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gdlogo-20200329a03.gif
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended March 29, 2020
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.
 
 
 
 
 
 
 
 
 
 
11011 Sunset Hills Road
Reston,
Virginia
 
20190
Address of principal executive offices
 
Zip code
(703) 876-3000
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
GD
New York Stock Exchange

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
286,864,540 shares of the registrant’s common stock, $1 par value per share, were outstanding on March 29, 2020.





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)
March 29, 2020
 
March 31, 2019
Revenue:
 
 
 
Products
$
4,890

 
$
5,251

Services
3,859

 
4,010

 
8,749


9,261

Operating costs and expenses:
 
 
 
Products
(3,983
)
 
(4,235
)
Services
(3,278
)
 
(3,398
)
General and administrative (G&A)
(547
)
 
(614
)
 
(7,808
)
 
(8,247
)
Operating earnings
941

 
1,014

Interest, net
(107
)
 
(117
)
Other, net
14

 
18

Earnings before income tax
848


915

Provision for income tax, net
(142
)
 
(170
)
Net earnings
$
706


$
745

 
 
 
 
Earnings per share
 
 
 
Basic
$
2.45

 
$
2.59

Diluted
$
2.43

 
$
2.56

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 29, 2020
 
March 31, 2019
Net earnings
$
706

 
$
745

(Losses) gains on cash flow hedges
(99
)
 
17

Unrealized gains on marketable securities
1

 

Foreign currency translation adjustments
(239
)
 
31

Change in retirement plans’ funded status
77

 
63

Other comprehensive (loss) income, pretax
(260
)
 
111

Benefit (provision) for income tax, net
8

 
(16
)
Other comprehensive (loss) income, net of tax
(252
)
 
95

Comprehensive income
$
454


$
840

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 29, 2020
 
December 31, 2019
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
5,330

 
$
902

Accounts receivable
3,547

 
3,544

Unbilled receivables
7,938

 
7,857

Inventories
6,852

 
6,306

Other current assets
1,074

 
1,171

Total current assets
24,741


19,780

Noncurrent assets:
 
 
 
Property, plant and equipment, net
4,537

 
4,475

Intangible assets, net
2,259

 
2,315

Goodwill
19,653

 
19,677

Other assets
2,520

 
2,594

Total noncurrent assets
28,969


29,061

Total assets
$
53,710


$
48,841

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
5,047

 
$
2,920

Accounts payable
2,788

 
3,162

Customer advances and deposits
6,825

 
7,148

Other current liabilities
3,780

 
3,571

Total current liabilities
18,440


16,801

Noncurrent liabilities:
 
 
 
Long-term debt
12,951

 
9,010

Other liabilities
9,119

 
9,453

Commitments and contingencies (see Note M)


 


Total noncurrent liabilities
22,070


18,463

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
3,015

 
3,039

Retained earnings
31,983

 
31,633

Treasury stock
(17,809
)
 
(17,358
)
Accumulated other comprehensive loss
(4,471
)
 
(4,219
)
Total shareholders’ equity
13,200


13,577

Total liabilities and shareholders equity
$
53,710


$
48,841

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 29, 2020
 
March 31, 2019
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
706

 
$
745

Adjustments to reconcile net earnings to net cash from operating activities:
 
 

Depreciation of property, plant and equipment
122

 
114

Amortization of intangible and finance lease right-of-use assets
90

 
91

Equity-based compensation expense
30

 
40

Deferred income tax benefit
(28
)
 
(10
)
(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
(33
)
 
49

Unbilled receivables
(78
)
 
(873
)
Inventories
(546
)
 
(210
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(375
)
 
(167
)
Customer advances and deposits
(373
)
 
(623
)
Other, net
(181
)
 
49

Net cash used by operating activities
(666
)
 
(795
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(185
)
 
(181
)
Other, net
8

 
(6
)
Net cash used by investing activities
(177
)
 
(187
)
Cash flows from financing activities:
 
 
 
