10-Q 1 gd-2018070110q.htm 10-Q Document



gdlogo20180701.gif
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 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
296,281,432 shares of the registrant’s common stock, $1 par value per share, were outstanding on July 1, 2018.





INDEX

 
 
 
PART I -
PAGE
Item 1 -
 
 
 
 
 
 
 
 

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

2



PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
July 1, 2018
 
July 2, 2017
Revenue:
 
 
 
Products
$
4,754

 
$
4,666

Services
4,432

 
3,009

 
9,186

 
7,675

Operating costs and expenses:
 
 
 
Products
(3,702
)
 
(3,597
)
Services
(3,807
)
 
(2,517
)
General and administrative (G&A)
(589
)
 
(494
)
 
(8,098
)
 
(6,608
)
Operating earnings
1,088

 
1,067

Interest, net
(103
)
 
(24
)
Other, net
(15
)
 
(11
)
Earnings before income tax
970

 
1,032

Provision for income tax, net
(184
)
 
(283
)
Net earnings
$
786

 
$
749

 
 
 
 
Earnings per share
 
 
 
Basic
$
2.65

 
$
2.50

Diluted
$
2.62

 
$
2.45

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


3



CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Six Months Ended
(Dollars in millions, except per-share amounts)
July 1, 2018
 
July 2, 2017
Revenue:
 
 
 
Products
$
9,330

 
$
9,133

Services
7,391

 
5,983

 
16,721

 
15,116

Operating costs and expenses:
 
 
 
Products
(7,248
)
 
(7,035
)
Services
(6,251
)
 
(5,002
)
G&A
(1,126
)
 
(966
)
 
(14,625
)
 
(13,003
)
Operating earnings
2,096

 
2,113

Interest, net
(130
)
 
(49
)
Other, net
(36
)
 
(22
)
Earnings before income tax
1,930

 
2,042

Provision for income tax, net
(345
)
 
(530
)
Net earnings
$
1,585

 
$
1,512

 
 
 
 
Earnings per share
 
 
 
Basic
$
5.35

 
$
5.03

Diluted
$
5.27

 
$
4.94

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


4



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
Six Months Ended
(Dollars in millions)
July 1, 2018
 
July 2, 2017
July 1, 2018
 
July 2, 2017
Net earnings
$
786

 
$
749

$
1,585

 
$
1,512

(Losses) gains on cash flow hedges
(18
)
 
135

(21
)
 
148

Unrealized gains on marketable securities

 
2


 
7

Foreign currency translation adjustments
(216
)
 
199

(215
)
 
281

Change in retirement plans’ funded status
79

 
63

163

 
132

Other comprehensive (loss) income, pretax
(155
)
 
399

(73
)
 
568

Provision for income tax, net
(12
)
 
(59
)
(27
)
 
(103
)
Other comprehensive (loss) income, net of tax
(167
)
 
340

(100
)
 
465

Comprehensive income
$
619

 
$
1,089

$
1,485

 
$
1,977

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


5



CONSOLIDATED BALANCE SHEET

 
(Unaudited)
 
 
(Dollars in millions)
July 1, 2018
 
December 31, 2017
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
1,862

 
$
2,983

Accounts receivable
3,874

 
3,617

Unbilled receivables
7,125

 
5,240

Inventories
5,890

 
5,303

Other current assets
1,076

 
1,185

Total current assets
19,827

 
18,328

Noncurrent assets:
 
 
 
Property, plant and equipment, net
4,179

 
3,517

Intangible assets, net
2,738

 
702

Goodwill
19,738

 
11,914

Other assets
670

 
585

Total noncurrent assets
27,325

 
16,718

Total assets
$
47,152

 
$
35,046

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
2,881

 
$
2

Accounts payable
3,032

 
3,207

Customer advances and deposits
7,219

 
6,992

Other current liabilities
3,441

 
2,898

Total current liabilities
16,573

 
13,099

Noncurrent liabilities:
 
 
 
Long-term debt
11,397

 
3,980

Other liabilities
7,188

 
6,532

Commitments and contingencies (see Note M)


