10-Q 1 gd-2018093010q.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 September 30, 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 (or for such shorter period that the registrant was required to file such reports), 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 every Interactive Data File required to be submitted 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 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
296,149,755 shares of the registrant’s common stock, $1 par value per share, were outstanding on September 30, 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)
September 30, 2018
 
October 1, 2017
Revenue:
 
 
 
Products
$
4,842

 
$
4,718

Services
4,252

 
2,862

 
9,094

 
7,580

Operating costs and expenses:
 
 
 
Products
(3,797
)
 
(3,635
)
Services
(3,610
)
 
(2,379
)
General and administrative (G&A)
(552
)
 
(503
)
 
(7,959
)
 
(6,517
)
Operating earnings
1,135

 
1,063

Interest, net
(114
)
 
(27
)
Other, net
2

 
(9
)
Earnings from continuing operations before income tax
1,023

 
1,027

Provision for income tax, net
(159
)
 
(263
)
Earnings from continuing operations
864

 
764

Discontinued operations, net of tax
(13
)
 

Net earnings
$
851

 
$
764

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
2.92

 
$
2.56

Discontinued operations
(0.04
)
 

Net earnings
$
2.88

 
$
2.56

Diluted:
 
 
 
Continuing operations
$
2.89

 
$
2.52

Discontinued operations
(0.04
)
 

Net earnings
$
2.85

 
$
2.52

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


3



CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Nine Months Ended
(Dollars in millions, except per-share amounts)
September 30, 2018
 
October 1, 2017
Revenue:
 
 
 
Products
$
14,172

 
$
13,851

Services
11,643

 
8,845

 
25,815

 
22,696

Operating costs and expenses:
 
 
 
Products
(11,045
)
 
(10,670
)
Services
(9,838
)
 
(7,381
)
G&A
(1,701
)
 
(1,469
)
 
(22,584
)
 
(19,520
)
Operating earnings
3,231

 
3,176

Interest, net
(244
)
 
(76
)
Other, net
(34
)
 
(31
)
Earnings from continuing operations before income tax
2,953

 
3,069

Provision for income tax, net
(504
)
 
(793
)
Earnings from continuing operations
2,449

 
2,276

Discontinued operations, net of tax
(13
)
 

Net earnings
$
2,436

 
$
2,276

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
8.27

 
$
7.59

Discontinued operations
(0.04
)
 

Net earnings
$
8.23

 
$
7.59

Diluted:
 
 
 
Continuing operations
$
8.16

 
$
7.45

Discontinued operations
(0.04
)
 

Net earnings
$
8.12

 
$
7.45

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
Nine Months Ended
(Dollars in millions)
September 30, 2018
 
October 1, 2017
September 30, 2018
 
October 1,
2017
Net earnings
$
851

 
$
764

$
2,436

 
$
2,276

Gains on cash flow hedges
61

 
138

40

 
286

Unrealized gains on marketable securities

 
1


 
8

Foreign currency translation adjustments
85

 
128

(130
)
 
409

Change in retirement plans’ funded status
84

 
61

247

 
193

Other comprehensive income, pretax
230

 
328

157

 
896

Provision for income tax, net
(33
)
 
(57
)
(60
)
 
(160
)
Other comprehensive income, net of tax
197

 
271

97

 
736

Comprehensive income
$
1,048

 
$
1,035

$
2,533

 
$
3,012

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


5



CONSOLIDATED BALANCE SHEET

 
(Unaudited)
 
 
(Dollars in millions)
September 30, 2018
 
December 31, 2017
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
1,010

 
$
2,983

Accounts receivable
3,736

 
3,617

Unbilled receivables
7,564

 
5,240

Inventories
6,247

 
5,303

Other current assets
1,401

 
1,185

Total current assets
19,958

 
18,328

Noncurrent assets:
 
 
 
Property, plant and equipment, net
4,244

 
3,517

Intangible assets, net
2,667

 
702

Goodwill
19,486

 
11,914

Other assets
608

 
585

Total noncurrent assets
27,005

 
16,718

Total assets
$
46,963

 
$
35,046

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1,678

 
$
2

Accounts payable
3,033

 
3,207

Customer advances and deposits
7,327

 
6,992

Other current liabilities
3,651

 
2,898

Total current liabilities
15,689

 
13,099

Noncurrent liabilities:
 
