10-Q 1 gd-2019033110q.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 March 31, 2019
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
288,871,990 shares of the registrant’s common stock, $1 par value per share, were outstanding on March 31, 2019.





INDEX


2



PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
March 31, 2019
 
April 1, 2018
Revenue:
 
 
 
Products
$
5,251

 
$
4,576

Services
4,010

 
2,959

 
9,261


7,535

Operating costs and expenses:
 
 
 
Products
(4,235
)
 
(3,546
)
Services
(3,398
)
 
(2,444
)
General and administrative (G&A)
(614
)
 
(537
)
 
(8,247
)
 
(6,527
)
Operating earnings
1,014

 
1,008

Interest, net
(117
)
 
(27
)
Other, net
18

 
(21
)
Earnings before income tax
915


960

Provision for income tax, net
(170
)
 
(161
)
Net earnings
$
745


$
799

 
 
 
 
Earnings per share
 
 
 
Basic
$
2.59

 
$
2.70

Diluted
$
2.56

 
$
2.65

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


3



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
(Dollars in millions)
March 31, 2019
 
April 1, 2018
Net earnings
$
745

 
$
799

Gains (losses) on cash flow hedges
17

 
(3
)
Foreign currency translation adjustments
31

 
1

Change in retirement plans’ funded status
63

 
84

Other comprehensive income, pretax
111

 
82

Provision for income tax, net
(16
)
 
(15
)
Other comprehensive income, net of tax
95

 
67

Comprehensive income
$
840


$
866

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


4



CONSOLIDATED BALANCE SHEET

 
(Unaudited)
 
 
(Dollars in millions)
March 31, 2019
 
December 31, 2018
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
673

 
$
963

Accounts receivable
3,718

 
3,759

Unbilled receivables
7,367

 
6,576

Inventories
6,185

 
5,977

Other current assets
924

 
914

Total current assets
18,867


18,189

Noncurrent assets:
 
 
 
Property, plant and equipment, net
4,054

 
3,978

Intangible assets, net
2,518

 
2,585

Goodwill
19,668

 
19,594

Other assets
2,359

 
1,062

Total noncurrent assets
28,599


27,219

Total assets
$
47,466


$
45,408

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
2,097

 
$
973

Accounts payable
3,008

 
3,179

Customer advances and deposits
6,695

 
7,270

Other current liabilities
3,582

 
3,317

Total current liabilities
15,382


14,739

Noncurrent liabilities:
 
 
 
Long-term debt
11,451

 
11,444

Other liabilities
8,399

 
7,493

Commitments and contingencies (see Note M)


 


Total noncurrent liabilities
19,850


18,937

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
2,937

 
2,946

Retained earnings
29,781

 
29,326

Treasury stock
(17,283
)
 
(17,244
)
Accumulated other comprehensive loss
(3,683
)
 
(3,778
)
Total shareholders’ equity
12,234


11,732

Total liabilities and shareholders equity
$
47,466


$
45,408

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

5



CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 
Three Months Ended
(Dollars in millions)
March 31, 2019
 
April 1, 2018
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
745

 
$
799

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

Depreciation of property, plant and equipment
114

 
89

Amortization of intangible and finance lease right-of-use assets
91

 
20

Equity-based compensation expense
40

 
29

Deferred income tax provision
(10
)
 
4

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
49

 
(150
)
Unbilled receivables
(873
)
 
(608
)
Inventories
(210
)
 
(236
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(167
)
 
(358
)
Customer advances and deposits
(623
)
 
(149
)
Other, net
49

 
64

Net cash used by operating activities
(795
)
 
(496
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(181
)
 
(104
)
Other, net
(6
)
 
(1
)
Net cash used by investing activities
(187
)
 
(105
)
Cash flows from financing activities:
 
 
 
Proceeds from commercial paper, net
1,010

 
2,494

Dividends paid
(268
)
 
(250
)
Purchases of common stock
(133
)
 
(267
)
Other, net
88

 
(25
)
Net cash provided by financing activities
697

 
1,952

Net cash used by discontinued operations
(5
)
 
(2
)
Net (decrease) increase in cash and equivalents
(290
)
 
1,349

Cash and equivalents at beginning of period
963

 
2,983

Cash and equivalents at end of period
$
673

 
$
4,332

Supplemental cash flow information:
 
 
 
Income tax (payments) refunds, net
$
(37
)
 
$
4

Interest payments
$
(48
)
 
$
(21
)
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.