 


Total noncurrent liabilities
18,585

 
10,512

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
2,865

 
2,872

Retained earnings
28,115

 
26,444

Treasury stock
(15,910
)
 
(15,543
)
Accumulated other comprehensive loss
(3,558
)
 
(2,820
)
Total shareholders’ equity
11,994

 
11,435

Total liabilities and shareholders equity
$
47,152

 
$
35,046

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


6



CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 
Six Months Ended
(Dollars in millions)
July 1, 2018
 
July 2, 2017
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
1,585

 
$
1,512

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

Depreciation of property, plant and equipment
223

 
182

Amortization of intangible assets
104

 
38

Equity-based compensation expense
71

 
52

Deferred income tax provision
(6
)
 
93

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
344

 
(291
)
Unbilled receivables
(1,030
)
 
(815
)
Inventories
(542
)
 
(14
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(324
)
 
82

Customer advances and deposits
(159
)
 
(29
)
Other, net
25

 
200

Net cash provided by operating activities
291

 
1,010

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(10,039
)
 
(89
)
Capital expenditures
(279
)
 
(153
)
Other, net
74

 
47

Net cash used by investing activities
(10,244
)
 
(195
)
Cash flows from financing activities:
 
 
 
Proceeds from fixed-rate notes
6,461

 

Proceeds from commercial paper, net
2,786

 
(1
)
Proceeds from floating-rate notes
1,000

 

Dividends paid
(526
)
 
(483
)
Repayment of CSRA accounts receivable purchase agreement
(450
)
 

Purchases of common stock
(436
)
 
(901
)
Other, net
3

 
109

Net cash provided (used) by financing activities
8,838

 
(1,276
)
Net cash used by discontinued operations
(6
)
 
(17
)
Net decrease in cash and equivalents
(1,121
)
 
(478
)
Cash and equivalents at beginning of period
2,983

 
2,334

Cash and equivalents at end of period
$
1,862

 
$
1,856

Supplemental cash flow information:
 
 
 
Income tax payments, net
$
155

 
$
328

Interest payments
$
95

 
$
46

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


7



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

 

 
1,585

 

 

 
1,585

Cash dividends declared

 

 
(552
)
 

 

 
(552
)
Equity-based awards

 
(7
)
 

 
69

 

 
62

Shares purchased

 

 

 
(436
)
 

 
(436
)
Other comprehensive loss

 

 

 

 
(100
)
 
(100
)
July 1, 2018
$
482

 
$
2,865

 
$
28,115

 
$
(15,910
)
 
$
(3,558
)
 
$
11,994

 
 
 
 
 
 
 
 
 
 
 


December 31, 2016
$
482

 
$
2,819

 
$
24,543

 
$
(14,156
)
 
$
(3,387
)
 
$
10,301

Cumulative-effect adjustment*

 

 
(3
)
 

 

 
(3
)
Net earnings

 

 
1,512

 

 

 
1,512

Cash dividends declared

 

 
(506
)
 

 

 
(506
)
Equity-based awards

 
(23
)
 

 
99

 

 
76

Shares purchased

 

 

 
(893
)
 

 
(893
)
Other comprehensive income

 

 

 

 
465

 
465

July 2, 2017
$
482

 
$
2,796

 
$
25,546

 
$
(14,950
)
 
$
(2,922
)
 
$
10,952

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.



8



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share amounts or unless otherwise noted)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; information technology (IT) services; C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions; and shipbuilding and ship repair.
On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA). See Note B for further discussion of the acquisition. For segment reporting purposes, concurrent with the acquisition, our Information Systems and Technology operating segment was reorganized into the Information Technology and Mission Systems segments. Our company now has five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We collectively refer to Combat Systems, Information Technology, Mission Systems and Marine Systems as our defense segments. Prior-period segment information has been restated for this change.
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 included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three- and six-month periods ended July 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- and six-month periods ended July 1, 2018, and July 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.