 
 
Long-term debt
11,403

 
3,980

Other liabilities
7,116

 
6,532

Commitments and contingencies (see Note M)


 


Total noncurrent liabilities
18,519

 
10,512

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
2,914

 
2,872

Retained earnings
28,691

 
26,444

Treasury stock
(15,971
)
 
(15,543
)
Accumulated other comprehensive loss
(3,361
)
 
(2,820
)
Total shareholders’ equity
12,755

 
11,435

Total liabilities and shareholders equity
$
46,963

 
$
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)

 
Nine Months Ended
(Dollars in millions)
September 30, 2018
 
October 1, 2017
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
2,436

 
$
2,276

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

Depreciation of property, plant and equipment
352

 
269

Amortization of intangible assets
190

 
57

Equity-based compensation expense
110

 
93

Deferred income tax (benefit) provision
(66
)
 
155

Discontinued operations, net of tax
13

 

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
472

 
26

Unbilled receivables
(1,625
)
 
(1,361
)
Inventories
(854
)
 
57

Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(324
)
 
167

Customer advances and deposits
112

 
(296
)
Income taxes payable
250

 
223

Other, net
15

 
216

Net cash provided by operating activities
1,081

 
1,882

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(10,039
)
 
(364
)
Capital expenditures
(447
)
 
(273
)
Other, net
169

 
52

Net cash used by investing activities
(10,317
)
 
(585
)
Cash flows from financing activities:
 
 
 
Proceeds from fixed-rate notes
6,461

 
985

Proceeds from (repayments of) commercial paper, net
1,668

 
(2
)
Proceeds from floating-rate notes
1,000

 

Dividends paid
(801
)
 
(735
)
Purchases of common stock
(533
)
 
(1,172
)
Repayment of CSRA accounts receivable purchase agreement
(450
)
 

Other, net
(68
)
 
43

Net cash provided (used) by financing activities
7,277

 
(881
)
Net cash used by discontinued operations
(14
)
 
(28
)
Net (decrease) increase in cash and equivalents
(1,973
)
 
388

Cash and equivalents at beginning of period
2,983

 
2,334

Cash and equivalents at end of period
$
1,010

 
$
2,722

Supplemental cash flow information:
 
 
 
Income tax payments, net
$
305

 
$
398

Interest payments
$
144

 
$
66

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

 

 
2,436

 

 

 
2,436

Cash dividends declared

 

 
(827
)
 

 

 
(827
)
Equity-based awards

 
42

 

 
95

 

 
137

Shares purchased

 

 

 
(523
)
 

 
(523
)
Other comprehensive income

 

 

 

 
97

 
97

September 30, 2018
$
482

 
$
2,914

 
$
28,691

 
$
(15,971
)
 
$
(3,361
)
 
$
12,755

 
 
 
 
 
 
 
 
 
 
 


December 31, 2016
$
482

 
$
2,819

 
$
24,543

 
$
(14,156
)
 
$
(3,387
)
 
$
10,301

Cumulative-effect adjustment*

 

 
(3
)
 

 

 
(3
)
Net earnings

 

 
2,276

 

 

 
2,276

Cash dividends declared

 

 
(758
)
 

 

 
(758
)
Equity-based awards

 
22

 

 
127

 

 
149

Shares purchased

 

 

 
(1,137
)
 

 
(1,137
)
Other comprehensive income

 

 

 

 
736

 
736

October 1, 2017
$
482

 
$
2,841

 
$
26,058

 
$
(15,166
)
 
$
(2,651
)
 
$
11,564

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.
We are divesting certain non-core operations in our Information Technology segment. Accordingly, the assets and liabilities of these operations, including an estimated allocation of goodwill, were classified as held for sale on September 30, 2018. As we expect these operations to be divested within the next 12 months, the assets and liabilities held for sale are included in other current assets and liabilities on the unaudited Consolidated Balance Sheet.
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 nine-month periods ended September 30, 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 nine-month periods ended September 30, 2018, and October 1, 2017.

