Quarterly Report (10-q)

Date : 10/23/2019 @ 3:23PM
Source : Edgar (US Regulatory)
Stock : General Dynamics Corporation (GD)
Quote : 188.14  0.08 (0.04%) @ 9:02PM
After Hours
Last Trade
Last $ 188.14 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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GDLOGO-20190929A02.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 September 29, 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.
 
 
 
 
 
 
 
 
 
 
11011 Sunset Hills Road
Reston,
Virginia
 
20190
Address of principal executive offices
 
Zip code
(703) 876-3000
Registrant’s telephone number, including area code

2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042-4513
(Former name or former address, if changed since last report.)

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
289,306,108 shares of the registrant’s common stock, $1 par value per share, were outstanding on September 29, 2019.





INDEX

 
 
 
PART I -
PAGE
Item 1 -
 
 
 
 
 
 
 
 

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

2



PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
September 29, 2019
 
September 30, 2018
Revenue:
 
 
 
Products
$
5,789

 
$
4,842

Services
3,972

 
4,252

 
9,761


9,094

Operating costs and expenses:
 
 
 
Products
(4,640
)
 
(3,797
)
Services
(3,333
)
 
(3,610
)
General and administrative (G&A)
(572
)
 
(552
)
 
(8,545
)
 
(7,959
)
Operating earnings
1,216

 
1,135

Interest, net
(114
)
 
(114
)
Other, net
(12
)
 
2

Earnings from continuing operations before income tax
1,090


1,023

Provision for income tax, net
(177
)
 
(159
)
Earnings from continuing operations
913

 
864

Discontinued operations, net of tax

 
(13
)
Net earnings
$
913


$
851

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
3.17

 
$
2.92

Discontinued operations

 
(0.04
)
Net earnings
$
3.17

 
$
2.88

Diluted:
 
 
 
Continuing operations
$
3.14

 
$
2.89

Discontinued operations

 
(0.04
)
Net earnings
$
3.14

 
$
2.85

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


3



CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

 
Nine Months Ended
(Dollars in millions, except per-share amounts)
September 29, 2019
 
September 30, 2018
Revenue:
 
 
 
Products
$
16,441

 
$
14,172

Services
12,136

 
11,643

 
28,577


25,815

Operating costs and expenses:
 
 
 
Products
(13,217
)
 
(11,045
)
Services
(10,258
)
 
(9,838
)
G&A
(1,782
)
 
(1,701
)
 
(25,257
)
 
(22,584
)
Operating earnings
3,320


3,231

Interest, net
(350
)
 
(244
)
Other, net
18

 
(34
)
Earnings from continuing operations before income tax
2,988


2,953

Provision for income tax, net
(524
)
 
(504
)
Earnings from continuing operations
2,464

 
2,449

Discontinued operations, net of tax

 
(13
)
Net earnings
$
2,464


$
2,436

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
8.55

 
$
8.27

Discontinued operations

 
(0.04
)
Net earnings
$
8.55

 
$
8.23

Diluted:
 
 
 
Continuing operations
$
8.47

 
$
8.16

Discontinued operations

 
(0.04
)
Net earnings
$
8.47

 
$
8.12

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


4



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
Nine Months Ended
(Dollars in millions)
September 29, 2019
 
September 30, 2018
September 29, 2019
 
September 30, 2018
Net earnings
$
913

 
$
851

$
2,464

 
$
2,436

Gains on cash flow hedges
2

 
61

70

 
40

Unrealized gains on marketable securities
1

 

1

 

Foreign currency translation adjustments
(109
)
 
85

47

 
(130
)
Change in retirement plans’ funded status
66

 
84

188

 
247

Other comprehensive (loss) income, pretax
(40
)
 
230

306

 
157

Provision for income tax, net
(15
)
 
(33
)
(59
)
 
(60
)
Other comprehensive (loss) income, net of tax
(55
)
 
197

247

 
97

Comprehensive income
$
858


$
1,048

$
2,711

 
$
2,533

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


5



CONSOLIDATED BALANCE SHEET

 
(Unaudited)
 
 
(Dollars in millions)
September 29, 2019
 
December 31, 2018
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
974

 
$
963

Accounts receivable
3,489

 
3,759

Unbilled receivables
8,077

 
6,576

Inventories
6,573

 
5,977

Other current assets
1,038

 
914

Total current assets
20,151


18,189

Noncurrent assets:
 
 
 