Proceeds from fixed-rate notes
3,960

 

Proceeds from commercial paper, net
2,271

 
1,010

Purchases of common stock
(449
)
 
(133
)
Dividends paid
(295
)
 
(268
)
Other, net
(202
)
 
88

Net cash provided by financing activities
5,285

 
697

Net cash used by discontinued operations
(14
)
 
(5
)
Net increase (decrease) in cash and equivalents
4,428

 
(290
)
Cash and equivalents at beginning of period
902

 
963

Cash and equivalents at end of period
$
5,330

 
$
673

Supplemental cash flow information:
 
 
 
Income tax payments, net
$
(43
)
 
$
(37
)
Interest payments
$
(66
)
 
$
(48
)
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.


6



CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 
Three Months Ended
 
Common Stock
 
Retained
 
Treasury
 
Accumulated
Other 
Comprehensive
 
Total
Shareholders’    
(Dollars in millions)
Par
 
Surplus
 
Earnings
 
Stock
 
Loss
 
Equity
December 31, 2019
$
482

 
$
3,039

 
$
31,633

 
$
(17,358
)
 
$
(4,219
)
 
$
13,577

Cumulative-effect adjustment*

 

 
(37
)
 

 

 
(37
)
Net earnings

 

 
706

 

 

 
706

Cash dividends declared

 

 
(319
)
 

 

 
(319
)
Equity-based awards

 
(24
)
 

 
50

 

 
26

Shares purchased

 

 

 
(501
)
 

 
(501
)
Other comprehensive loss

 

 

 

 
(252
)
 
(252
)
March 29, 2020
$
482

 
$
3,015

 
$
31,983

 
$
(17,809
)
 
$
(4,471
)
 
$
13,200

 
 
 
 
 
 
 
 
 
 
 
 
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

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) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020. See Note A for additional details.



7



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; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) solutions; and shipbuilding and ship repair.
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 typically 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 29, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
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 29, 2020, and March 31, 2019.
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, 2019.
Use of Estimates and Other Uncertainties. The Coronavirus (COVID-19) outbreak has caused significant disruptions to national and global economies. Our U.S.-based businesses are designated as national critical infrastructure companies by the U.S. Department of Homeland Security and, as such, have been required to stay open. Within our Aerospace segment, quarantine and travel restrictions in connection with the outbreak have delayed aircraft deliveries and impacted some supply chain providers. Our defense business has experienced minimal disruptions to date. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak’s duration and its broader impact.

8



The nature of our business requires that we make estimates and assumptions in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The COVID-19 outbreak has impacted these estimates and assumptions and will continue to do so. The accounting for long-term contracts requires the use of estimates (see Note C). Our estimates at the end of the first quarter assumed no material impact from the disruptions caused by COVID-19. This assumption was based in part on the expectation that COVID-related costs will be reimbursed by our customers. The United States and other governments have taken steps, such as the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and U.S. Department of Defense (DoD) guidance, to provide relief. Through these government actions and our contract provisions, we will seek reimbursement of these costs. As the process for reimbursement has not been finalized, it is possible that our actual reimbursement could be less than 100% of our costs, resulting in a potentially unfavorable impact on the profitability of our contracts. Given the uncertainties, we are unable to estimate an amount or range, if any, of reasonably possible loss for costs that may not be reimbursed.
The company is also monitoring for other long-term impacts of the pandemic, such as the impairment of goodwill, intangibles or other long-lived assets. As of the end of the quarter, we have not identified a triggering event requiring an impairment test.
Property, Plant and Equipment, Net. Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. Net PP&E consisted of the following:
 
March 29, 2020
 
December 31, 2019
PP&E
$
9,932

 
$
9,761

Accumulated depreciation
(5,395
)
 
(5,286
)
PP&E, net
$
4,537

 
$
4,475


Accounting Standards Updates. Effective January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes how entities account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. The ASU requires a number of changes to the assessment of credit losses, including the utilization of an expected credit loss model, which requires consideration of a broader range of information to estimate expected credit losses over the entire lifetime of the asset, including losses where probability is considered remote. Additionally, the standard requires the estimation of lifetime expected losses for trade receivables and contract assets that are classified as current. We adopted the standard on a modified retrospective basis and recognized the cumulative effect as a $37 decrease to retained earnings on the date of adoption.
There are other accounting standards that have been issued by the Financial Accounting Standards Board but are not yet effective. These standards are not expected to have a material impact on our results of operations, financial condition or cash flows.


