shares of the registrant’s common stock, $1 par value per share, were outstanding on April 1, 2018.





INDEX


2



PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
April 1, 2018
 
April 2, 2017
Revenue:
 
 
 
Products
$
4,576

 
$
4,467

Services
2,959

 
2,974

 
7,535

 
7,441

Operating costs and expenses:
 
 
 
Products
3,546

 
3,438

Services
2,444

 
2,485

General and administrative (G&A)
537

 
472

 
6,527

 
6,395

Operating earnings
1,008

 
1,046

Interest, net
(27
)
 
(25
)
Other, net
(21
)
 
(11
)
Earnings before income tax
960

 
1,010

Provision for income tax, net
161

 
247

Net earnings
$
799

 
$
763

 
 
 
 
Earnings per share
 
 
 
Basic
$
2.70

 
$
2.53

Diluted
$
2.65

 
$
2.48

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


3



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
(Dollars in millions)
April 1, 2018
 
April 2, 2017
Net earnings
$
799

 
$
763

(Losses) gains on cash flow hedges
(3
)
 
13

Unrealized gains on marketable securities

 
5

Foreign currency translation adjustments
1

 
82

Change in retirement plans’ funded status
84

 
69

Other comprehensive income, pretax
82

 
169

Provision for income tax, net
15

 
44

Other comprehensive income, net of tax
67

 
125

Comprehensive income
$
866

 
$
888

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


4



CONSOLIDATED BALANCE SHEET

 
(Unaudited)
 
 
(Dollars in millions)
April 1, 2018
 
December 31, 2017
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
4,332

 
$
2,983

Accounts receivable
3,769

 
3,617

Unbilled receivables
5,865

 
5,240

Inventories
5,543

 
5,303

Other current assets
955

 
1,185

Total current assets
20,464

 
18,328

Noncurrent assets:
 
 
 
Property, plant and equipment, net
3,533

 
3,517

Intangible assets, net
702

 
702

Goodwill
11,955

 
11,914

Other assets
565

 
585

Total noncurrent assets
16,755

 
16,718

Total assets
$
37,219

 
$
35,046

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
2,498

 
$
2

Accounts payable
2,851

 
3,207

Customer advances and deposits
7,095

 
6,992

Other current liabilities
2,798

 
2,898

Total current liabilities
15,242

 
13,099

Noncurrent liabilities:
 
 
 
Long-term debt
3,981

 
3,980

Other liabilities
6,222

 
6,532

Commitments and contingencies (see Note N)


 


Total noncurrent liabilities
10,203

 
10,512

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
2,820

 
2,872

Retained earnings
27,605

 
26,444

Treasury stock
(15,742
)
 
(15,543
)
Accumulated other comprehensive loss
(3,391
)
 
(2,820
)
Total shareholders’ equity
11,774

 
11,435

Total liabilities and shareholders equity
$
37,219

 
$
35,046

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


5



CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 
Three Months Ended
(Dollars in millions)
April 1, 2018
 
April 2, 2017
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
799

 
$
763

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

Depreciation of property, plant and equipment
89

 
92

Amortization of intangible assets
20

 
19

Equity-based compensation expense
29

 
23

Deferred income tax provision
4

 
45

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
(150
)
 
(84
)
Unbilled receivables
(608
)
 
(338
)
Inventories
(236
)
 
2

Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(358
)
 
(72
)
Customer advances and deposits
(149
)
 
(95
)
Income taxes payable
167

 
202

Other current liabilities
(128
)
 
(76
)
Other, net
25

 
52

Net cash (used) provided by operating activities
(496
)
 
533

Cash flows from investing activities:
 
 
 
Capital expenditures
(104
)
 
(62
)
Other, net
(1
)
 
(23
)
Net cash used by investing activities
(105
)
 
(85
)
Cash flows from financing activities:
 
 
 
Proceeds from commercial paper, net
2,494

 

Purchases of common stock
(267
)
 
(354
)
Dividends paid
(250
)
 
(230
)
Other, net
(25
)
 
(22
)
Net cash provided (used) by financing activities
1,952

 
(606
)
Net cash used by discontinued operations
(2
)
 