Property, plant and equipment, net
4,217

 
3,978

Intangible assets, net
2,376

 
2,585

Goodwill
19,617

 
19,594

Other assets
2,427

 
1,062

Total noncurrent assets
28,637


27,219

Total assets
$
48,788


$
45,408

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
4,661

 
$
973

Accounts payable
2,999

 
3,179

Customer advances and deposits
6,854

 
7,270

Other current liabilities
3,713

 
3,317

Total current liabilities
18,227


14,739

Noncurrent liabilities:
 
 
 
Long-term debt
8,989

 
11,444

Other liabilities
8,059

 
7,493

Commitments and contingencies (see Note M)


 


Total noncurrent liabilities
17,048


18,937

Shareholders’ equity:
 
 
 
Common stock
482

 
482

Surplus
2,999

 
2,946

Retained earnings
30,909

 
29,326

Treasury stock
(17,346
)
 
(17,244
)
Accumulated other comprehensive loss
(3,531
)
 
(3,778
)
Total shareholders’ equity
13,513


11,732

Total liabilities and shareholders equity
$
48,788


$
45,408

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

6



CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 
Nine Months Ended
(Dollars in millions)
September 29, 2019
 
September 30, 2018
Cash flows from operating activities - continuing operations:
 
 
 
Net earnings
$
2,464

 
$
2,436

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

Depreciation of property, plant and equipment
352

 
315

Amortization of intangible and finance lease right-of-use assets
273

 
227

Equity-based compensation expense
103

 
110

Deferred income tax benefit
(72
)
 
(66
)
Discontinued operations, net of tax

 
13

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
253

 
472

Unbilled receivables
(1,603
)
 
(1,625
)
Inventories
(646
)
 
(854
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
(164
)
 
(324
)
Customer advances and deposits
(565
)
 
112

Other, net
192

 
265

Net cash provided by operating activities
587

 
1,081

Cash flows from investing activities:
 
 
 
Capital expenditures
(606
)
 
(447
)
Business acquisitions, net of cash acquired
(19
)
 
(10,039
)
Other, net
21

 
169

Net cash used by investing activities
(604
)
 
(10,317
)
Cash flows from financing activities:
 
 
 
Proceeds from commercial paper, net
947

 
1,668

Dividends paid
(858
)
 
(801
)
Purchases of common stock
(231
)
 
(533
)
Proceeds from fixed-rate notes

 
6,461

Proceeds from floating-rate notes

 
1,000

Repayment of CSRA accounts receivable purchase agreement

 
(450
)
Other, net
207

 
(68
)
Net cash provided by financing activities
65

 
7,277

Net cash used by discontinued operations
(37
)
 
(14
)
Net increase (decrease) in cash and equivalents
11

 
(1,973
)
Cash and equivalents at beginning of period
963

 
2,983

Cash and equivalents at end of period
$
974

 
$
1,010

Supplemental cash flow information:
 
 
 
Income tax payments, net
$
487

 
$
305

Interest payments
$
271

 
$
144

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


7



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
June 30, 2019
$
482

 
$
2,959

 
$
30,291

 
$
(17,379
)
 
$
(3,476
)
 
$
12,877

Net earnings

 

 
913

 

 

 
913

Cash dividends declared

 

 
(295
)
 

 

 
(295
)
Equity-based awards

 
40

 

 
33

 

 
73

Shares purchased

 

 

 

 

 

Other comprehensive loss

 

 

 

 
(55
)
 
(55
)
September 29, 2019
$
482

 
$
2,999

 
$
30,909

 
$
(17,346
)
 
$
(3,531
)
 
$
13,513

 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2018
$
482

 
$
2,865

 
$
28,115

 
$
(15,910
)
 
$
(3,558
)
 
$
11,994

Net earnings

 

 
851

 

 

 
851

Cash dividends declared

 

 
(275
)
 

 

 
(275
)
Equity-based awards

 
49

 

 
26

 

 
75

Shares purchased

 

 

 
(87
)
 

 
(87
)
Other comprehensive income

 

 

 

 
197

 
197

September 30, 2018
$
482

 
$
2,914

 
$
28,691

 
$
(15,971
)
 
$
(3,361
)
 
$
12,755

 
Nine Months Ended
 
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

 

 
2,464

 

 

 
2,464

Cash dividends declared

 

 
(881
)
 

 

 
(881
)
Equity-based awards

 
53

 

 
82

 

 
135

Shares purchased

 

 

 
(184
)
 

 
(184
)
Other comprehensive income

 

 

 

 
247

 
247

September 29, 2019
$
482

 
$
2,999

 
$
30,909

 
$
(17,346
)
 
$
(3,531
)
 
$
13,513

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
482

 
$
2,872

 
$
26,444

 
$
(15,543
)
 
$
(2,820
)
 
$
11,435

Cumulative-effect adjustments*

 

 
638

 

 
(638
)
 

Net earnings

 

 
2,436

 

 

 
2,436

Cash dividends declared

 

 
(827
)
 

 

 
(827
)
Equity-based awards

 
42

 

 
95

 

 
137

Shares purchased

 

 

 
(523
)
 

 
(523
)
Other comprehensive income

 

 

 

 
97

 
97

September 30, 2018
$
482

 
$
2,914

 
$
28,691

 
$
(15,971
)
 
$
(3,361
)
 
$
12,755

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

* Reflects the cumulative effects 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.