9



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.
Discontinued Operations, Net of Tax. Concurrent with the acquisition of CSRA, we were required by a government customer to dispose of certain CSRA operations to address an organizational conflict of interest with respect to services provided to the customer. In the third quarter of 2018, we sold these operations. In accordance with GAAP, the sale did not result in a gain for financial reporting purposes. However, the sale generated a taxable gain, resulting in tax expense of $13.
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 a material effect on our cash flows for the nine-month period ended October 1, 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 retirement benefit cost to be reported separately from the other components of net retirement benefit cost in the Consolidated Statement of Earnings. We adopted the standard retrospectively on January 1, 2018. Our restated operating earnings increased $11 and $33 for the three- and nine-month periods ended October 1, 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.
There are several other accounting standards that have been issued by the FASB but are not yet effective, including the following:
ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. The ASU also requires disclosure of key information about leasing arrangements. ASU 2016-02 is effective on January 1, 2019, using a

10



modified retrospective method of adoption as of January 1, 2017. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, that provides an alternative transition method of adoption, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption.
We intend to adopt the standard on the effective date using the alternative transition method provided by ASU 2018-11. We are currently evaluating our population of leased assets in order to assess the impact of the ASU on our lease portfolio, and designing and implementing new processes and controls. Until this effort is completed, we cannot determine the effect of the ASU on our results of operations, financial condition or cash flows.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. We intend to adopt the standard on the effective date, and we do not expect the adoption of the ASU to have a material effect on our results of operations, financial condition or cash flows.

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.
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


11



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
145

Unbilled receivables
718

Other current assets
290

Property, plant and equipment, net
684

Intangible assets, net
2,069

Goodwill
7,792

Other noncurrent assets
20

Total assets
$
11,763

Account payable
$
(136
)
Customer advances and deposits
(151
)
Current capital lease obligation
(51
)
Other current liabilities
(540
)
Noncurrent capital lease obligation
(207
)
Noncurrent deferred tax liability
(406
)
Other noncurrent liabilities
(523
)
Total liabilities
$
(2,014
)
Net assets acquired
$
9,749

During the quarter ended September 30, 2018, we continued to obtain information to refine the estimated fair values. The additional information obtained during the quarter did not result in any material adjustments. However, 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:
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 pre-acquisition goodwill 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. As we immediately began integrating CSRA with GDIT following the acquisition, it is becoming increasingly

12



difficult to separate the results of legacy CSRA from those of the combined entity. Approximately $1.2 billion and $2.5 billion of revenue, $130 and $265 of operating earnings, and $140 and $285 of pretax earnings from legacy CSRA were included in our unaudited Consolidated Statement of Earnings for the three- and nine-month periods ended September 30, 2018, respectively. These amounts exclude amortization of intangible assets and acquisition financing.
In addition, 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 earnings from continuing operations as if the acquisition of CSRA and the related financing transactions had occurred on January 1, 2017:
 
Three Months Ended
Nine Months Ended
 
September 30, 2018
 
October 1,
2017
September 30, 2018
 
October 1,
2017
Revenue
$
9,094

 
$
8,799

$
27,156

 
$
26,296

Earnings from continuing operations
872

 
776

2,470

 
2,213

Diluted earnings per share from
continuing operations
$
2.92

 
$
2.55

$
8.23

 
$
7.24

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 were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. We completed the sale of these operations in the third quarter of 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.
Other Acquisitions and Divestitures
In addition to the acquisition of CSRA, we acquired two businesses in the first nine 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.

13



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 nine months of 2018, we completed the sale of a commercial health products business in our Information Technology segment and the sale of certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. The proceeds from the sales are included in other investing activities 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)
148

 

 

 
7,796

 
1

 

 
7,945

Other (c)
(37
)
 
(21
)
 

 
(347
)
 
(9
)
 

 
(414
)
September 30, 2018 (e)
$
2,789

 
$
2,642

 
$

 
$
9,525

 
$
4,233

 
$
297

 
$
19,486

(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. Activity in the six-month period ended September 30, 2018, also includes an allocation of goodwill in our Information Technology reporting unit associated with the operations classified as held for sale on the unaudited Consolidated Balance Sheet on September 30, 2018.
(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 $526 and $1.3 billion of accumulated impairment losses, respectively.
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
 
September 30, 2018
 
December 31, 2017
Contract and program
    intangible assets (b)
$
3,792

$
(1,473
)
$
2,319

 
$
1,684

$
(1,320
)
$
364

Trade names and trademarks
468

(173
)
295

 
465

(160
)
305

Technology and software
167

(115
)
52

 
137

(105
)
32

Other intangible assets
155

(154
)
1

 
155

(154
)
1

Total intangible assets
$
4,582

$
(1,915
)
$
2,667

 
$
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.