6



CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 
Common Stock
 
Retained
 
Treasury
 
Accumulated
Other 
Comprehensive
 
Total
Shareholders’    
(Dollars in millions)
Par
 
Surplus
 
Earnings
 
Stock
 
Loss
 
Equity
December 31, 2018
$
482

 
$
2,946

 
$
29,326

 
$
(17,244
)
 
$
(3,778
)
 
$
11,732

Net earnings

 

 
745

 

 

 
745

Cash dividends declared

 

 
(290
)
 

 

 
(290
)
Equity-based awards

 
(9
)
 

 
47

 

 
38

Shares purchased

 

 

 
(86
)
 

 
(86
)
Other comprehensive income

 

 

 

 
95

 
95

March 31, 2019
$
482


$
2,937


$
29,781


$
(17,283
)

$
(3,683
)

$
12,234

 
 
 
 
 
 
 
 
 
 
 


December 31, 2017
$
482

 
$
2,872

 
$
26,444

 
$
(15,543
)
 
$
(2,820
)
 
$
11,435

Cumulative-effect adjustment*

 

 
638

 

 
(638
)
 

Net earnings

 

 
799

 

 

 
799

Cash dividends declared

 

 
(276
)
 

 

 
(276
)
Equity-based awards

 
(52
)
 

 
58

 

 
6

Shares purchased

 

 

 
(257
)
 

 
(257
)
Other comprehensive income

 

 

 

 
67

 
67

April 1, 2018
$
482

 
$
2,820

 
$
27,605

 
$
(15,742
)
 
$
(3,391
)
 
$
11,774

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) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which we adopted on January 1, 2018.



7



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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the unaudited Consolidated Financial Statements. Some prior-year amounts have been reclassified among financial statement accounts or disclosures to conform to the current-year presentation.
Consistent with industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts may not be realized within one year.
Further discussion of our significant accounting policies is contained in the other notes to these financial statements.
Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These rules and regulations permit some of the information and footnote disclosures included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three-month period ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three-month periods ended March 31, 2019, and April 1, 2018.
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, 2018.
Accounting Standards Updates. Effective January 1, 2019, we adopted Accounting Standards Codification (ASC) Topic 842, Leases. ASC Topic 842 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. As we elected the cumulative-effect adoption method, prior-period information has not been restated.
The standard provided several optional practical expedients for use in transition. We elected to use what the Financial Accounting Standards Board (FASB) has deemed the “package of practical expedients,” which allowed us not to reassess our previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. We did not elect the practical expedient pertaining to the use of hindsight.
The most significant effects of the standard on our Consolidated Financial Statements are (1) the recognition of new right-of-use assets and lease liabilities on our Consolidated Balance Sheet for our operating leases, and (2) significant new disclosures about our leasing activities (see Note N). On January 1, 2019, we recognized operating lease liabilities and right-of-use assets of $1.4 billion based on the present

8



value of the remaining lease payments over the lease term. The adoption did not result in a cumulative-effect adjustment to retained earnings. The new standard did not have a material impact on our results of operations or cash flows.
For a discussion of other accounting standards that have been issued by the FASB but are not yet effective, refer to the Accounting Standards Updates section in our Annual Report on Form 10-K for the year ended December 31, 2018. These standards are not expected to have a material impact on our results of operations 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 plus the assumption of outstanding net debt. CSRA is a provider of IT solutions to the defense, intelligence and federal civilian markets and is included in our Information Technology segment.
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 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
155

Unbilled receivables
420

Other current assets
303

Property, plant and equipment, net
326

Intangible assets, net
2,066

Goodwill
7,931

Other noncurrent assets
369

Total assets
$
11,615

Account payable
$
(135
)
Customer advances and deposits
(151
)
Current lease obligation
(51
)
Other current liabilities
(434
)
Noncurrent lease obligation
(207
)
Noncurrent deferred tax liability
(356
)
Other noncurrent liabilities
(532
)
Total liabilities
$
(1,866
)
Net assets acquired
$
9,749


