NOTES TO 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 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 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.
Use of Estimates. The nature of our business requires that we make estimates and assumptions in accordance with U.S. generally accepted accounting principles (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. We base our estimates on historical experience, currently available information and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates.
Discontinued Operations, Net of Tax. On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA). See Note B for further discussion of the acquisition. In the third quarter of 2018, we disposed of 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.
Research and Development Expenses. Company-sponsored research and development (R&D) expenses, including Aerospace product-development costs, were $466 in 2019, $502 in 2018 and $521 in 2017. R&D expenses have trended downward over the three-year period with the completion of the G500 and G600 aircraft test programs, offset partially by increased activities associated with the development of the new G700 aircraft model. R&D expenses are included in operating costs and expenses in the Consolidated Statement of Earnings in the period in which they are incurred. Customer-sponsored R&D expenses are charged directly to the related contracts.
The Aerospace segment has cost-sharing arrangements with some of its suppliers that enhance the segment’s internal development capabilities and offset a portion of the financial cost associated with the segment’s product development efforts. These arrangements explicitly state that supplier contributions are for reimbursement of costs we incur in the development of new aircraft models and technologies, and we retain substantial rights in the products developed under these arrangements. We record amounts received from these cost-sharing arrangements as a reduction of R&D expenses. We have no obligation to refund
any amounts received under the agreements regardless of the outcome of the development efforts. Under the typical terms of an agreement, payments received from suppliers for their share of the costs are based on milestones and are recognized as received. Our policy is to defer payments in excess of the costs we have incurred.
Interest, Net. Net interest expense consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Interest expense
|
$
|
472
|
|
|
$
|
374
|
|
|
$
|
117
|
|
Interest income
|
(12
|
)
|
|
(18
|
)
|
|
(14
|
)
|
Interest expense, net
|
$
|
460
|
|
|
$
|
356
|
|
|
$
|
103
|
|
The increase in 2018 and 2019 is due primarily to the impact of financing the CSRA acquisition, including the issuance of $7.5 billion of fixed- and floating-rate notes in the second quarter of 2018. See Note K for additional information regarding our debt obligations, including interest rates.
Cash and Equivalents and Investments in Debt and Equity Securities. We consider securities with a maturity of three months or less to be cash equivalents. Our cash balances are invested primarily in time deposits rated A-/A3 or higher. Our investments in other securities are included in other current and noncurrent assets on the Consolidated Balance Sheet (see Note E). We report our equity securities at fair value with subsequent changes in fair value recognized in net earnings. We report our available-for-sale debt securities at fair value with unrealized gains and losses recognized as a component of other comprehensive income in the Consolidated Statement of Comprehensive Income. We had no trading or held-to-maturity debt securities on December 31, 2019 or 2018.
Other Contract Costs. Other contract costs represent amounts that are not currently allocable to government contracts, such as a portion of our estimated workers’ compensation obligations, other insurance-related assessments, pension and other post-retirement benefits, and environmental expenses. These costs will become allocable to contracts generally after they are paid. We expect to recover these costs through ongoing business, including existing backlog and probable follow-on contracts. If the backlog in the future does not support the continued deferral of these costs, the profitability of our remaining contracts could be adversely affected. Other contract costs on December 31, 2019 and 2018, were $144 and $135, respectively, and are included in other current assets on the Consolidated Balance Sheet.
Long-lived Assets and Goodwill. We review long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived asset over its estimated fair value as determined by discounted projected cash flows.
Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Our reporting units are consistent with our operating segments in Note S. We use both qualitative and quantitative approaches when testing goodwill for impairment. When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments. Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events. If, based on the qualitative assessment, we determine that it is more likely than not that
the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary. However, if a quantitative assessment is determined to be necessary, we use a two-step process to first identify potential goodwill impairment for a reporting unit by comparing its fair value to its carrying value and then, if necessary, measure the amount of the impairment loss. Our estimate of fair value is based primarily on the discounted projected cash flows of the underlying operations.