9



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. The adoption of the ASU did not have an effect on our cash flows for the six-month period ended July 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 Consolidated Statement of Earnings. We adopted the standard retrospectively on January 1, 2018. Our restated operating earnings increased $11 and $22 for the three- and six-month periods ended July 2, 2017, respectively, 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. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS
CSRA Acquisition
On April 3, 2018, we acquired 100% of the outstanding shares of CSRA Inc. (CSRA) for $41.25 per share in cash. CSRA has been combined with General Dynamics Information Technology (GDIT) to create a premier provider of IT solutions to the defense, intelligence and federal civilian markets. Except where otherwise noted in the Notes to Unaudited Consolidated Financial Statements, changes in balances and activity were generally driven by the CSRA acquisition.

10



Purchase Price and Fair Value of Net Assets Acquired. The cash purchase price totaled $9.7 billion and consisted of the following:
CSRA shares outstanding (in millions)
165.4

Cash consideration per CSRA share
$
41.25

Cash paid to purchase outstanding CSRA shares
$
6,825

Cash paid to extinguish CSRA debt
2,846

Cash settlement of outstanding CSRA stock options and restricted stock units
78

Total purchase price
$
9,749

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the acquisition date, with the excess recorded as goodwill:
Cash and equivalents
$
45

Accounts receivable
156

Unbilled receivables
807

Other current assets
190

Property, plant and equipment, net
685

Intangible assets, net
2,069

Goodwill
7,807

Other noncurrent assets
19

Total assets
$
11,778

Account payable
$
(135
)
Customer advances and deposits
(151
)
Current capital lease obligation
(51
)
Other current liabilities
(542
)
Noncurrent capital lease obligation
(207
)
Noncurrent deferred tax liability
(421
)
Other noncurrent liabilities
(522
)
Total liabilities
$
(2,029
)
Net assets acquired
$
9,749

We are in the process of valuing the net tangible and intangible assets acquired and liabilities assumed, and our estimate of these values were still preliminary on July 1, 2018. Therefore, these provisional amounts are subject to change as we complete the valuations throughout the measurement period, which will extend throughout 2018.
The $2.1 billion of estimated acquired intangible assets consists of acquired backlog and probable follow-on work and associated customer relationships (contract and program intangible assets), with a weighted-average life of 17 years. The intangible assets will be amortized using an accelerated method, which approximates the pattern of how the economic benefit is expected to be used. Under this method, approximately 50% of the aggregate value of the intangible assets will be amortized within six years. We expect to record amortization expense associated with these intangible assets over the next five years as follows:

11



2018 (9 months post-acquisition)
$
188

2019
204

2020
195

2021
154

2022
136

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of CSRA. Approximately $490 of this goodwill is considered pre-acquisition goodwill and is, therefore, deductible for income tax purposes over its remaining tax life.
CSRA’s operating results have been included with our reported results since the acquisition date. Excluding the amortization of intangible assets and acquisition financing, $1.3 billion of revenue, $134 of operating earnings and $147 of pretax earnings from CSRA were included in our unaudited Consolidated Statement of Earnings for the three- and six-month periods ended July 1, 2018. In connection with the acquisition, we have recognized approximately $75 of one-time, acquisition-related costs, reported in operating costs and expenses and other income (expense) in the unaudited Consolidated Statement of Earnings.
Pro Forma Information. The following pro forma information presents our consolidated revenue and net earnings as if the acquisition of CSRA and the related financing transactions had occurred on January 1, 2017:
 
Three Months Ended
Six Months Ended
 
July 1, 2018
 
July 2, 2017
July 1, 2018
 
July 2, 2017
Revenue
$
9,186

 
$
8,853

$
18,023

 
$
17,497

Net earnings
804

 
756

1,534

 
1,489

Diluted earnings per share
$
2.68

 
$
2.48

$
5.10

 
$
4.86

The pro forma information was prepared by combining our reported historical results with the historical results of CSRA for the pre-acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:
The impact of acquisition financing.
The removal of certain CSRA operations we are required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. While the operation is classified as held for sale, it has not yet been sold as of July 1, 2018.
The removal of CSRA’s historical pre-acquisition intangible asset amortization expense and debt-related interest expense.
The impact of intangible asset amortization expense assuming our current estimate of fair value was applied on January 1, 2017.
The payment of acquisition-related costs assuming they were incurred on January 1, 2017.
The pro forma information is based on the preliminary amounts allocated to the estimated fair value of net assets acquired and may be revised as the provisional amounts change. The pro forma information does not reflect the realization of expected cost savings or synergies from the acquisition, and does not reflect what our combined results of operations would have been had the acquisition occurred on January 1, 2017.