8



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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; information technology (IT) services; 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- and nine-month periods ended September 29, 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- and nine-month periods ended September 29, 2019, and September 30, 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.
Discontinued Operations, Net of Tax. In the third quarter of 2018, we disposed of certain CSRA operations to address an organizational conflict of interest with respect to services provided to a government customer. In accordance with GAAP, the sale did not result in a gain for financial reporting purposes. However, the sale generated a taxable gain, resulting in tax expense of $13.
Accounting Standards Updates. 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.

9



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 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, financial condition or cash flows.
There are several other accounting standards that have been issued by the FASB but are not yet effective, including Accounting Standards Update (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 intend to adopt the standard on the effective date of January 1, 2020. We have not yet determined the effect of the ASU on our results of operations, financial condition or cash flows.

B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS
CSRA Acquisition
On April 3, 2018, we acquired 100% of the outstanding shares of CSRA Inc. (CSRA) for $41.25 per share in cash 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.

10



Fair Value of Net Assets Acquired. The following table summarizes the allocation of the $9.7 billion cash 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
415

Other current assets
303

Property, plant and equipment, net
326

Intangible assets, net
2,066

Goodwill
7,935

Other noncurrent assets
369

Total assets
$
11,614

Accounts payable
$
(135
)
Customer advances and deposits
(151
)
Current lease obligation
(51
)
Other current liabilities
(434
)
Noncurrent lease obligation
(207
)
Noncurrent deferred tax liability
(355
)
Other noncurrent liabilities
(532
)
Total liabilities
$
(1,865
)
Net assets acquired
$
9,749


Pro Forma Information. The following pro forma information presents our consolidated revenue and earnings from continuing operations as if the acquisition of CSRA and the related financing transactions had occurred on January 1, 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2018
Revenue
$
9,094

 
$
27,156

Earnings from continuing operations
872

 
2,470

Diluted earnings per share from continuing operations
$
2.92

 
$
8.23


The pro forma information was prepared by combining our reported historical results with the historical results of CSRA for the pre-acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:
The impact of acquisition financing.
The removal of certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. We completed the sale of these operations in the third quarter of 2018.
The removal of CSRA’s historical pre-acquisition intangible asset amortization expense and debt-related interest expense.
The impact of intangible asset amortization expense assuming our estimate of fair value was applied on January 1, 2017.
The payment of acquisition-related costs assuming they were incurred on January 1, 2017.

11



The pro forma information does not reflect the realization of expected cost savings or synergies from the acquisition, and does not reflect what our combined results of operations would have been had the acquisition occurred on January 1, 2017.
Other Acquisitions and Divestitures
In the first nine months of 2019, we acquired two businesses in our Aerospace segment and a business in our Missions Systems segment for a total of $19. 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.
The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.
In the first nine months of 2019, we completed the sale of a business in our Information Technology segment that was classified as held for sale on the Consolidated Balance Sheet on December 31, 2018. 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. For the nine-month periods ended September 29, 2019, and September 30, 2018, the proceeds from the sale of businesses were not material and 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/divestitures (b)
2

 
15

 
77

 
6

 

 
100

Other (c)
(16
)
 
14

 

 
(75
)
 

 
(77
)
September 29, 2019 (a)
$
2,799

 
$
2,662

 
$
9,699

 
$
4,160

 
$
297


$
19,617


(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. Also includes an estimated allocation of goodwill in our Mission Systems reporting unit associated with a non-core operation classified as held for sale on the unaudited Consolidated Balance Sheet on September 29, 2019. As we expect this operation to be divested within the next 12 months, the assets and liabilities held for sale are included in other current assets and liabilities on the unaudited Consolidated Balance Sheet.