9



B. GOODWILL AND INTANGIBLE ASSETS
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, 2019 (a)
$
2,831

 
$
2,681

 
$
9,700

 
$
4,168

 
$
297

 
$
19,677

Acquisitions (b)
20

 

 

 

 

 
20

Other (c)
20

 
(58
)
 

 
(6
)
 

 
(44
)
March 29, 2020 (a)
$
2,871

 
$
2,623

 
$
9,700

 
$
4,162

 
$
297


$
19,653


(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 a business acquired in our Aerospace segment and adjustments during the purchase price allocation period.
(c)Consists primarily of adjustments for foreign currency translation.
Intangible Assets. Intangible assets consisted of the following:
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
March 29, 2020
 
December 31, 2019
Contract and program
    intangible assets (b)
$
3,784

$
(1,839
)
$
1,945

 
$
3,776

$
(1,779
)
$
1,997

Trade names and trademarks
478

(201
)
277

 
474

(195
)
279

Technology and software
164

(128
)
36

 
164

(126
)
38

Other intangible assets
158

(157
)
1

 
159

(158
)
1

Total intangible assets
$
4,584

$
(2,325
)
$
2,259

 
$
4,573

$
(2,258
)
$
2,315

(a)
Changes in gross carrying amounts consist 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 is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $66 and $70 for the three-month periods ended March 29, 2020, and March 31, 2019, respectively.

C. REVENUE
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 for revenue. 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 81% and 75% of our revenue for the three-month periods ended March 29, 2020, and March 31, 2019, 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 19% and 25% of our revenue for the three-month periods ended March 29, 2020, and March 31, 2019, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in

10



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 29, 2020, we had $85.7 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 55% of our remaining performance obligations as revenue by year-end 2021, an additional 30% by year-end 2023 and the balance thereafter.
Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. 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 29, 2020
 
March 31, 2019
Revenue
$
90

 
$
96

Operating earnings
90

 
68

Diluted earnings per share
$
0.25

 
$
0.18


No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended March 29, 2020, or March 31, 2019.

11



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 29, 2020
 
March 31, 2019
Aircraft manufacturing and completions
$
1,194

 
$
1,733

Aircraft services
497

 
507

Total Aerospace
1,691


2,240

Military vehicles
1,146

 
1,134

Weapons systems, armament and munitions
433

 
401

Engineering and other services
129

 
101

Total Combat Systems
1,708


1,636

IT services
1,988

 
2,169

Total Information Technology
1,988


2,169

C4ISR solutions
1,116

 
1,158

Total Mission Systems
1,116


1,158

Nuclear-powered submarines
1,560

 
1,377

Surface ships
462

 
446

Repair and other services
224

 
235

Total Marine Systems
2,246


2,058

Total revenue
$
8,749


$
9,261



Revenue by contract type was as follows:
Three Months Ended March 29, 2020
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
1,478

 
$
1,465

 
$
769

 
$
620

 
$
1,569

 
$
5,901

Cost-reimbursement

 
229

 
893

 
454

 
675

 
2,251

Time-and-materials
213

 
14

 
326

 
42

 
2

 
597

Total revenue
$
1,691


$
1,708


$
1,988


$
1,116


$
2,246


$
8,749

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
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

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.