As of December 31, 2019, we completed qualitative assessments for our Aerospace, Combat Systems, Mission Systems and Marine Systems reporting units as the estimated fair values of each of these reporting units significantly exceeded the respective carrying values based on our most recent quantitative assessments, which were performed as of December 31, 2018. Our qualitative assessments did not present indicators of impairment for these reporting units as of December 31, 2019.
As of December 31, 2019, we completed a quantitative assessment for our Information Technology reporting unit, and the results indicated that no impairment existed. The Information Technology reporting unit’s estimated fair value exceeded its carrying value by approximately 25%, reflecting the size of the CSRA acquisition relative to the Information Technology reporting unit and its recent acquisition date. Given that the net book value of this business was recorded at its fair value at the acquisition date in 2018, the reporting unit’s carrying value, by default, continues to closely approximate its fair value as of December 31, 2019. As the carrying value and fair value of the Information Technology reporting unit are closely aligned, a material change in the fair value or carrying value could put the reporting unit at risk of goodwill impairment. For example, if the synergies from the acquisition or funding in the U.S. government budget for our contracts fall significantly below our projections, the fair value of the reporting unit would be negatively impacted. Similarly, an increase in interest rates would lower our discounted cash flows and negatively impact the fair value of the reporting unit. We believe the projections and assumptions we used in estimating fair value are reasonable, but it is possible actual experience could differ, impacting our fair value estimate.
For a summary of our goodwill by reporting unit, see Note B.
Accounting Standards Updates. On January 1, 2019, we adopted the following accounting standards issued by the Financial Accounting Standards Board (FASB):
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|
•
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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 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 P). We adopted the standard on January 1, 2019, and 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.
|
|
•
|
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. ASU
|
2018-14 adds, removes and clarifies disclosure requirements for defined-benefit pension and other post-retirement benefit plans. The standard is effective retrospectively on January 1, 2020, with early adoption permitted. We adopted the standard in 2019, and the adoption did not have a material effect on our disclosures.
There are several other accounting standards that have been issued by the FASB but are not yet effective, including 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 January 1, 2020. The adoption of the ASU did not have a material effect on our results of operations, financial condition or cash flows.
B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS
CSRA Acquisition
On April 3, 2018, we acquired 100% of the outstanding shares of CSRA 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.
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 (Unaudited). 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:
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|
|
|
|
|
|
|
|
Year Ended December 31
|
2018
|
|
2017
|
Revenue
|
$
|
37,534
|
|
|
$
|
35,828
|
|
Earnings from continuing operations
|
3,390
|
|
|
2,982
|
|
Diluted earnings per share from continuing operations
|
$
|
11.33
|
|
|
$
|
9.79
|
|
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 CSRA operations that 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 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.
|
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 2019, we acquired two businesses in our Aerospace segment and a business in our Mission Systems segment for an aggregate of approximately $20.
In 2018, in addition to the acquisition of CSRA, we acquired five businesses for an aggregate of approximately $400:
|
|
•
|
Hawker Pacific, a leading provider of aircraft services across Asia Pacific and the Middle East, and two fixed-base operator (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.
|
In 2017, we acquired four businesses for an aggregate of approximately $400:
|
|
•
|
an FBO in our Aerospace segment;
|
|
|
•
|
a provider of mission-critical support services in our Information Technology segment; and
|
|
|
•
|
a manufacturer of electronics and communications products and a manufacturer of signal distribution products in our Mission Systems segment.
|
The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.
In 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 three businesses in our Information Technology segment: a commercial health products business, CSRA operations that 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 and a public-facing contact-center business.