(8
)
Net increase (decrease) in cash and equivalents
1,349

 
(166
)
Cash and equivalents at beginning of period
2,983

 
2,334

Cash and equivalents at end of period
$
4,332

 
$
2,168

Supplemental cash flow information:
 
 
 
Income tax refunds, net
$
4

 
$
4

Interest payments
$
21

 
$
20

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


6



CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 
Common Stock
 
Retained
 
Treasury
 
Accumulated
Other 
Comprehensive
 
Total
Shareholders’    
(Dollars in millions)
Par
 
Surplus
 
Earnings
 
Stock
 
Loss
 
Equity
December 31, 2017
$
482

 
$
2,872

 
$
26,444

 
$
(15,543
)
 
$
(2,820
)
 
$
11,435

Cumulative-effect adjustments (see Note A)

 

 
638

 

 
(638
)
 

Net earnings

 

 
799

 

 

 
799

Cash dividends declared

 

 
(276
)
 

 

 
(276
)
Equity-based awards

 
(52
)
 

 
58

 

 
6

Shares purchased

 

 

 
(257
)
 

 
(257
)
Other comprehensive income

 

 

 

 
67

 
67

April 1, 2018
$
482

 
$
2,820

 
$
27,605

 
$
(15,742
)
 
$
(3,391
)
 
$
11,774

 
 
 
 
 
 
 
 
 
 
 


December 31, 2016
$
482

 
$
2,819

 
$
24,543

 
$
(14,156
)
 
$
(3,387
)
 
$
10,301

Cumulative-effect adjustment*

 

 
(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

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

* Reflects the cumulative effect of Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which we adopted on January 1, 2017.



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 1, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
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 1, 2018, and April 2, 2017.
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, 2017.
Accounting Standards Updates. On January 1, 2018, we adopted the following accounting standards issued by the Financial Accounting Standards Board (FASB):
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Specific to our business, ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income. The ASU eliminates the available-for-sale classification for equity investments that recognized changes in fair value as a component of other comprehensive income. We adopted the standard on a modified retrospective basis on January 1, 2018, and recognized the cumulative effect as a $24 increase to retained earnings on the date of adoption.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. We adopted the standard retrospectively on January 1, 2018.

8



The adoption of the ASU did not have an effect on our cash flows for the three-month period ended April 2, 2017.
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. We adopted the standard retrospectively on January 1, 2018. Our restated operating earnings increased $11 for the three-month period ended April 2, 2017, due to the reclassification of the non-service cost components of net benefit cost, and other income decreased by the same amount, with no impact to net earnings.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act (tax reform) enacted on December 22, 2017. We adopted the standard on January 1, 2018, and recognized a $614 increase to retained earnings on the date of adoption.
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, 2017.

B. SUBSEQUENT EVENTS
On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA) for $41.25 per share in cash. The aggregate amount of consideration paid, including amounts to repay CSRA’s due and payable debt and cash out outstanding stock options and restricted stock units of CSRA, was approximately $9.7 billion. This amount was funded by a combination of available cash on hand, a borrowing of $7.5 billion under the 364-day credit facility further described in Note J and proceeds from commercial paper issuances. In addition, approximately $450 was paid to satisfy obligations under CSRA’s accounts receivable purchase agreement.
CSRA is now part of General Dynamics Information Technology (GDIT) in our Information Systems and Technology group. The combination of GDIT and CSRA creates a premier provider of high-tech IT solutions to the government IT market.
The disclosures required by Accounting Standards Codification (ASC) Topic 805 are not included in this Form 10-Q because the initial accounting for the business combination is incomplete.
Additionally, on April 11, 2018, we announced that we had entered into a binding agreement to acquire Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, for $250. The transaction is subject to customary closing conditions, and is expected to be completed in the second quarter of 2018.

C. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS
Acquisitions and Divestitures. In the first quarter of 2018, we acquired a provider of specialized transmitters and receivers in our Information Systems and Technology group. In 2017, we acquired four businesses for an aggregate of $399: a fixed-base operation (FBO) in our Aerospace group; and a manufacturer of electronics and communications products, a provider of mission-critical support services, and a manufacturer of signal distribution products in our Information Systems and Technology group. As the purchase prices of these

9



acquisitions were not material for the three-month periods ended April 1, 2018, and April 2, 2017, they are included in other investing activities, net, 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.
In the first quarter of 2018, we completed the sale of a commercial health products business in our Information Systems and Technology group. The proceeds from the sale are included in other investing activities, net, in the unaudited Consolidated Statement of Cash Flows.
Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:
 
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Goodwill
December 31, 2017 (a)
$
2,638

 
$
2,677

 
$
6,302

 
$
297

 
$
11,914

Acquisitions/divestitures (b)

 

 
16

 

 
16

Other (c)
40

 
(14
)
 
(1
)
 

 
25

April 1, 2018 (a)
$
2,678

 
$
2,663

 
$
6,317

 
$
297

 
$
11,955

(a)Goodwill 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 and an allocation of goodwill associated with the sale of the commercial health products business discussed above.
(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 1, 2018
 
December 31, 2017
Contract and program intangible assets (b)
$
1,665

$
(1,318
)
$
347

 
$
1,684

$
(1,320
)
$
364

Trade names and trademarks
477

(168
)
309

 
465

(160
)
305

Technology and software
154

(109
)
45

 
137

(105
)
32

Other intangible assets
155

(154
)
1

 
155

(154
)
1

Total intangible assets
$
2,451

$
(1,749
)
$
702

 
$
2,441

$
(1,739
)
$
702

(a)
Change in gross carrying amounts consists primarily of adjustments for acquired intangible assets and foreign currency translation.
(b)
Consists of acquired backlog and probable follow-on work and associated customer relationships.
Amortization expense was $20 and $19 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively.

D. 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.
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

10



to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). 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.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.
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 73% and 70% of our revenue for the three-month periods ended April 1, 2018, and April 2, 2017, respectively. Substantially all of our revenue in the defense groups is recognized over time because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.
Revenue from goods and services transferred to customers at a point in time accounted for 27% and 30% of our revenue for the three-month periods ended April 1, 2018, and April 2, 2017, 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 obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.
On April 1, 2018, we had $62.1 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 60% of our remaining performance obligations as revenue by 2019, an additional 25% by 2021 and the balance thereafter. On December 31, 2017, we had $63.2 billion of remaining performance obligations, and on December 31, 2017, we expected to recognize approximately 40% of these remaining performance obligations as revenue in 2018, an additional 40% by 2020 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,

11



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 on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are 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 period 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, operating earnings and diluted earnings per share as follows:
Three Months Ended
April 1, 2018
 
April 2, 2017
Revenue
$
115

 
$
72

Operating earnings
97

 
50

Diluted earnings per share
$
0.25

 
$
0.11

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended April 1, 2018, or April 2, 2017.
Revenue by Category. Our portfolio of products and services consists of almost 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

12



Revenue by major products and services was as follows:
Three Months Ended
April 1, 2018
 
April 2, 2017
Aircraft manufacturing, outfitting and completions
$
1,366

 
$
1,629

Aircraft services
451

 
435

Pre-owned aircraft
8

 
10

Total Aerospace
1,825

 
2,074

Wheeled combat and tactical vehicles
625

 
560

Weapons systems, armament and munitions
383

 
346

Tanks and tracked vehicles
331

 
247

Engineering and other services
101

 
134

Total Combat Systems
1,440

 
1,287

C4ISR* solutions

1,098

 
1,088

Information technology (IT) services
1,138

 
1,058

Total Information Systems and Technology
2,236

 
2,146

Nuclear-powered submarines
1,296

 
1,204

Surface combatants
265

 
247

Auxiliary and commercial ships
218

 
143

Repair and other services
255

 
340

Total Marine Systems
2,034

 
1,934

Total revenue
$
7,535

 
$
7,441

* Command, control, communications, computers, intelligence, surveillance and reconnaissance.
Revenue by contract type was as follows:
Three Months Ended April 1, 2018
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Revenue
Fixed-price
$
1,668

 
$
1,253

 
$
1,007

 
$
1,305

 
$
5,233

Cost-reimbursement

 
179

 
1,017

 
728

 
1,924

Time-and-materials
157

 
8

 
212

 
1

 
378

Total revenue
$
1,825

 
$
1,440

 
$
2,236

 
$
2,034

 
$
7,535

Three Months Ended April 2, 2017
 
 
 
 
 
 
 
 
 
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

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 rates 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.