12



Other Acquisitions and Divestitures
In addition to the acquisition of CSRA, we acquired two businesses in the first six months of 2018 for an aggregate of $335: Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, in our Aerospace segment, and a provider of specialized transmitters and receivers in our Mission Systems segment. In 2017, we acquired four businesses for an aggregate of $399: a fixed-base operation (FBO) in our Aerospace segment; a provider of mission-critical support services in our Information Technology segment; and a manufacturer of electronics and communications products and a manufacturer of signal distribution products in our Mission Systems segment.
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 six months of 2018, we completed the sale of a commercial health products business in our Information Technology segment. 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
 
Information Technology
 
Mission Systems
 
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

Change in reporting
    unit composition (d)

 

 
(6,317
)
 
2,076

 
4,241

 

 

Acquisitions/
    divestitures (b)
149

 

 

 
7,752

 
1

 

 
7,902

Other (c)
(71
)
 
(36
)
 

 

 
(12
)
 

 
(119
)
July 1, 2018 (e)
$
2,756

 
$
2,627

 
$

 
$
9,828

 
$
4,230

 
$
297

 
$
19,738

(a)Goodwill in the Information Systems and Technology reporting unit is net of $1.9 billion of accumulated impairment losses.
(b)Includes adjustments during the purchase price allocation period. Activity in the first quarter of 2018 also includes 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.
(d)Concurrent with the acquisition of CSRA, we reorganized our Information Systems and Technology operating segment into the Information Technology and Mission Systems segments. See Note A for further discussion of the segment reorganization. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization.
(e)Goodwill in the Information Technology and Mission Systems reporting units is net of $632 and $1.3 billion of accumulated impairment losses, respectively.

13



Intangible Assets
Intangible assets consisted of the following:
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
July 1, 2018
 
December 31, 2017
Contract and program
    intangible assets (b)
$
3,793

$
(1,394
)
$
2,399

 
$
1,684

$
(1,320
)
$
364

Trade names and trademarks
458

(166
)
292

 
465

(160
)
305

Technology and software
158

(112
)
46

 
137

(105
)
32

Other intangible assets
155

(154
)
1

 
155

(154
)
1

Total intangible assets
$
4,564

$
(1,826
)
$
2,738

 
$
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 $84 and $104 for the three- and six-month periods ended July 1, 2018, and $19 and $38 for the three- and six-month periods ended July 2, 2017.

C. 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 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 78% and 75% of our revenue for the three- and six-month periods ended July 1, 2018, and 71% and 70% of our revenue for the three- and six-month periods ended July 2, 2017, respectively. Substantially all of our revenue in the defense segments 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.

14



Revenue from goods and services transferred to customers at a point in time accounted for 22% and 25% of our revenue for the three- and six-month periods ended July 1, 2018, and 29% and 30% of our revenue for the three- and six-month periods ended July 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 segment. 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 July 1, 2018, we had $66.3 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 year-end 2019, an additional 25% by year-end 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 year-end 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, 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:

15



 
Three Months Ended
Six Months Ended
 
July 1, 2018
 
July 2, 2017
July 1, 2018
 
July 2, 2017
Revenue
$
91

 
$
90

$
206

 
$
162

Operating earnings
83

 
121

180

 
171

Diluted earnings per share
$
0.22

 
$
0.26

$
0.47

 
$
0.36

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 1, 2018, or July 2, 2017.
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.
Revenue by major products and services was as follows:
 