Goodwill
The changes in the carrying amount of goodwill by reporting unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
|
Combat Systems
|
|
Information Systems and Technology
|
|
Information Technology
|
|
Mission Systems
|
|
Marine Systems
|
|
Total Goodwill
|
December 31, 2017 (a)
|
$
|
2,638
|
|
|
$
|
2,677
|
|
|
$
|
6,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
297
|
|
|
$
|
11,914
|
|
Acquisitions/
divestitures (b)
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Other (c)
|
40
|
|
|
(14
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
April 1, 2018 (a)
|
2,678
|
|
|
2,663
|
|
|
6,317
|
|
|
—
|
|
|
—
|
|
|
297
|
|
|
11,955
|
|
Change in reporting
unit composition (d)
|
—
|
|
|
—
|
|
|
(6,317
|
)
|
|
2,076
|
|
|
4,241
|
|
|
—
|
|
|
—
|
|
Acquisitions/
divestitures (b)
|
183
|
|
|
30
|
|
|
—
|
|
|
7,601
|
|
|
7
|
|
|
—
|
|
|
7,821
|
|
Other (c)
|
(48
|
)
|
|
(60
|
)
|
|
—
|
|
|
(55
|
)
|
|
(19
|
)
|
|
—
|
|
|
(182
|
)
|
December 31, 2018 (e)
|
2,813
|
|
|
2,633
|
|
|
—
|
|
|
9,622
|
|
|
4,229
|
|
|
297
|
|
|
19,594
|
|
Acquisitions/
divestitures (b)
|
3
|
|
|
15
|
|
|
—
|
|
|
77
|
|
|
6
|
|
|
—
|
|
|
101
|
|
Other (c)
|
15
|
|
|
33
|
|
|
—
|
|
|
1
|
|
|
(67
|
)
|
|
—
|
|
|
(18
|
)
|
December 31, 2019 (e)
|
$
|
2,831
|
|
|
$
|
2,681
|
|
|
$
|
—
|
|
|
$
|
9,700
|
|
|
$
|
4,168
|
|
|
$
|
297
|
|
|
$
|
19,677
|
|
(a)Goodwill in the Information Systems and Technology reporting unit is net of $1.9 billion of accumulated impairment losses.
(b)Includes adjustments during the purchase price allocation period. Activity in the first quarter of 2018 and the nine-month period ended December 31, 2018, also includes an allocation of goodwill associated with the sale of the commercial health products business and an allocation of goodwill associated with the sale of a public-facing contact-center business, respectively, as discussed above.
(c)Consists primarily of adjustments for foreign currency translation. Activity in the nine-month period ended December 31, 2018, also includes an allocation of goodwill in our Information Technology reporting unit associated with certain operations classified as held for sale on the Consolidated Balance Sheet on December 31, 2018. Activity in 2019 also includes an allocation of goodwill in our Mission Systems reporting unit associated with a non-core operation classified as held for sale on the Consolidated Balance Sheet on December 31, 2019.
(d)Concurrent with the acquisition of CSRA, we reorganized our Information Systems and Technology operating segment, in accordance with the nature of the segment’s products and services, into the Information Technology and Mission Systems segments. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization.
(e)Goodwill in the Information Technology and Mission Systems reporting units is net of $536 and $1.3 billion of accumulated impairment losses, respectively.
Intangible Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount (a)
|
Accumulated Amortization
|
Net Carrying Amount
|
|
Gross Carrying Amount (a)
|
Accumulated Amortization
|
Net Carrying Amount
|
December 31
|
2019
|
|
2018
|
Contract and program
intangible assets (b)
|
$
|
3,776
|
|
$
|
(1,779
|
)
|
$
|
1,997
|
|
|
$
|
3,771
|
|
$
|
(1,531
|
)
|
$
|
2,240
|
|
Trade names and trademarks
|
474
|
|
(195
|
)
|
279
|
|
|
469
|
|
(177
|
)
|
292
|
|
Technology and software
|
164
|
|
(126
|
)
|
38
|
|
|
165
|
|
(116
|
)
|
49
|
|
Other intangible assets
|
159
|
|
(158
|
)
|
1
|
|
|
159
|
|
(155
|
)
|
4
|
|
Total intangible assets
|
$
|
4,573
|
|
$
|
(2,258
|
)
|
$
|
2,315
|
|
|
$
|
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.