9



During the quarter, we obtained additional information that resulted in adjustments to the estimated fair values that were not material.
We have valued $2.1 billion of acquired intangible assets, which 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 are being 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 of the acquisition date.
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 deductible for income tax purposes over its remaining tax life.
Other Acquisitions and Divestitures
In the first three months of 2019, we completed the acquisition of a business in each of our Aerospace and Missions Systems segments. In 2018, we acquired five businesses in addition to the acquisition of CSRA for approximately $400: Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, and two fixed-base operation (FBO) businesses in our Aerospace segment; a maintenance and service provider for the German Army and other international customers in our Combat Systems segment; and a provider of specialized transmitters and receivers in our Mission Systems segment. As the purchase prices of these acquisitions were not material for the three-month periods ended March 31, 2019, and April 1, 2018, they are included in other investing activities, net, in the unaudited Consolidated Statement of Cash Flows.
The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.
We did not have any divestitures in the first three months of 2019. In 2018, we completed the sale of a commercial health products business during the first quarter and the sale of a public-facing contact-center business during the fourth quarter in our Information Technology segment. As the proceeds from the sale of the commercial health products business were not material for the three-month period ended April 1, 2018, they 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 Technology
 
Mission Systems
 
Marine Systems
 
Total
Goodwill
December 31, 2018 (a)
$
2,813

 
$
2,633

 
$
9,622

 
$
4,229

 
$
297

 
$
19,594

Acquisitions (b)
3

 
(1
)
 
72

 
6

 

 
80

Other (c)
(20
)
 
9

 
1

 
4

 

 
(6
)
March 31, 2019 (a)
$
2,796

 
$
2,641

 
$
9,695

 
$
4,239

 
$
297


$
19,668

(a)Goodwill in the Information Technology and Mission Systems reporting units is net of $536 and $1.3 billion of accumulated impairment losses, respectively.
(b)Includes adjustments during the purchase price allocation period.
(c)Consists primarily of adjustments for foreign currency translation.

10



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
 
March 31, 2019
 
December 31, 2018
Contract and program
    intangible assets (b)
$
3,771

$
(1,589
)
$
2,182

 
$
3,771

$
(1,531
)
$
2,240

Trade names and trademarks
463

(180
)
283

 
469

(177
)
292

Technology and software
171

(120
)
51

 
165

(116
)
49

Other intangible assets
159

(157
)
2

 
159

(155
)
4

Total intangible assets
$
4,564

$
(2,046
)
$
2,518

 
$
4,564

$
(1,979
)
$
2,585

(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 for intangible assets was $70 and $20 for the three-month periods ended March 31, 2019, and April 1, 2018.

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 within that contract 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 75% and 73% of our revenue for the three-month periods ended March 31, 2019, and April 1, 2018, 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.

11



Revenue from goods and services transferred to customers at a point in time accounted for 25% and 27% of our revenue for the three-month periods ended March 31, 2019, and April 1, 2018, 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 March 31, 2019, we had $69.2 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 65% of our remaining performance obligations as revenue by year-end 2020, an additional 25% by year-end 2022 and the balance thereafter. On December 31, 2018, we had $67.9 billion of remaining performance obligations, at which time we expected to recognize approximately 45% of these remaining performance obligations as revenue in 2019, an additional 35% by year-end 2021 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:
Three Months Ended
March 31, 2019
 
April 1, 2018
Revenue
$
96

 
$
115

Operating earnings
68

 
97

Diluted earnings per share
$
0.18

 
$
0.25


12



No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended March 31, 2019, or April 1, 2018.
Revenue by Category. Our portfolio of products and services consists of approximately 11,000 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
March 31, 2019
 
April 1, 2018
Aircraft manufacturing and completions
$
1,691

 
$
1,366

Aircraft services
507

 
451

Pre-owned aircraft
42

 
8

Total Aerospace
2,240


1,825

Military vehicles
1,134

 
956

Weapons systems, armament and munitions
401

 
383

Engineering and other services
101

 
101

Total Combat Systems
1,636


1,440

Information technology services
2,169

 
1,138

Total Information Technology
2,169


1,138

C4ISR* solutions
1,158

 
1,098

Total Mission Systems
1,158


1,098

Nuclear-powered submarines
1,377

 
1,296

Surface ships
446

 
483

Repair and other services
235

 
255

Total Marine Systems
2,058


2,034

Total revenue
$
9,261


$
7,535

* Command, control, communications, computers, intelligence, surveillance and reconnaissance.
Revenue by contract type was as follows:
Three Months Ended March 31, 2019
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
2,040