14



Amortization expense was $86 and $190 for the three- and nine-month periods ended September 30, 2018, and $19 and $57 for the three- and nine-month periods ended October 1, 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 74% and 75% of our revenue for the three- and nine-month periods ended September 30, 2018, and 70% of our revenue for the three- and nine-month periods ended October 1, 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.
Revenue from goods and services transferred to customers at a point in time accounted for 26% and 25% of our revenue for the three- and nine-month periods ended September 30, 2018, and 30% of our revenue for the three- and nine-month periods ended October 1, 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 September 30, 2018, we had $69.5 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 50% of our remaining performance obligations as revenue by year-end 2019, an additional 30% by year-end 2021 and the balance thereafter. On December 31, 2017, we had $63.2 billion of remaining performance obligations, at which time 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

15



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:
 
Three Months Ended
Nine Months Ended
 
September 30, 2018
 
October 1,
2017
September 30, 2018
 
October 1,
2017
Revenue
$
96

 
$
94

$
302

 
$
256

Operating earnings
103

 
103

283

 
274

Diluted earnings per share
$
0.27

 
$
0.22

$
0.75

 
$
0.58

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and nine-month periods ended September 30, 2018, or October 1, 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.

16



Revenue by major products and services was as follows:
 
Three Months Ended
Nine Months Ended
 
September 30, 2018
 
October 1,
2017
September 30, 2018
 
October 1,
2017
Aircraft manufacturing and
    completions
$
1,437

 
$
1,562

$
4,165

 
$
4,791

Aircraft services
525

 
422

1,507

 
1,302

Pre-owned aircraft
69

 
11

79

 
54

Total Aerospace
2,031

 
1,995

5,751

 
6,147

Wheeled combat and tactical vehicles
657

 
623

1,926

 
1,749

Weapons systems, armament and
    munitions
425

 
412

1,251

 
1,167

Tanks and tracked vehicles
334

 
315

1,011

 
840

Engineering and other services
107

 
150

309

 
445

Total Combat Systems
1,523

 
1,500

4,497

 
4,201

Information technology services
2,307

 
1,068

5,887

 
3,178

Total Information Technology
2,307

 
1,068

5,887

 
3,178

Platform systems and sensors
423

 
387

1,197

 
1,170

Intelligence, surveillance and
    reconnaissance systems
398

 
351

1,147

 
1,013

Communication systems
409

 
348

1,131

 
1,043

Total Mission Systems
1,230

 
1,086

3,475

 
3,226

Nuclear-powered submarines
1,369

 
1,248

4,103

 
3,794

Surface combatants
293

 
256

834

 
757

Auxiliary and commercial ships
152

 
129

567

 
427

Repair and other services
189

 
298

701

 
966

Total Marine Systems
2,003

 
1,931

6,205

 
5,944

Total revenue
$
9,094

 
$
7,580

$
25,815

 
$
22,696

Revenue by contract type was as follows:
Three Months Ended September 30, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
1,807

 
$
1,309

 
$
941

 
$
695

 
$
1,284

 
$
6,036

Cost-reimbursement

 
204

 
955

 
499

 
718

 
2,376

Time-and-materials
224

 
10

 
411

 
36

 
1

 
682

Total revenue
$
2,031

 
$
1,523

 
$
2,307

 
$
1,230

 
$
2,003

 
$
9,094

Three Months Ended October 1, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
1,835

 
$
1,258

 
$
359

 
$
612

 
$
1,131

 
$
5,195

Cost-reimbursement

 
233

 
552

 
437

 
797

 
2,019

Time-and-materials
160

 
9

 
157

 
37

 
3

 
366

Total revenue
$
1,995

 
$
1,500

 
$
1,068

 
$
1,086

 
$
1,931

 
$
7,580


17



Nine Months Ended September 30, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
5,171