Three Months Ended
Six Months Ended
 
July 1, 2018
 
July 2, 2017
July 1, 2018
 
July 2, 2017
Aircraft manufacturing and
    completions
$
1,362

 
$
1,600

$
2,728

 
$
3,229

Aircraft services
531

 
445

982

 
880

Pre-owned aircraft
2

 
33

10

 
43

Total Aerospace
1,895

 
2,078

3,720

 
4,152

Wheeled combat and tactical vehicles
644

 
566

1,269

 
1,126

Weapons systems, armament and
    munitions
443

 
409

826

 
755

Tanks and tracked vehicles
346

 
278

677

 
525

Engineering and other services
101

 
161

202

 
295

Total Combat Systems
1,534

 
1,414

2,974

 
2,701

Information technology services
2,442

 
1,052

3,580

 
2,110

Total Information Technology
2,442

 
1,052

3,580

 
2,110

Platform systems and sensors
383

 
393

774

 
783

Intelligence, surveillance and
    reconnaissance systems
372

 
333

749

 
662

Communication systems
392

 
326

722

 
695

Total Mission Systems
1,147

 
1,052

2,245

 
2,140

Nuclear-powered submarines
1,438

 
1,342

2,734

 
2,546

Surface combatants
276

 
254

541

 
501

Auxiliary and commercial ships
197

 
155

415

 
298

Repair and other services
257

 
328

512

 
668

Total Marine Systems
2,168

 
2,079

4,202

 
4,013

Total revenue
$
9,186

 
$
7,675

$
16,721

 
$
15,116


16



Revenue by contract type was as follows:
Three Months Ended July 1, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
1,696

 
$
1,330

 
$
1,059

 
$
658

 
$
1,372

 
$
6,115

Cost-reimbursement

 
197

 
930

 
451

 
795

 
2,373

Time-and-materials
199

 
7

 
453

 
38

 
1

 
698

Total revenue
$
1,895

 
$
1,534

 
$
2,442

 
$
1,147

 
$
2,168

 
$
9,186

Three Months Ended July 2, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
1,913

 
$
1,207

 
$
339

 
$
553

 
$
1,253

 
$
5,265

Cost-reimbursement

 
196

 
555

 
463

 
824

 
2,038

Time-and-materials
165

 
11

 
158

 
36

 
2

 
372

Total revenue
$
2,078

 
$
1,414

 
$
1,052

 
$
1,052

 
$
2,079

 
$
7,675

Six Months Ended July 1, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
3,364

 
$
2,583

 
$
1,446

 
$
1,278

 
$
2,677

 
$
11,348

Cost-reimbursement

 
376

 
1,507

 
891

 
1,523

 
4,297

Time-and-materials
356

 
15

 
627

 
76

 
2

 
1,076

Total revenue
$
3,720

 
$
2,974

 
$
3,580

 
$
2,245

 
$
4,202

 
$
16,721

Six Months Ended July 2, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
3,815

 
$
2,280

 
$
690

 
$
1,132

 
$
2,383

 
$
10,300

Cost-reimbursement

 
403

 
1,108

 
920

 
1,625

 
4,056

Time-and-materials
337

 
18

 
312

 
88

 
5

 
760

Total revenue
$
4,152

 
$
2,701

 
$
2,110

 
$
2,140

 
$
4,013

 
$
15,116

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.

17



Revenue by customer was as follows:
Three Months Ended July 1, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
Department of Defense (DoD)
$
89

 
$
660

 
$
1,052

 
$
764

 
$
2,032

 
$
4,597

Non-DoD

 
3

 
1,311

 
130

 
1

 
1,445

Foreign Military Sales (FMS)
19

 
83

 
7

 
14

 
39

 
162

Total U.S. government
108

 
746

 
2,370

 
908

 
2,072

 
6,204

U.S. commercial
917

 
58

 
41

 
36

 
91

 
1,143

Non-U.S. government
143

 
712

 
31

 
161

 
4

 
1,051

Non-U.S. commercial
727

 
18

 

 
42

 
1

 
788

Total revenue
$
1,895

 
$
1,534

 
$
2,442

 
$
1,147

 
$
2,168

 
$
9,186

Three Months Ended July 2, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
32