13



Revenue by customer was as follows:
Three Months Ended April 1, 2018
Aerospace
 
Combat Systems
 
Information Systems and Technology
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
Department of Defense (DoD)
$
41

 
$
607

 
$
1,175

 
$
1,950

 
$
3,773

Non-DoD

 
1

 
755

 

 
756

Foreign Military Sales (FMS)
16

 
69

 
15

 
29

 
129

Total U.S. government
57

 
677

 
1,945

 
1,979

 
4,658

U.S. commercial
842

 
58

 
67

 
53

 
1,020

Non-U.S. government
10

 
697

 
173

 
2

 
882

Non-U.S. commercial
916

 
8

 
51

 

 
975

Total revenue
$
1,825

 
$
1,440

 
$
2,236

 
$
2,034

 
$
7,535

Three Months Ended April 2, 2017
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
DoD
$
40

 
$
609

 
$
1,142

 
$
1,837

 
$
3,628

Non-DoD

 
2

 
698

 

 
700

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

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 1, 2018, were not materially impacted by any other factors.
Revenue recognized in the three-month periods ended April 1, 2018, and April 2, 2017, that was included in the contract liability balance at the beginning of each year was $1.5 billion and $1.7 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.


14



E. 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 2018 and 2017 due to share repurchases. See Note L 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 1, 2018
 
April 2, 2017
Basic weighted average shares outstanding
296,399

 
301,771

Dilutive effect of stock options and restricted stock/RSUs*
4,705

 
5,511

Diluted weighted average shares outstanding
301,104

 
307,282

* Excludes outstanding options to purchase shares of common stock that 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 517 and 681 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively.

F. 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 1, 2018, or December 31, 2017.
Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable 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 1, 2018, and December 31, 2017, and the basis for determining their fair values:

15



 
Carrying
Value
 
Fair
Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial Assets (Liabilities)
April 1, 2018
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
6

 
$
6

 
$
2

 
$
4

 
$

        Available-for-sale debt securities
130

 
130

 

 
130

 

        Equity securities
54

 
54

 
54

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(107
)
 
(107
)
 

 
(107
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(6,532
)
 
(6,356
)
 

 
(6,356
)
 

 
December 31, 2017
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
20

 
$
20

 
$
15

 
$
5

 
$

        Available-for-sale debt securities
117

 
117

 

 
117

 

        Equity securities
54

 
54

 
54

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(105
)
 
(105
)
 

 
(105
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(4,032
)
 
(3,974
)
 

 
(3,974
)
 

Our Level 1 assets include investments in publicly traded equity securities valued using quoted prices from the market exchanges. The fair value of our Level 2 assets and liabilities is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets include direct private equity investments that are measured using inputs unobservable to a marketplace participant.

G. INCOME TAXES
Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. Tax reform was enacted on December 22, 2017, and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduced the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. We recorded the effect of the change in tax law in the fourth quarter of 2017.
Net Deferred Tax Liability. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax liability consisted of the following:

16



 
April 1, 2018
 
December 31, 2017
Deferred tax asset
$
60

 
$
75

Deferred tax liability
(249
)
 
(244
)
Net deferred tax liability
$
(189
)
 
$
(169
)
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% 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 1, 2018, 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 2016. 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 April 1, 2018, was 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.

H. UNBILLED RECEIVABLES
Unbilled receivables represent revenue recognized on long-term contracts (contract costs and estimated profits) less associated advances and progress billings. These amounts will be billed in accordance with the agreed-upon contractual terms or upon achievement of contractual milestones. Unbilled receivables consisted of the following:
 
April 1, 2018
 
December 31, 2017
Unbilled revenue
$
22,928

 
$
21,845

Advances and progress billings
(17,063
)
 
(16,605
)
Net unbilled receivables
$
5,865

 
$
5,240

The increase in net unbilled receivables during the three-month period ended April 1, 2018, was due primarily to the timing of billings on large international vehicle contracts in our Combat Systems group.