 
$
1,416

 
$
921

 
$
651

 
$
1,416

 
$
6,444

Cost-reimbursement

 
211

 
841

 
463

 
640

 
2,155

Time-and-materials
200

 
9

 
407

 
44

 
2

 
662

Total revenue
2,240


1,636


2,169


1,158


2,058


9,261

Three Months Ended April 1, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
1,668

 
$
1,253

 
$
387

 
$
620

 
$
1,305

 
$
5,233

Cost-reimbursement

 
179

 
577

 
440

 
728

 
1,924

Time-and-materials
157

 
8

 
174

 
38

 
1

 
378

Total revenue
1,825


1,440


1,138


1,098


2,034


7,535

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

13



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.
Revenue by customer was as follows:
Three Months Ended March 31, 2019
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
Department of Defense (DoD)
$
123

 
$
793

 
$
950

 
$
784

 
$
1,975

 
$
4,625

Non-DoD

 
3

 
1,166

 
135

 

 
1,304

Foreign Military Sales (FMS)
15

 
79

 
5

 
9

 
44

 
152

Total U.S. government
138


875


2,121


928


2,019


6,081

U.S. commercial
1,329

 
50

 
40

 
35

 
36

 
1,490

Non-U.S. government
59

 
701

 
8

 
166

 
2

 
936

Non-U.S. commercial
714

 
10

 

 
29

 
1

 
754

Total revenue
2,240


1,636


2,169


1,158


2,058


9,261

Three Months Ended April 1, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
41

 
$
607

 
$
433

 
$
742

 
$
1,950

 
$
3,773

Non-DoD

 
1

 
637

 
118

 

 
756

FMS
16

 
69

 
8

 
7

 
29

 
129

Total U.S. government
57


677


1,078


867


1,979


4,658

U.S. commercial
842

 
58

 
40

 
27

 
53

 
1,020

Non-U.S. government
10

 
697

 
20

 
172

 
2

 
901

Non-U.S. commercial
916

 
8

 

 
32

 

 
956

Total revenue
$
1,825

 
$
1,440

 
$
1,138

 
$
1,098

 
$
2,034

 
$
7,535

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

14



three-month period ended March 31, 2019, were not materially impacted by any other factors except for the delays in payment on an international wheeled armored vehicle contract in our Combat Systems segment as further discussed in Note G.
Revenue recognized for the three-month periods ended March 31, 2019, and April 1, 2018, that was included in the contract liability balance at the beginning of each year was $1.7 billion and $1.5 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.

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 2019 and 2018 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
March 31, 2019
 
April 1, 2018
Basic weighted average shares outstanding
287,917

 
296,399

Dilutive effect of stock options and restricted stock/RSUs*
2,974

 
4,705

Diluted weighted average shares outstanding
290,891

 
301,104

* 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 3,975 and 517 for the three-month periods ended March 31, 2019, and April 1, 2018, 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 March 31, 2019, or December 31, 2018.
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 March 31, 2019, and December 31, 2018, and the basis for determining their fair values:

15



 
Carrying
Value
 
Fair
Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial Assets (Liabilities)
March 31, 2019
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
6

 
$
6

 
$

 
$
6

 
$

        Available-for-sale debt securities
143

 
143

 

 
143

 

        Equity securities
50

 
50

 
50

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(61
)
 
(61
)
 

 
(61
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(13,646
)
 
(13,704
)
 

 
(13,704
)
 

 
December 31, 2018
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
29

 
$
29

 
$
23

 
$
6

 
$

        Available-for-sale debt securities
121

 
121

 

 
121

 

        Equity securities
52

 
52

 
52

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(69
)
 
(69
)
 

 
(69
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(12,518
)
 
(12,346
)
 

 
(12,346
)
 

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
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:
 
March 31, 2019
 
December 31, 2018
Deferred tax asset
$
39

 
$
38

Deferred tax liability
(544
)
 