12



Intangible Assets
Intangible assets consisted of the following:
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount (a)
Accumulated Amortization
Net Carrying Amount
 
September 29, 2019
 
December 31, 2018
Contract and program
    intangible assets (b)
$
3,775

$
(1,717
)
$
2,058

 
$
3,771

$
(1,531
)
$
2,240

Trade names and trademarks
465

(188
)
277

 
469

(177
)
292

Technology and software
165

(126
)
39

 
165

(116
)
49

Other intangible assets
159

(157
)
2

 
159

(155
)
4

Total intangible assets
$
4,564

$
(2,188
)
$
2,376

 
$
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 $69 and $209 for the three- and nine-month periods ended September 29, 2019, and $86 and $190 for the three- and nine-month periods ended September 30, 2018, 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 72% and 74% of our revenue for the three- and nine-month periods ended September 29, 2019, and 75% and 76% of our revenue for the three- and nine-month periods ended September 30, 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.
Revenue from goods and services transferred to customers at a point in time accounted for 28% and 26% of our revenue for the three- and nine-month periods ended September 29, 2019, and 25% and 24%

13



of our revenue for the three- and nine-month periods ended September 30, 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 September 29, 2019, we had $67.4 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 2020, an additional 30% 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. 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.

14



The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:
 
Three Months Ended
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
September 29, 2019
 
September 30, 2018
Revenue
$
95

 
$
96

$
263

 
$
302

Operating earnings
81

 
103

220

 
283

Diluted earnings per share
$
0.22

 
$
0.27

$
0.60

 
$
0.75


No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and nine-month periods ended September 29, 2019, or September 30, 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
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
September 29, 2019
 
September 30, 2018
Aircraft manufacturing and
    completions
$
1,881

 
$
1,437

$
5,169

 
$
4,165

Aircraft services
523

 
525

1,567

 
1,507

Pre-owned aircraft
91

 
69

135

 
79

Total Aerospace
2,495


2,031

6,871

 
5,751

Military vehicles
1,137

 
991

3,361

 
2,937

Weapons systems, armament and
    munitions
474

 
425

1,336

 
1,251

Engineering and other services
129

 
107

338

 
309

Total Combat Systems
1,740


1,523

5,035

 
4,497

IT services
2,071

 
2,307

6,398

 
5,887

Total Information Technology
2,071


2,307

6,398

 
5,887

C4ISR solutions
1,220

 
1,230

3,655

 
3,475

Total Mission Systems
1,220


1,230

3,655

 
3,475

Nuclear-powered submarines
1,567

 
1,369

4,482

 
4,103

Surface ships
402

 
445

1,376

 
1,401

Repair and other services
266

 
189

760

 
701

Total Marine Systems
2,235


2,003

6,618

 
6,205

Total revenue
$
9,761


$
9,094

$
28,577

 
$
25,815




15



Revenue by contract type was as follows:
Three Months Ended September 29, 2019
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
2,306

 
$
1,501

 
$
824

 
$
719

 
$
1,517

 
$
6,867

Cost-reimbursement

 
230

 
838

 
458

 
716

 
2,242

Time-and-materials
189

 
9

 
409

 
43

 
2

 
652

Total revenue
$
2,495


$
1,740


$
2,071


$
1,220


$
2,235


$
9,761

Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
1,807

 
$
1,309

 
$
941

 
$
695

 
$
1,284

 
$
6,036

Cost-reimbursement

 
204

 
955

 
499

 
718

 
2,376

Time-and-materials
224

 
10

 
411

 
36

 
1

 
682

Total revenue
$
2,031


$
1,523


$
2,307


$
1,230


$
2,003


$
9,094

Nine Months Ended September 29, 2019
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
Fixed-price
$
6,271

 
$
4,344

 
$
2,620

 
$
2,122

 
$
4,508

 
$
19,865

Cost-reimbursement

 
662

 
2,537

 
1,405

 
2,101

 
6,705

Time-and-materials
600

 
29

 
1,241

 
128

 
9

 
2,007

Total revenue
$
6,871

 
$
5,035

 
$
6,398

 
$
3,655

 
$
6,618

 
$
28,577

Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed-price
$
5,171

 
$
3,892

 
$
2,387

 
$
1,973

 
$
3,961

 
$
17,384

Cost-reimbursement

 
580

 
2,462

 
1,390

 
2,241

 
6,673

Time-and-materials
580

 
25

 
1,038

 
112

 
3

 
1,758

Total revenue
$
5,751

 
$
4,497

 
$
5,887

 
$
3,475

 
$
6,205

 
$
25,815

Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.
Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.