 
$
3,892

 
$
2,387

 
$
1,973

 
$
3,961

 
$
17,384

Cost-reimbursement

 
580

 
2,462

 
1,390

 
2,241

 
6,673

Time-and-materials
580

 
25

 
1,038

 
112

 
3

 
1,758

Total revenue
$
5,751

 
$
4,497

 
$
5,887

 
$
3,475

 
$
6,205

 
$
25,815

Nine Months Ended October 1, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
5,650

 
$
3,538

 
$
1,049

 
$
1,744

 
$
3,514

 
$
15,495

Cost-reimbursement

 
636

 
1,660

 
1,357

 
2,422

 
6,075

Time-and-materials
497

 
27

 
469

 
125

 
8

 
1,126

Total revenue
$
6,147

 
$
4,201

 
$
3,178

 
$
3,226

 
$
5,944

 
$
22,696

Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.
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.

18



Revenue by customer was as follows:
Three Months Ended September 30, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
Department of Defense (DoD)
$
35

 
$
698

 
$
889

 
$
854

 
$
1,895

 
$
4,371

Non-DoD

 
2

 
1,348

 
130

 

 
1,480

Foreign Military Sales (FMS)
13

 
65

 
8

 
10

 
37

 
133

Total U.S. government
48

 
765

 
2,245

 
994

 
1,932

 
5,984

U.S. commercial
827

 
59

 
41

 
38

 
69

 
1,034

Non-U.S. government
59

 
677

 
21

 
156

 
2

 
915

Non-U.S. commercial
1,097

 
22

 

 
42

 

 
1,161

Total revenue
$
2,031

 
$
1,523

 
$
2,307

 
$
1,230

 
$
2,003

 
$
9,094

Three Months Ended October 1, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
40

 
$
659

 
$
424

 
$
745

 
$
1,878

 
$
3,746

Non-DoD

 
2

 
582

 
135

 
1

 
720

FMS
8

 
93

 
5

 
12

 
42

 
160

Total U.S. government
48

 
754

 
1,011

 
892

 
1,921

 
4,626

U.S. commercial
958

 
63

 
50

 
25

 
6

 
1,102

Non-U.S. government
63

 
668

 
7

 
134

 
2

 
874

Non-U.S. commercial
926

 
15

 

 
35

 
2

 
978

Total revenue
$
1,995

 
$
1,500

 
$
1,068

 
$
1,086

 
$
1,931

 
$
7,580


19



Nine Months Ended September 30, 2018
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
165

 
$
1,965

 
$
2,374

 
$
2,360

 
$
5,877

 
$
12,741

Non-DoD

 
6

 
3,296

 
378

 
1

 
3,681

FMS
48

 
217

 
23

 
31

 
105

 
424

Total U.S. government
213

 
2,188

 
5,693

 
2,769

 
5,983

 
16,846

U.S. commercial
2,586

 
175

 
122

 
101

 
213

 
3,197

Non-U.S. government
212

 
2,086

 
72

 
489

 
8

 
2,867

Non-U.S. commercial
2,740

 
48

 

 
116

 
1

 
2,905

Total revenue
$
5,751

 
$
4,497

 
$
5,887

 
$
3,475

 
$
6,205

 
$
25,815

Nine Months Ended October 1, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
112

 
$
1,928

 
$
1,269

 
$
2,144

 
$
5,731

 
$
11,184

Non-DoD

 
5

 
1,700

 
413

 
1

 
2,119

FMS
26

 
284

 
16

 
34

 
140

 
500

Total U.S. government
138

 
2,217

 
2,985

 
2,591

 
5,872

 
13,803

U.S. commercial
2,771

 
166

 
176

 
79

 
56

 
3,248

Non-U.S. government
132

 
1,764

 
17

 
463

 
10

 
2,386

Non-U.S. commercial
3,106

 
54

 

 
93

 
6

 
3,259

Total revenue
$
6,147

 
$
4,201

 
$
3,178

 
$
3,226

 
$
5,944

 
$
22,696

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 nine-month period ended September 30, 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 nine-month periods ended September 30, 2018, and October 1, 2017, that was included in the contract liability balance at the beginning of each year was $875 and $3.5 billion, and $982 and $3.9 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.