 
$
660

 
$
424

 
$
678

 
$
2,016

 
$
3,810

Non-DoD

 
1

 
551

 
147

 

 
699

FMS
9

 
83

 
6

 
15

 
40

 
153

Total U.S. government
41

 
744

 
981

 
840

 
2,056

 
4,662

U.S. commercial
877

 
42

 
65

 
26

 
17

 
1,027

Non-U.S. government
64

 
594

 
6

 
154

 
4

 
822

Non-U.S. commercial
1,096

 
34

 

 
32

 
2

 
1,164

Total revenue
$
2,078

 
$
1,414

 
$
1,052

 
$
1,052

 
$
2,079

 
$
7,675


18



Six Months Ended July 1, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
130

 
$
1,267

 
$
1,485

 
$
1,506

 
$
3,982

 
$
8,370

Non-DoD

 
4

 
1,948

 
248

 
1

 
2,201

FMS
35

 
152

 
15

 
21

 
68

 
291

Total U.S. government
165

 
1,423

 
3,448

 
1,775

 
4,051

 
10,862

U.S. commercial
1,759

 
116

 
81

 
63

 
144

 
2,163

Non-U.S. government
153

 
1,409

 
51

 
333

 
6

 
1,952

Non-U.S. commercial
1,643

 
26

 

 
74

 
1

 
1,744

Total revenue
$
3,720

 
$
2,974

 
$
3,580

 
$
2,245

 
$
4,202

 
$
16,721

Six Months Ended July 2, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
72

 
$
1,269

 
$
845

 
$
1,399

 
$
3,853

 
$
7,438

Non-DoD

 
3

 
1,118

 
278

 

 
1,399

FMS
18

 
191

 
11

 
22

 
98

 
340

Total U.S. government
90

 
1,463

 
1,974

 
1,699

 
3,951

 
9,177

U.S. commercial
1,813

 
103

 
126

 
54

 
50

 
2,146

Non-U.S. government
69

 
1,096

 
10

 
329

 
8

 
1,512

Non-U.S. commercial
2,180

 
39

 

 
58

 
4

 
2,281

Total revenue
$
4,152

 
$
2,701

 
$
2,110

 
$
2,140

 
$
4,013

 
$
15,116

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 segments, 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 segment, 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 six-month period ended July 1, 2018, were not materially impacted by any other factors except for the acquisition of CSRA as further described in Note B.
Revenue recognized for the three- and six-month periods ended July 1, 2018, and July 2, 2017, that was included in the contract liability balance at the beginning of each year was $1.1 billion and $2.6 billion, and $1.2 billion and $2.9 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.


19



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 2018 and 2017 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
Six Months Ended
 
July 1, 2018
 
July 2, 2017
July 1, 2018
 
July 2, 2017
Basic weighted average shares
    outstanding
296,153

 
299,790

296,276

 
300,780

Dilutive effect of stock options and
    restricted stock/RSUs*
3,986

 
5,560

4,318

 
5,560

Diluted weighted average shares
    outstanding
300,139

 
305,350

300,594

 
306,340

* 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 3,511 and 2,851 for the three- and six-month periods ended July 1, 2018, and 1,846 and 1,251 for the three- and six-month periods ended July 2, 2017, 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 July 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 July 1, 2018, and December 31, 2017, and the basis for determining their fair values:

20



 
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)
July 1, 2018
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
8

 
$
8

 
$
2

 
$
6

 
$

        Available-for-sale debt securities
127

 
127

 

 
127

 

        Equity securities
52

 
52

 
52

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(151
)
 
(151
)
 

 
(151
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(14,400
)
 
(14,194
)
 

 
(14,194
)
 

 
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.

F. INCOME TAXES
Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. U.S. federal 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:

21



 
July 1, 2018
 
December 31, 2017
Deferred tax asset
$
36

 
$
75

Deferred tax liability
(594
)
 
(244
)
Net deferred tax liability
$
(558
)
 
$
(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 July 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 July 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.