16



Revenue by customer was as follows:
Three Months Ended September 29, 2019
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
Department of Defense (DoD)
$
87

 
$
931

 
$
875

 
$
861

 
$
2,157

 
$
4,911

Non-DoD

 
3

 
1,141

 
135

 

 
1,279

Foreign Military Sales (FMS)
18

 
58

 
3

 
12

 
43

 
134

Total U.S. government
105


992


2,019


1,008


2,200


6,324

U.S. commercial
1,420

 
62

 
52

 
33

 
31

 
1,598

Non-U.S. government
64

 
663

 

 
145

 
3

 
875

Non-U.S. commercial
906

 
23

 

 
34

 
1

 
964

Total revenue
$
2,495


$
1,740


$
2,071


$
1,220


$
2,235


$
9,761

Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
35

 
$
698

 
$
864

 
$
854

 
$
1,895

 
$
4,346

Non-DoD

 
2

 
1,373

 
130

 

 
1,505

FMS
13

 
65

 
8

 
10

 
37

 
133

Total U.S. government
48


765


2,245


994


1,932


5,984

U.S. commercial
827

 
59

 
41

 
38

 
69

 
1,034

Non-U.S. government
59

 
677

 
21

 
156

 
2

 
915

Non-U.S. commercial
1,097

 
22

 

 
42

 

 
1,161

Total revenue
$
2,031

 
$
1,523

 
$
2,307

 
$
1,230

 
$
2,003

 
$
9,094


17



Nine Months Ended September 29, 2019
Aerospace
 
Combat Systems
 
Information Technology
 
Mission Systems
 
Marine Systems
 
Total
Revenue
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
262

 
$
2,634

 
$
2,725

 
$
2,529

 
$
6,375

 
$
14,525

Non-DoD

 
9

 
3,511

 
403

 
1

 
3,924

FMS
47

 
227

 
12

 
33

 
134

 
453

Total U.S. government
309

 
2,870

 
6,248

 
2,965

 
6,510

 
18,902

U.S. commercial
3,991

 
171

 
137

 
107

 
97

 
4,503

Non-U.S. government
264

 
1,951

 
13

 
492

 
7

 
2,727

Non-U.S. commercial
2,307

 
43

 

 
91

 
4

 
2,445

Total revenue
$
6,871

 
$
5,035

 
$
6,398

 
$
3,655

 
$
6,618

 
$
28,577

Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government:
 
 
 
 
 
 
 
 
 
 
 
DoD
$
165

 
$
1,965

 
$
2,321

 
$
2,360

 
$
5,877

 
$
12,688

Non-DoD

 
6

 
3,349

 
378

 
1

 
3,734

FMS
48

 
217

 
23

 
31

 
105

 
424

Total U.S. government
213

 
2,188

 
5,693

 
2,769

 
5,983

 
16,846

U.S. commercial
2,586

 
175

 
122

 
101

 
213

 
3,197

Non-U.S. government
212

 
2,086

 
72

 
489

 
8

 
2,867

Non-U.S. commercial
2,740

 
48

 

 
116

 
1

 
2,905

Total revenue
$
5,751

 
$
4,497

 
$
5,887

 
$
3,475

 
$
6,205

 
$
25,815

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the nine-month period ended September 29, 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, which contributed to growth in contract assets as further discussed in Note G.
Revenue recognized for the three- and nine-month periods ended September 29, 2019, and September 30, 2018, that was included in the contract liability balance at the beginning of each year was $1.1 billion and $4.0 billion, and $875 and $3.5 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.


18



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
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
September 29, 2019
 
September 30, 2018
Basic weighted average shares
    outstanding
288,374

 
295,339

288,130

 
295,964

Dilutive effect of stock options and
    restricted stock/RSUs*
2,518

 
3,748

2,704

 
4,114

 Diluted weighted average shares
    outstanding
290,892

 
299,087

290,834

 
300,078


* 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 5,270 and 4,899 for the three- and nine-month periods ended September 29, 2019, and 3,447 and 3,043 for the three- and nine-month periods ended September 30, 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 September 29, 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 September 29, 2019, and December 31, 2018, and the basis for determining their fair values:

19



 
Carrying
Value
 
Fair
Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial Assets (Liabilities)
September 29, 2019
Measured at fair value:
 
 
 
 
 
 
 
 
 
    Marketable securities held in trust:
 
 
 
 
 
 
 
 
 
        Cash and equivalents
$
7

 
$
7

 
$
1

 
$
6

 
$

        Available-for-sale debt securities
135

 
135

 

 
135

 

        Equity securities
52

 
52

 
52

 

 

    Other investments
4

 
4

 

 

 
4

    Cash flow hedges
(10
)
 
(10
)
 

 
(10
)
 

Measured at amortized cost:
 
 
 
 
 
 
 
 
 
    Short- and long-term debt principal
(13,733
)
 
(14,073
)
 

 
(14,073
)
 


 
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
)