20



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
Nine Months Ended
 
September 30, 2018
 
October 1,
2017
September 30, 2018
 
October 1,
2017
Basic weighted average shares
    outstanding
295,339

 
298,145

295,964

 
299,902

Dilutive effect of stock options and
    restricted stock/RSUs*
3,748

 
5,606

4,114

 
5,599

Diluted weighted average shares
    outstanding
299,087

 
303,751

300,078

 
305,501

* 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 3,447 and 3,043 for the three- and nine-month periods ended September 30, 2018, and 1,850 and 1,449 for the three- and nine-month periods ended October 1, 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 September 30, 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 September 30, 2018, and December 31, 2017, and the basis for determining their fair values:

21



 
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)
September 30, 2018
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
7

 
$
7

 
$
2

 
$
5

 
$

        Available-for-sale debt securities
123

 
123

 

 
123

 

        Equity securities
55

 
55

 
55

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(63
)
 
(63
)
 

 
(63
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(13,191
)
 
(12,956
)
 

 
(12,956
)
 

 
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:

22



 
September 30, 2018
 
December 31, 2017
Deferred tax asset
$
19

 
$
75

Deferred tax liability
(544
)
 
(244
)
Net deferred tax liability
$
(525
)
 
$
(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 September 30, 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 2017. 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 September 30, 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:
 
September 30, 2018
 
December 31, 2017
Unbilled revenue
$
27,536

 
$
21,845

Advances and progress billings
(19,972
)
 
(16,605
)
Net unbilled receivables
$
7,564

 
$
5,240

Excluding the acquisition of CSRA, the increase in net unbilled receivables during the nine-month period ended September 30, 2018, was primarily on the large international vehicle contracts in our Combat Systems segment.








23



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.
Inventories consisted of the following:
 
September 30, 2018
 
December 31, 2017
Work in process
$
4,688

 
$
3,872

Raw materials
1,425

 
1,357

Finished goods
45

 
51

Pre-owned aircraft
89

 
23

Total inventories
$
6,247

 
$
5,303

The increase in total inventories during the nine-month period ended September 30, 2018, was due primarily to the ramp-up in production of the new G500 and G600 aircraft programs in our Aerospace segment. We received type certification from the U.S. Federal Aviation Administration (FAA) for the G500 aircraft in July 2018 and delivered the first G500 aircraft in the third quarter of 2018. Additionally, we continue to progress toward anticipated FAA type certification later this year and entry into service in 2019 of the new G600 aircraft.

I. DEBT
Debt consisted of the following:
 
 
September 30, 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
2.114%
1,672

 

Other
Various
19

 
32

Total debt principal
 
13,191

 
4,032

Less unamortized debt issuance costs
    and discounts
 
110

 
50

Total debt
 
13,081

 
3,982

Less current portion
 
1,678

 
2

Long-term debt
 
$
11,403

 
$
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 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
$
1,678

2019
2

2020
2,502

2021
3,002

2022
1,002

Thereafter
5,005

Total debt principal
$
13,191

On September 30, 2018, we had $1.7 billion of commercial paper outstanding with a dollar-weighted average interest rate of 2.114%. 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 September 30, 2018.


24



J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Salaries and wages
$
943

 
$
786

Workers’ compensation
321

 
320

Retirement benefits
298

 
295

Fair value of cash flow hedges
130

 
180

Other (a)
1,959

 
1,317

Total other current liabilities
$
3,651

 
$
2,898

 
 
 
 
Retirement benefits
$
4,160

 
$
4,408

Customer deposits on commercial contracts 
750

 
814

Deferred income taxes
544

 
244

Other (b)
1,662

 
1,066

Total other liabilities
$
7,116

 
$
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 nine-month period ended September 30, 2018, we repurchased 2.5 million of our outstanding shares for $522. On September 30, 2018, 5.1 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased 5.9 million shares for $1.1 billion in the nine-month period ended October 1, 2017.
Dividends per Share. Our board of directors declared dividends of $0.93 and $2.79 per share for the three- and nine-month periods ended September 30, 2018, and $0.84 and $2.52 per share for the three- and nine-month periods ended October 1, 2017, respectively. We paid cash dividends of $275 and $801 for the three- and nine-month periods ended September 30, 2018, and $252 and $735 for the three- and nine-month periods ended October 1, 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
40


(130
)
247

157

Provision for income tax, net
(8
)


(52
)
(60
)
Other comprehensive income, net of tax
32


(130
)
195

97

September 30, 2018
$
(66
)
$