G. 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:
 
July 1, 2018
 
December 31, 2017
Unbilled revenue
$
24,610

 
$
21,845

Advances and progress billings
(17,485
)
 
(16,605
)
Net unbilled receivables
$
7,125

 
$
5,240

Excluding the acquisition of CSRA, the increase in net unbilled receivables during the six-month period ended July 1, 2018, was due primarily to the timing of billings on large international vehicle contracts in our Combat Systems segment.

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 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.

22



Inventories consisted of the following:
 
July 1, 2018
 
December 31, 2017
Work in process
$
4,385

 
$
3,872

Raw materials
1,381

 
1,357

Finished goods
49

 
51

Pre-owned aircraft
75

 
23

Total inventories
$
5,890

 
$
5,303

The increase in total inventories during the six-month period ended July 1, 2018, was due primarily to the ramp-up in production of the new G500 and G600 aircraft programs in our Aerospace segment.

I. DEBT
Debt consisted of the following:
 
 
July 1, 2018
 
December 31, 2017
Fixed-rate notes due:
Interest rate:
 
 
 
May 2020
2.875%
$
2,000

 
$

May 2021
3.000%
2,000

 

July 2021
3.875%
500

 
500

November 2022
2.250%
1,000

 
1,000

May 2023
3.375%
750

 

August 2023
1.875%
500

 
500

November 2024
2.375%
500

 
500

May 2025
3.500%
750

 

August 2026
2.125%
500

 
500

November 2027
2.625%
500

 
500

May 2028
3.750%
1,000

 

November 2042
3.600%
500

 
500

Floating-rate notes due:
 
 
 
 
May 2020
3-month LIBOR + 0.29%
500

 

May 2021
3-month LIBOR + 0.38%
500

 

Commercial paper
2.137%
2,796

 

Other
Various
104

 
32

Total debt principal
 
14,400

 
4,032

Less unamortized debt issuance costs
    and discounts
 
122

 
50

Total debt
 
14,278

 
3,982

Less current portion
 
2,881

 
2

Long-term debt
 
$
11,397

 
$
3,980

In April 2018, we borrowed $7.5 billion under a short-term credit facility to finance, in part, the acquisition of CSRA. In May 2018, we issued $7.5 billion of fixed- and floating-rate notes to repay the borrowings under this facility. We entered into interest rate swap contracts that exchange the floating interest rates on the $500 notes due in May 2020 and May 2021 for fixed rates. The result of the interest rate swap

23



contracts is effective interest rates on the floating-rate notes that are the same as the rates on the fixed-rate notes due in May 2020 and May 2021. See Note L for further discussion of our derivative financial instruments.
Our fixed- and floating-rate notes are fully and unconditionally guaranteed by several of our 100%-owned subsidiaries. See Note P for condensed consolidating financial statements. We have the option to redeem the fixed-rate notes prior to their maturity in whole or in part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.
The aggregate amounts of scheduled principal maturities of our debt in the remainder of 2018 and in subsequent years are as follows:
2018
$
2,887

2019
2

2020
2,502

2021
3,002

2022
1,002

Thereafter
5,005

Total debt principal
$
14,400

On July 1, 2018, we had $2.8 billion of commercial paper outstanding with a dollar-weighted average interest rate of 2.137%. We have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. These credit facilities include a $2 billion 364-day facility expiring in March 2019, a $1 billion multi-year facility expiring in November 2020 and a $2 billion multi-year facility expiring in March 2023. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries. We also have an effective shelf registration on file with the Securities and Exchange Commission 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 and restrictions on July 1, 2018.