(577
)
Net deferred tax liability
$
(505
)
 
$
(539
)
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

16



incurred in connection with income taxes as part of income tax expense. The total amount of these tax liabilities on March 31, 2019, 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 March 31, 2019, 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. Unbilled receivables consisted of the following:
 
March 31, 2019
 
December 31, 2018
Unbilled revenue
$
30,497

 
$
27,908

Advances and progress billings
(23,130
)
 
(21,332
)
Net unbilled receivables
$
7,367


$
6,576

The increase in net unbilled receivables during the three-month period ended March 31, 2019, was due primarily to an international wheeled armored vehicle contract in our Combat Systems segment. At March 31, 2019 the net unbilled receivable related to this contract was $2.2 billion. Our contract is with the Canadian government, who is selling the vehicles to an international customer. We have experienced delays in payment under the contract. We continue to meet our obligations under the contract and are entitled to payment for work performed. Therefore, we expect to collect the full amount currently outstanding.

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.

17



Inventories consisted of the following:
 
March 31, 2019
 
December 31, 2018
Work in process
$
4,510

 
$
4,357

Raw materials
1,535

 
1,504

Finished goods
45

 
33

Pre-owned aircraft
95

 
83

Total inventories
$
6,185

 
$
5,977

The increase in total inventories during the three-month period ended March 31, 2019, was due primarily to the ramp-up in production of the new G600 aircraft in our Aerospace segment, for which we are anticipating FAA type certification and entry into service in 2019.

I. DEBT
Debt consisted of the following:
 
 
March 31, 2019
 
December 31, 2018
Fixed-rate notes due:
Interest rate:
 
 
 
May 2020
2.875%
$
2,000

 
$
2,000

May 2021
3.000%
2,000

 
2,000

July 2021
3.875%
500

 
500

November 2022
2.250%
1,000

 
1,000

May 2023
3.375%
750

 
750

August 2023
1.875%
500

 
500

November 2024
2.375%
500

 
500

May 2025
3.500%
750

 
750

August 2026
2.125%
500

 
500

November 2027
2.625%
500

 
500

May 2028
3.750%
1,000

 
1,000

November 2042
3.600%
500

 
500

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

 
500

May 2021
3-month LIBOR + 0.38%
500

 
500

Commercial paper
2.516%
1,865

 
850

Other
Various
281

 
168

Total debt principal
 
13,646

 
12,518

Less unamortized debt issuance costs
    and discounts
 
98

 
101

Total debt
 
13,548

 
12,417

Less current portion
 
2,097

 
973

Long-term debt
 
$
11,451

 
$
11,444

Our fixed- and floating-rate notes are fully and unconditionally guaranteed by several of our 100%-owned subsidiaries. See Note Q for condensed consolidating financial statements. We have the option to

18



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.
On March 31, 2019, we had $1.9 billion of commercial paper outstanding with a dollar-weighted average interest rate of 2.516%. 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 2020, 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 March 31, 2019.

J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Salaries and wages
$
811

 
$
952

Retirement benefits
267

 
272

Operating lease liabilities
255

 

Workers’ compensation
248

 
244

Fair value of cash flow hedges
102

 
141

Other (a)
1,899

 
1,708

Total other current liabilities
$
3,582

 
$
3,317

 
 
 
 
Retirement benefits
$
4,334

 
$
4,422

Operating lease liabilities
1,129

 

Customer deposits on commercial contracts
678

 
726

Deferred income taxes
544

 
577

Other (b)
1,714

 
1,768

Total other liabilities
$
8,399

 
$
7,493

(a)Consists primarily of dividends payable, taxes payable, environmental remediation reserves, warranty reserves, deferred revenue and supplier contributions in the Aerospace segment, liabilities of discontinued operations, finance lease liabilities and insurance-related costs.
(b)Consists primarily of warranty reserves, workers’ compensation liabilities, finance lease 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 December 5, 2018, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the three-month period ended March 31, 2019, we repurchased 0.5 million of our outstanding shares for $86. On March 31, 2019, 7 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased 1.2 million shares for $257 in the three-month period ended April 1, 2018.