I. 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 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.

17



Inventories consisted of the following:
 
April 1, 2018
 
December 31, 2017
Work in process
$
4,138

 
$
3,872

Raw materials
1,328

 
1,357

Finished goods
52

 
51

Pre-owned aircraft
25

 
23

Total inventories
$
5,543

 
$
5,303


J. DEBT
Debt consisted of the following:
 
 
April 1, 2018
 
December 31, 2017
Fixed-rate notes due:
Interest rate:
 
 
 
July 2021
3.875%
$
500

 
$
500

November 2022
2.250%
1,000

 
1,000

August 2023
1.875%
500

 
500

November 2024
2.375%
500

 
500

August 2026
2.125%
500

 
500

November 2027
2.625%
500

 
500

November 2042
3.600%
500

 
500

Commercial paper
2.097%
2,500

 

Other
Various
32

 
32

Total debt principal
 
6,532

 
4,032

Less unamortized debt issuance costs and discounts
 
53

 
50

Total debt
 
6,479

 
3,982

Less current portion
 
2,498

 
2

Long-term debt
 
$
3,981

 
$
3,980

In the first quarter of 2018, we renewed and increased to $2 billion our $1 billion multi-year committed bank credit facility, which was scheduled to expire in July 2018. The new credit facility expires in March 2023. We have an additional $1 billion multi-year committed bank credit facility that expires in November 2020. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates.
Also in the first quarter of 2018, we entered into a $7.5 billion, 364-day committed bank credit facility that expires in March 2019. We financed the acquisition of CSRA, in part, by borrowing $7.5 billion under this facility subsequent to the end of the quarter. We intend to issue debt securities in the future to repay in whole or in part the borrowings under this facility. The proceeds from these issuances will automatically reduce the banks commitments under this facility to an amount not less than $2 billion. Following this reduction, our three credit facilities will total $5 billion. Our credit facilities are used for general corporate purposes and working capital needs and support our commercial paper issuances. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries.
On April 1, 2018, $2.5 billion of commercial paper had been issued and remained outstanding with a dollar-weighted average interest rate of 2.097% and original maturities of less than 90 days.

18



Our fixed-rate notes are fully and unconditionally guaranteed by several of our 100%-owned subsidiaries. See Note Q 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.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on April 1, 2018.

K. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 
April 1, 2018
 
December 31, 2017
 
 
 
 
Salaries and wages
$
665

 
$
786

Workers’ compensation
320

 
320

Retirement benefits
292

 
295

Fair value of cash flow hedges
201

 
180

Other (a)
1,320

 
1,317

Total other current liabilities
$
2,798

 
$
2,898

 
 
 
 
Retirement benefits
$
4,359

 
$
4,408

Customer deposits on commercial contracts 
555

 
814

Deferred income taxes
249

 
244

Other (b)
1,059

 
1,066

Total other liabilities
$
6,222

 
$
6,532

(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.

L. 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 1, 2018, we repurchased 1.2 million of our outstanding shares for $257. On April 1, 2018, 6.4 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased 1.9 million shares for $355 in the three-month period ended April 2, 2017.
Dividends per Share. Dividends declared per share were $0.93 and $0.84 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively. Cash dividends paid were $250 and $230 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively.

19



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 Marketable Securities
Foreign Currency Translation Adjustments
Changes in Retirement Plans’ Funded Status
AOCL
December 31, 2017
$
(94
)
$
19

$
402

$
(3,147
)
$
(2,820
)
Cumulative effect adjustments (see Note A)
(4
)
(19
)

(615
)
(638
)
Other comprehensive income, pretax
(3
)

1

84

82

Provision for income tax, net
(1
)


16

15

Other comprehensive income, net of tax
(2
)

1

68

67

April 1, 2018
$
(100
)
$

$
403

$
(3,694
)
$
(3,391
)
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
)
Current-period amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and consisted of pretax recognized net actuarial losses of $95 and $85 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively. This was offset partially by pretax amortization of prior service credit of $12 and $18 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note O for additional details.

M. 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 $4.3 billion in notional forward exchange contracts outstanding on April 1, 2018, and December 31, 2017. 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 F 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 dollar-weighted 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

20



financial instruments not designated as cash flow hedges to market value each period and record the gain 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 1, 2018, and April 2, 2017. Net gains and losses reclassified to earnings from OCL were not material to our results of operations for the three-month periods ended April 1, 2018, and April 2, 2017, 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 1, 2018, or December 31, 2017.
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 1, 2018, we held $4.3 billion in cash and equivalents, but held no marketable securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified supplemental executive retirement plans. On April 1, 2018, and December 31, 2017, these marketable securities totaled $190 and $191, respectively, and were reflected at fair value on the unaudited Consolidated Balance Sheet in other current and noncurrent assets.
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 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 1, 2018, and April 2, 2017. 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 1, 2018, and April 2, 2017.