12



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 29, 2020
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
161

 
$
888

 
$
849

 
$
788

 
$
2,159

 
$
4,845

Non-DoD

 
3

 
1,078

 
106

 
1

 
1,188

Foreign Military Sales (FMS)
18

 
89

 
4

 
9

 
49

 
169

Total U.S. government
179


980


1,931


903


2,209


6,202

U.S. commercial
845

 
55

 
48

 
33

 
33

 
1,014

Non-U.S. government
16

 
663

 
9

 
143

 
3

 
834

Non-U.S. commercial
651

 
10

 

 
37

 
1

 
699

Total revenue
$
1,691


$
1,708


$
1,988


$
1,116


$
2,246


$
8,749

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
123

 
$
793

 
$
950

 
$
784

 
$
1,975

 
$
4,625

Non-DoD

 
3

 
1,166

 
135

 

 
1,304

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

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 three-month period ended March 29, 2020, were not materially impacted by any other factors.

13



Revenue recognized for the three-month periods ended March 29, 2020, and March 31, 2019, that was included in the contract liability balance at the beginning of each year was $1.2 billion and $1.7 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. 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 29, 2020
 
March 31, 2019
Basic weighted average shares outstanding
288,569

 
287,917

Dilutive effect of stock options and restricted stock/RSUs*
1,374

 
2,974

Diluted weighted average shares outstanding
289,943

 
290,891


* 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 5,908 and 3,975 for the three-month periods ended March 29, 2020, and March 31, 2019, 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 29, 2020, or December 31, 2019.
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 29, 2020, and December 31, 2019, and the basis for determining their fair values:

14



 
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 29, 2020
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
3

 
$
3

 
$

 
$
3

 
$

        Available-for-sale debt securities
148

 
148

 

 
148

 

        Equity securities
50

 
50

 
50

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(53
)
 
(53
)
 

 
(53
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(18,132
)
 
(18,720
)
 

 
(18,720
)
 


 
December 31, 2019
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
24

 
$
24

 
$
11

 
$
13

 
$

        Available-for-sale debt securities
129

 
129

 

 
129

 

        Equity securities
54

 
54

 
54

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
26

 
26

 

 
26

 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(12,005
)
 
(12,339
)
 

 
(12,339
)
 


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 29, 2020
 
December 31, 2019
Deferred tax asset
$
35

 
$
33

Deferred tax liability
(435
)
 
(481
)
Net deferred tax liability
$
(400
)
 
$
(448
)

Tax Uncertainties. 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 and is completing its review of our 2018 tax year.
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

15



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.
Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on March 29, 2020, was not material to our results of operations, financial condition or cash flows. 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 29, 2020
 
December 31, 2019
Unbilled revenue
$
33,385

 
$
33,481

Advances and progress billings
(25,447
)
 
(25,624
)
Net unbilled receivables
$
7,938


$
7,857


On March 29, 2020, and December 31, 2019, net unbilled receivables included $2.4 billion and $2.9 billion, respectively, associated with a large international wheeled armored vehicle contract in our Combat Systems segment. We had experienced delays in payment under the contract in 2018 and 2019, which resulted in the large unbilled receivables balance. In March 2020, we finalized a new agreement with the customer that included a revised payment schedule. Under the new agreement, we received two $500 progress payments, one in each of the first and second quarters of 2020. Further progress payments will be due annually that will liquidate the net unbilled receivables balance over the next few years.

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.

16



Inventories consisted of the following:
 
March 29, 2020
 
December 31, 2019
Work in process
$
4,602

 
$
4,419

Raw materials
1,684

 
1,733

Finished goods
475

 
30

Pre-owned aircraft
91

 
124

Total inventories
$
6,852

 
$
6,306


The increase in total inventories was due primarily to delays in Gulfstream aircraft deliveries in our Aerospace segment caused by quarantine and travel restrictions resulting from the COVID-19 outbreak.


17



I. DEBT
Debt consisted of the following:
 
 
March 29, 2020
 
December 31, 2019
Fixed-rate notes due:
Interest rate:
 
 
 
May 2020
2.875%
$
2,000

 
$