19



Dividends per Share. Our board of directors declared dividends of $1.02 and $0.93 per share for the three-month periods ended March 31, 2019 and April 1, 2018, respectively. We paid cash dividends of $268 and $250 for the three-month periods ended March 31, 2019, and April 1, 2018, respectively.
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, 2018
$
(71
)
$

$
102

$
(3,809
)
$
(3,778
)
Other comprehensive income, pretax
17


31

63

111

Provision for income tax, net
(2
)


(14
)
(16
)
Other comprehensive income, net of tax
15


31

49

95

March 31, 2019
$
(56
)
$

$
133

$
(3,760
)
$
(3,683
)
December 31, 2017
$
(94
)
$
19

$
402

$
(3,147
)
$
(2,820
)
Cumulative effect adjustments*
(4
)
(19
)

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

1

84

82

Provision for income tax, net
1



(16
)
(15
)
Other comprehensive income, net of tax
(2
)

1

68

67

April 1, 2018
$
(100
)
$

$
403

$
(3,694
)
$
(3,391
)
* Reflects the cumulative effect of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which we adopted on January 1, 2018.
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 $68 and $95 for the three-month periods ended March 31, 2019, and April 1, 2018, respectively. This was offset partially by pretax amortization of prior service credit of $5 and $12 for the three-month periods ended March 31, 2019, and April 1, 2018, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note O for additional details.


20



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- and floating-rate long-term debt obligations. We entered into derivative financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest risk. The interest rate risk associated with our financial instruments is not material.
Commodity Price Risk. We are subject to rising labor and commodity price risk, primarily on long-term, fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from these risks. Some of the protective terms included in our contracts are considered derivative financial instruments but are not accounted for separately, because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On March 31, 2019, we held $673 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 March 31, 2019, and December 31, 2018, these marketable securities totaled $199 and $202, 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 notional forward exchange and interest rate swap contracts outstanding of $4.6 billion and $5.8 billion on March 31, 2019, and December 31, 2018, respectively. These derivative financial instruments are cash flow hedges, and are reflected at fair value on the Consolidated Balance Sheet in other current assets and liabilities. 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 AOCL until the underlying transaction is reflected in earnings. Alternatively, gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in earnings. All gains and losses from derivative financial instruments recognized in the Consolidated Statement of Earnings are presented in the same line item as the underlying transaction, either operating costs and expenses or interest expense.
Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations for the three-month periods ended March 31, 2019, and April 1, 2018. Net gains and losses reclassified to earnings from AOCL related to qualified hedges also were not material to our results of operations for the three-month periods ended March 31, 2019, and

21



April 1, 2018, 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 March 31, 2019, or December 31, 2018.
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 AOCL.
We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations’ results into U.S. dollars. The impact of translating our non-U.S. operations’ revenue into U.S. dollars was not material to our results of operations for the three-month periods ended March 31, 2019, or April 1, 2018. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the three-month periods ended March 31, 2019, and April 1, 2018.

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-related matters. The nature of litigation is such that we cannot predict the outcome of these other matters. However, based on information currently available, we believe any potential liabilities in these other proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.
Environmental
We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a Potentially Responsible Party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.
As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liabilities. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.
Other
Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government audits and investigations will not have a material impact on our results of operations, financial condition or cash flows.

22



In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.
Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance carriers totaling approximately $1.3 billion on March 31, 2019. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance of our subsidiaries arising under certain contracts.
Aircraft Trade-ins. In connection with orders for new aircraft in contract backlog, our Aerospace segment has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are generally structured to establish the fair market value of the trade-in aircraft at a date generally 45 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Other trade-in commitments are structured to guarantee a pre-determined trade-in value. These commitments present more risk in the event of an adverse change in market conditions. In either case, any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction. As of March 31, 2019, the estimated change in fair market values from the date of the commitments was not material.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business-jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheet.
The changes in the carrying amount of warranty liabilities for the three-month periods ended March 31, 2019, and April 1, 2018, were as follows:
Three Months Ended
March 31, 2019
 
April 1, 2018
Beginning balance
$
480

 
$
467

Warranty expense
27

 
29

Payments
(24
)
 
(25
)
Adjustments
(1
)
 