N. 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. 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 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 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

21



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 other 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 $1.4 billion on April 1, 2018. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance of our subsidiaries arising under certain contracts.
Aircraft Trade-ins. In connection with orders for new aircraft in 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 generally 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 1, 2018, and April 2, 2017, were as follows:
Three Months Ended
April 1, 2018
 
April 2, 2017
Beginning balance
$
467

 
$
474

Warranty expense
29

 
38

Payments
(25
)
 
(24
)
Adjustments
(3
)
 

Ending balance
$
468

 
$
488


O. RETIREMENT PLANS
We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits.

22



Net periodic defined-benefit pension and other post-retirement benefit cost for the three-month periods ended April 1, 2018, and April 2, 2017, consisted of the following:
 
Pension Benefits
Other Post-retirement Benefits
Three Months Ended
April 1, 2018
 
April 2, 2017
April 1, 2018
 
April 2, 2017
Service cost
$
46

 
$
42

$
3

 
$
3

Interest cost
114

 
113

8

 
8

Expected return on plan assets
(179
)
 
(169
)
(9
)
 
(8
)
Recognized net actuarial loss (gain)
96

 
86

(1
)
 
(1
)
Amortization of prior service credit
(11
)
 
(17
)
(1
)
 
(1
)
Net periodic benefit cost
$
66

 
$
55

$

 
$
1

As discussed in Note A, the service cost component of net periodic benefit cost is reported separately from the other components of net periodic benefit cost in accordance with ASU 2017-07.
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 other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have similarly deferred recognition of these excess earnings on the Consolidated Balance Sheet.
It is our policy to fund our defined-benefit retirement plans in a manner that optimizes the tax deductibility and contract recovery of contributions considered within our capital deployment framework. Therefore, we may make discretionary contributions in addition to the required contributions determined in accordance with IRS regulations. In addition to our required contributions of approximately $315 in 2018, as we deploy additional cash resulting from the recent tax reform, we intend to make discretionary contributions, resulting in total pension plan contributions of approximately $550 in 2018.

P. 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.

23



Summary financial information for each of our business groups follows:
 
Revenue
Operating Earnings
Three Months Ended
April 1, 2018
April 2, 2017
April 1, 2018
April 2, 2017
Aerospace
$
1,825

$
2,074

$
346

$
439

Combat Systems
1,440

1,287

224

205

Information Systems and Technology
2,236

2,146

247

236

Marine Systems
2,034

1,934

184

161

Corporate


7

5

Total
$
7,535

$
7,441

$
1,008

$
1,046

ASU 2017-07 requires the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) to be reported in other income (expense) in the income statement. In our three defense groups, pension and other post-retirement benefit costs are allocable contract costs. For these groups, we report the offset for the non-service cost components in Corporate operating results. Stock option expense is also reported in Corporate operating results.

24



Q. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed-rate notes described in Note J are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of our 100%-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 STATEMENT OF EARNINGS (UNAUDITED)

Three Months Ended April 1, 2018
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue
$

$
6,484

$
1,051

$

$
7,535

Cost of sales
(19
)
5,202

807


5,990

G&A
13

436

88


537

Operating earnings
6

846

156


1,008

Interest, net
(26
)

(1
)

(27
)
Other, net
(24
)
1

2


(21
)
Earnings before income tax
(44
)
847

157


960

Provision for income tax, net
(42
)
165

38


161

Equity in net earnings of subsidiaries
801



(801
)

Net earnings
$
799

$
682

$
119

$
(801
)
$
799

Comprehensive income
$
866

$
685

$
137

$
(822
)
$
866

Three Months Ended April 2, 2017
 
 
 
 
 
Revenue
$

$
6,544

$
897

$

$
7,441

Cost of sales
(17
)
5,252

688


5,923

G&A
10

386

76


472

Operating earnings
7

906

133


1,046

Interest, net
(24
)