We did not recognize any impairments of our intangible assets in 2019, 2018 or 2017. The amortization lives (in years) of our intangible assets on December 31, 2019, were as follows:
|
|
|
|
Intangible Asset
|
|
Range of Amortization Life
|
Contract and program intangible assets
|
|
7-30
|
Trade names and trademarks
|
|
30
|
Technology and software
|
|
5-15
|
Other intangible assets
|
|
7
|
Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense was $277 in 2019, $270 in 2018 and $79 in 2017. We expect to record annual amortization expense over the next five years as follows:
|
|
|
|
|
Year Ended December 31
|
Amortization Expense
|
2020
|
$
|
264
|
|
2021
|
220
|
|
2022
|
192
|
|
2023
|
177
|
|
2024
|
164
|
|
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 73% of our revenue in 2019, 74% in 2018 and 71% in 2017. 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 27% of our revenue in 2019, 26% in 2018 and 29% in 2017. 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 December 31, 2019, we had $86.9 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 35% of our remaining performance obligations as revenue in 2020, an additional 35% by 2022 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Revenue
|
$
|
342
|
|
|
$
|
377
|
|
|
$
|
292
|
|
Operating earnings
|
271
|
|
|
345
|
|
|
323
|
|
Diluted earnings per share
|
$
|
0.74
|
|
|
$
|
0.91
|
|
|
$
|
0.69
|
|
No adjustment on any one contract was material to our Consolidated Financial Statements in 2019, 2018 or 2017.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Aircraft manufacturing and completions
|
$
|
7,355
|
|
|
$
|
6,226
|
|
|
$
|
6,320
|
|
Aircraft services
|
2,154
|
|
|
2,096
|
|
|
1,743
|
|
Pre-owned aircraft
|
292
|
|
|
133
|
|
|
66
|
|
Total Aerospace
|
9,801
|
|
|
8,455
|
|
|
8,129
|
|
Military vehicles
|
4,620
|
|
|
4,027
|
|
|
3,731
|
|
Weapons systems, armament and munitions
|
1,906
|
|
|
1,798
|
|
|
1,633
|
|
Engineering and other services
|
481
|
|
|
416
|
|
|
585
|
|
Total Combat Systems
|
7,007
|
|
|
6,241
|
|
|
5,949
|
|
IT services
|
8,422
|
|
|
8,269
|
|
|
4,410
|
|
Total Information Technology
|
8,422
|
|
|
8,269
|
|
|
4,410
|
|
C4ISR solutions
|
4,937
|
|
|
4,726
|
|
|
4,481
|
|
Total Mission Systems
|
4,937
|
|
|
4,726
|
|
|
4,481
|
|
Nuclear-powered submarines
|
6,254
|
|
|
5,712
|
|
|
5,175
|
|
Surface ships
|
1,912
|
|
|
1,872
|
|
|
1,607
|
|
Repair and other services
|
1,017
|
|
|
918
|
|
|
1,222
|
|
Total Marine Systems
|
9,183
|
|
|
8,502
|
|
|
8,004
|
|
Total revenue
|
$
|
39,350
|
|
|
$
|
36,193
|
|
|
$
|
30,973
|
|
Revenue by contract type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Aerospace
|
|
Combat Systems
|
|
Information Technology
|
|
Mission Systems
|
|
Marine Systems
|
|
Total
Revenue
|
Fixed-price
|
$
|
8,949
|
|
|
$
|
6,049
|
|
|
$
|
3,436
|
|
|
$
|
2,908
|
|
|
$
|
6,331