(3
)
Ending balance
$
482

 
$
468



23



N. LEASES
We determine at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of our leases include options to extend the term of the lease for up to 30 years or to terminate the lease within 1 year. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments. As most of our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate on the commencement date to calculate the present value of future payments.
Our leases commonly include payments that are based on the Consumer Price Index (CPI) or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability. Other variable lease payments, such as usage-based amounts, are excluded from the ROU asset and lease liability, and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease, such as commissions.
In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.
Our leases are for office space, manufacturing facilities, and machinery and equipment. Real estate represents over 75% of our lease obligations.
The components of lease costs were as follows:
Three Months Ended
March 31, 2019
Finance lease cost

    Amortization of right-of-use assets
$
21

    Interest on lease liabilities
7

Operating lease cost
86

Short-term lease cost
13

Sublease income
(4
)
Total lease costs, net
$
123


24



Additional information related to leases was as follows:
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
88

Operating cash flows from finance leases
7

Financing cash flows from finance leases
16

Right-of-use assets obtained in exchange for lease liabilities
 
Operating leases
40

Finance leases
6

Weighted-average remaining lease term
 
Operating leases
11.0 years

Finance leases
5.6 years

Weighted-average discount rate
 
Operating leases
4
%
Finance leases
9
%
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on our Consolidated Balance Sheet on March 31, 2019:
Year Ended December 31
Operating Leases
 
Finance Leases
2019 (excluding the three months ended March 31, 2019)
$
233

 
$
67

2020
253

 
81

2021
208

 
74

2022
161

 
74

2023
122

 
29

Thereafter
722

 
66

Total future lease payments
1,699

 
391

Less imputed interest
315

 
81

Present value of future lease payments
1,384

 
310

Less current portion of lease liabilities
255

 
66

Long-term lease liabilities
$
1,129

 
$
244

ROU assets
$
1,315

 
$
357

Lease liabilities are included on our Consolidated Balance Sheet in current and noncurrent other liabilities, while ROU assets are included in noncurrent other assets.
As of March 31, 2019, we have additional future payments on leases that have not yet commenced of $218. These leases will commence between 2019 and 2020 and have lease terms of 1 to 20 years.

25



As we have not restated prior-year information for our adoption of ASC Topic 842, the following presents our future minimum lease payments for operating leases and capital leases under ASC Topic 840 on December 31, 2018:
Year Ended December 31
Operating Leases
Capital Leases
2019
$
297

$
92

2020
234

84

2021
196

78

2022
154

79

2023
110

30

Thereafter
698

70

Total future minimum lease payments
$
1,689

433

Less amount representing interest
*

95

Less amount representing executory costs
*

19

Present value of net minimum lease payments
*

319

Less current maturities of capital lease liabilities
*

64

Noncurrent capital lease liabilities
*

$
255

* Not applicable for operating leases.

O. RETIREMENT PLANS
We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits.
Net periodic defined-benefit pension and other post-retirement benefit cost (credit) for the three-month periods ended March 31, 2019, and April 1, 2018, consisted of the following:
 
Pension Benefits
Other Post-retirement Benefits
Three Months Ended
March 31, 2019
 
April 1, 2018
March 31, 2019
 
April 1, 2018
Service cost
$
28

 
$
46

$
2

 
$
3

Interest cost
150

 
114

9

 
8

Expected return on plan assets
(228
)
 
(179
)
(9
)
 
(9
)
Recognized net actuarial loss (gain)
70

 
96

(2
)
 
(1
)
Amortization of prior service credit
(4
)
 
(11
)
(1
)
 
(1
)
Net periodic benefit cost (credit)
$
16

 
$
66

$
(1
)
 
$

Beginning in 2019, we decreased the expected long-term rates of return on assets in our primary U.S. other post-retirement benefit plans by 100 basis points, following an assessment of the historical and expected long-term returns of our various asset classes.
Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense segments. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and other post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent we consider recovery of the cost to be probable based on our backlog and probable follow-on contracts,

26



we defer the excess in other contract costs in other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have similarly deferred recognition of these excess earnings on the Consolidated Balance Sheet.