24



J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 
July 1, 2018
 
December 31, 2017
 
 
 
 
Salaries and wages
$
892

 
$
786

Workers’ compensation
319

 
320

Retirement benefits
299

 
295

Fair value of cash flow hedges
221

 
180

Other (a)
1,710

 
1,317

Total other current liabilities
$
3,441

 
$
2,898

 
 
 
 
Retirement benefits
$
4,561

 
$
4,408

Customer deposits on commercial contracts 
587

 
814

Deferred income taxes
594

 
244

Other (b)
1,446

 
1,066

Total other liabilities
$
7,188

 
$
6,532

(a)Consists primarily of dividends payable, taxes payable, capital lease obligations, environmental remediation reserves, warranty reserves, deferred revenue and supplier contributions in the Aerospace segment, liabilities of discontinued operations, and insurance-related costs.
(b)Consists primarily of capital lease obligations, warranty reserves, workers’ compensation liabilities and liabilities of discontinued operations.

K. SHAREHOLDERS EQUITY
Share Repurchases. Our board of directors from time to time authorizes management’s repurchase of outstanding shares of our common stock on the open market. 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 six-month period ended July 1, 2018, we repurchased 2.1 million of our outstanding shares for $436. On July 1, 2018, 5.5 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased 4.6 million shares for $893 in the six-month period ended July 2, 2017.
Dividends per Share. Our board of directors declared dividends of $0.93 and $1.86 per share for the three- and six-month periods ended July 1, 2018, and $0.84 and $1.68 per share for the three- and six-month periods ended July 2, 2017, respectively. We paid cash dividends of $276 and $526 for the three- and six-month periods ended July 1, 2018, and $253 and $483 for the three- and six-month periods ended July 2, 2017, respectively.

25



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
(21
)

(215
)
163

(73
)
Provision for income tax, net
7



(34
)
(27
)
Other comprehensive loss, net of tax
(14
)

(215
)
129

(100
)
July 1, 2018
$
(112
)
$

$
187

$
(3,633
)
$
(3,558
)
December 31, 2016
$
(345
)
$
14

$
69

$
(3,125
)
$
(3,387
)
Other comprehensive income, pretax
148

7

281

132

568

Provision for income tax, net
(39
)
(2
)
(15
)
(47
)
(103
)
Other comprehensive income, net of tax
109

5

266

85

465

July 2, 2017
$
(236
)
$
19

$
335

$
(3,040
)
$
(2,922
)
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 $187 and $170 for the six-month periods ended July 1, 2018, and July 2, 2017, respectively. This was offset partially by pretax amortization of prior service credit of $24 and $35 for the six-month periods ended July 1, 2018, and July 2, 2017, 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 do not use derivative financial instruments for trading or speculative purposes.
Foreign Currency Risk. 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 two-year average maturity of these instruments generally matches the duration of the activities that are at risk.
Interest Rate Risk. Our financial instruments subject to interest rate risk include variable-rate commercial paper and fixed-rate long-term debt obligations. However, the risk associated with these instruments is not material. Our floating-rate long-term debt obligations are also subject to interest rate risk. However, as described in Note I, we entered into derivative financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest risk.

26



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 July 1, 2018, we held $1.9 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 July 1, 2018, and December 31, 2017, these marketable securities totaled $187 and $191, respectively, and were reflected at fair value on the unaudited Consolidated Balance Sheet in other current and noncurrent assets. See Note E for additional details.
Hedging Activities. We had $6 billion in notional forward exchange and interest rate swap contracts outstanding on July 1, 2018, and $4.3 billion on December 31, 2017. These derivative financial instruments are cash flow hedges, and are reported on the Consolidated Balance Sheet at fair value. See Note E for additional details.
Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in other comprehensive loss (OCL) until the underlying transaction is reflected in earnings. Gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in the Consolidated Statement of Earnings in operating costs and expenses or interest expense. The gains and losses on derivative financial instruments that do not qualify for hedge accounting generally offset losses and gains on the assets and liabilities 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- and six-month periods ended July 1, 2018, and July 2, 2017. Net gains and losses reclassified to earnings from OCL were not material to our results of operations for the three- and six-month periods ended July 1, 2018, and July 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 July 1, 2018, or December 31, 2017.
Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international businesses’ functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and statements of earnings at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of OCL.
We do not hedge the fluctuation in reported 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- and six-month periods ended July 1, 2018, or July 2, 2017. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the six-month periods ended July 1, 2018, and July 2, 2017.

27




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 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-re