(1
)

(25
)
Other, net
(15
)
3

1


(11
)
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



25



CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

April 1, 2018
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
3,787

$

$
545

$

$
4,332

Accounts receivable

1,215

2,554


3,769

Unbilled receivables

2,757

3,108


5,865

Inventories

5,441

102


5,543

Other current assets
113

453

389


955

Total current assets
3,900

9,866

6,698


20,464

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment (PP&E)
228

6,857

1,250


8,335

Accumulated depreciation of PP&E
(77
)
(3,940
)
(785
)

(4,802
)
Intangible assets, net

285

417


702

Goodwill

8,336

3,619


11,955

Other assets
188

229

148


565

Investment in subsidiaries
45,799



(45,799
)

Total noncurrent assets
46,138

11,767

4,649

(45,799
)
16,755

Total assets
$
50,038

$
21,633

$
11,347

$
(45,799
)
$
37,219

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
2,496

$

$
2

$

$
2,498

Customer advances and deposits

4,273

2,822


7,095

Other current liabilities
559

3,417

1,673


5,649

Total current liabilities
3,055

7,690

4,497


15,242

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
3,952

20

9


3,981

Other liabilities
2,399

3,234

589


6,222

Total noncurrent liabilities
6,351

3,254

598


10,203

Intercompany
28,858

(28,093
)
(765
)


Shareholders’ equity:
 
 
 
 
 
Common stock
482

6

2,126

(2,132
)
482

Other shareholders’ equity
11,292

38,776

4,891

(43,667
)
11,292

Total shareholders’ equity
11,774

38,782

7,017

(45,799
)
11,774

Total liabilities and shareholders’ equity
$
50,038

$
21,633

$
11,347

$
(45,799
)
$
37,219



26



CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2017
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,930

$

$
1,053

$

$
2,983

Accounts receivable

1,259

2,358


3,617

Unbilled receivables

2,547

2,693


5,240

Inventories

5,216

87


5,303

Other current assets
351

461

373


1,185

Total current assets
2,281

9,483

6,564


18,328

Noncurrent assets:
 
 
 
 
 
PP&E
221

6,779

1,237


8,237

Accumulated depreciation of PP&E
(75
)
(3,869
)
(776
)

(4,720
)
Intangible assets, net

287

415


702

Goodwill

8,320

3,594


11,914

Other assets
199

232

154


585

Investment in subsidiaries
44,887



(44,887
)

Total noncurrent assets
45,232

11,749

4,624

(44,887
)
16,718

Total assets
$
47,513

$
21,232

$
11,188

$
(44,887
)
$
35,046

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

$
1

$
1

$

$
2

Customer advances and deposits

4,180

2,812


6,992

Other current liabilities
561

3,758

1,786


6,105

Total current liabilities
561

7,939

4,599


13,099

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
3,950

21

9


3,980

Other liabilities
2,451

3,473

608


6,532

Total noncurrent liabilities
6,401

3,494

617


10,512

Intercompany
29,116

(28,494
)
(622
)


Shareholders’ equity:
 
 
 
 
 
Common stock
482

6

2,126

(2,132
)
482

Other shareholders’ equity
10,953

38,287

4,468

(42,755
)
10,953

Total shareholders’ equity
11,435

38,293

6,594

(44,887
)
11,435

Total liabilities and shareholders’ equity
$
47,513

$
21,232

$
11,188

$
(44,887
)
$
35,046



27



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

Three Months Ended April 1, 2018
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Net cash (used) provided by operating activities*
$
80

$
105

$
(681
)
$

$
(496
)
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(7
)
(86
)
(11
)

(104
)
Other, net
1

(2
)


(1
)
Net cash used by investing activities
(6
)
(88
)
(11
)

(105
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from commercial paper, net
2,494




2,494

Purchases of common stock
(267
)



(267
)
Dividends paid
(250
)



(250
)
Other, net
(25
)



(25
)
Net cash provided by financing activities
1,952




1,952

Net cash used by discontinued operations
(2
)



(2
)
Cash sweep/funding by parent
(167
)
(17
)
184



Net increase in cash and equivalents
1,857


(508
)

1,349

Cash and equivalents at beginning of period
1,930


1,053