P. SEGMENT INFORMATION
We have five operating segments, Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We organize our segments in accordance with the nature of products and services offered. We measure each segment’s profitability based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our segments.
Summary financial information for each of our segments follows:
 
Revenue
Operating Earnings
Three Months Ended
March 31, 2019
April 1, 2018
March 31, 2019
April 1, 2018
Aerospace
$
2,240

$
1,825

$
328

$
346

Combat Systems
1,636

1,440

206

224

Information Technology
2,169

1,138

156

101

Mission Systems
1,158

1,098

148

146

Marine Systems
2,058

2,034

180

184

Corporate


(4
)
7

Total
$
9,261

$
7,535

$
1,014

$
1,008

Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) in other income (expense) in the Consolidated Statement of Earnings. As described in Note O, in our defense segments, pension and other post-retirement benefit costs are recoverable contract costs. Therefore, the non-service cost components are included in the operating results of these segments, but an offset is reported in Corporate.

Q. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed- and floating-rate notes described in Note I are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of our 100%-owned subsidiaries (the guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the guarantors on a combined basis (each guarantor together with its majority-owned subsidiaries) and all other subsidiaries on a combined basis.


27



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED)

Three Months Ended March 31, 2019
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue
$

$
6,945

$
2,316

$

$
9,261

Cost of sales
18

(5,726
)
(1,925
)

(7,633
)
G&A
(22
)
(419
)
(173
)

(614
)
Operating earnings
(4
)
800

218


1,014

Interest, net
(107
)

(10
)

(117
)
Other, net
(8
)
4

22


18

Earnings before income tax
(119
)
804

230


915

Provision for income tax, net
31

(155
)
(46
)

(170
)
Equity in net earnings of subsidiaries
833



(833
)

Net earnings
$
745

$
649

$
184

$
(833
)
$
745

Comprehensive income
$
840

$
652

$
237

$
(889
)
$
840

Three Months Ended April 1, 2018
 
 
 
 

Revenue
$

$
6,484

$
1,051

$

$
7,535

Cost of sales
19

(5,202
)
(807
)

(5,990
)
G&A
(13
)
(436
)
(88
)

(537
)
Operating earnings
6

846

156


1,008

Interest, net
(26
)

(1
)

(27
)
Other, net
(24
)
1

2


(21
)
Earnings before income tax
(44
)
847

157


960

Provision for income tax, net
42

(165
)
(38
)

(161
)
Equity in net earnings of subsidiaries
801



(801
)

Net earnings
$
799

$
682

$
119

$
(801
)
$
799

Comprehensive income
$
866

$
685

$
137

$
(822
)
$
866



28



CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

March 31, 2019
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
329

$

$
344

$

$
673

Accounts receivable

1,253

2,465


3,718

Unbilled receivables

2,985

4,382


7,367

Inventories

6,067

118


6,185

Other current assets
(43
)
445

522


924

Total current assets
286

10,750

7,831


18,867

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment (PP&E)
288

7,263

1,594


9,145

Accumulated depreciation of PP&E
(85
)
(4,138
)
(868
)

(5,091
)
Intangible assets, net

241

2,277


2,518

Goodwill

8,036

11,632


19,668

Other assets
207

1,052

1,100


2,359

Net investment in subsidiaries
27,050



(27,050
)

Total noncurrent assets
27,460

12,454

15,735

(27,050
)
28,599

Total assets
$
27,746

$
23,204

$
23,566

$
(27,050
)
$
47,466

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
1,863

$

$
234

$

$
2,097

Customer advances and deposits

4,245

2,450


6,695

Other current liabilities
691

4,000

1,899


6,590

Total current liabilities
2,554

8,245

4,583


15,382

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
11,405

39

7


11,451

Other liabilities
1,553

4,656

2,190


8,399

Total noncurrent liabilities
12,958

4,695

2,197


19,850

Total shareholders’ equity
12,234

10,264

16,786

(27,050
)
12,234

Total liabilities and shareholders’ equity
$
27,746

$
23,204

$
23,566

$
(27,050
)
$
47,466



29



CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2018
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
460

$

$
503

$

$
963

Accounts receivable

1,171

2,588


3,759

Unbilled receivables

2,758

3,818


6,576

Inventories

5,855

122


5,977

Other current assets
(45
)
441

518


914

Total current assets
415

10,225

7,549


18,189

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

273

7,177

1,522


8,972

Accumulated depreciation of PP&E
(83
)
(4,071
)
(840
)

(4,994
)
Intangible assets, net

251

2,334