|
|
|
$
|
27,673
|
|
Cost-reimbursement
|
—
|
|
|
894
|
|
|
3,401
|
|
|
1,862
|
|
|
2,839
|
|
|
8,996
|
|
Time-and-materials
|
852
|
|
|
64
|
|
|
1,585
|
|
|
167
|
|
|
13
|
|
|
2,681
|
|
Total revenue
|
$
|
9,801
|
|
|
$
|
7,007
|
|
|
$
|
8,422
|
|
|
$
|
4,937
|
|
|
$
|
9,183
|
|
|
$
|
39,350
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price
|
$
|
7,600
|
|
|
$
|
5,406
|
|
|
$
|
3,396
|
|
|
$
|
2,711
|
|
|
$
|
5,493
|
|
|
$
|
24,606
|
|
Cost-reimbursement
|
—
|
|
|
800
|
|
|
3,422
|
|
|
1,861
|
|
|
3,004
|
|
|
9,087
|
|
Time-and-materials
|
855
|
|
|
35
|
|
|
1,451
|
|
|
154
|
|
|
5
|
|
|
2,500
|
|
Total revenue
|
$
|
8,455
|
|
|
$
|
6,241
|
|
|
$
|
8,269
|
|
|
$
|
4,726
|
|
|
$
|
8,502
|
|
|
$
|
36,193
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price
|
$
|
7,479
|
|
|
$
|
5,090
|
|
|
$
|
1,465
|
|
|
$
|
2,478
|
|
|
$
|
4,808
|
|
|
$
|
21,320
|
|
Cost-reimbursement
|
—
|
|
|
823
|
|
|
2,305
|
|
|
1,838
|
|
|
3,186
|
|
|
8,152
|
|
Time-and-materials
|
650
|
|
|
36
|
|
|
640
|
|
|
165
|
|
|
10
|
|
|
1,501
|
|
Total revenue
|
$
|
8,129
|
|
|
$
|
5,949
|
|
|
$
|
4,410
|
|
|
$
|
4,481
|
|
|
$
|
8,004
|
|
|
$
|
30,973
|
|
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.
Revenue by customer was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Aerospace
|
|
Combat Systems
|
|
Information Technology
|
|
Mission Systems
|
|
Marine Systems
|
|
Total
Revenue
|
U.S. government:
|
|
|
|
|
|
|
|
|
|
|
|
Department of Defense (DoD)
|
$
|
305
|
|
|
$
|
3,695
|
|
|
$
|
3,573
|
|
|
$
|
3,454
|
|
|
$
|
8,837
|
|
|
$
|
19,864
|
|
Non-DoD
|
88
|
|
|
13
|
|
|
4,652
|
|
|
499
|
|
|
2
|
|
|
5,254
|
|
Foreign Military Sales (FMS)
|
105
|
|
|
340
|
|
|
15
|
|
|
41
|
|
|
188
|
|
|
689
|
|
Total U.S. government
|
498
|
|
|
4,048
|
|
|
8,240
|
|
|
3,994
|
|
|
9,027
|
|
|
25,807
|
|
U.S. commercial
|
5,477
|
|
|
229
|
|
|
176
|
|
|
151
|
|
|
142
|
|
|
6,175
|
|
Non-U.S. government
|
378
|
|
|
2,663
|
|
|
6
|
|
|
667
|
|
|
9
|
|
|
3,723
|
|
Non-U.S. commercial
|
3,448
|
|
|
67
|
|
|
—
|
|
|
125
|
|
|
5
|
|
|
3,645
|
|
Total revenue
|
$
|
9,801
|
|
|
$
|
7,007
|
|
|
$
|
8,422
|
|
|
$
|
4,937
|
|
|
$
|
9,183
|
|
|
$
|
39,350
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government:
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD
|
$
|
236
|
|
|
$
|
2,903
|
|
|
$
|
3,213
|
|
|
$
|
3,224
|
|
|
$
|
8,098
|
|
|
$
|
17,674
|
|
Non-DoD
|
—
|
|
|
8
|
|
|
4,790
|
|
|
506
|
|
|
2
|
|
|
5,306
|
|
FMS
|
98
|
|
|
317
|
|
|
22
|
|
|
44
|
|
|
145
|
|
|
626
|
|
Total U.S. government
|
334
|
|
|
3,228
|
|
|
8,025
|
|
|
3,774
|
|
|
8,245
|
|
|
23,606
|
|
U.S. commercial
|
4,175
|
|
|
251
|
|
|
163
|
|
|
138
|
|
|
245
|
|
|
4,972
|
|
Non-U.S. government
|
551
|
|
|
2,698
|
|
|
81
|
|
|
662
|
|
|
10
|
|
|
4,002
|
|
Non-U.S. commercial
|
3,395
|
|
|
64
|
|
|
—
|
|
|
152
|
|
|
2
|
|
|
3,613
|
|
Total revenue
|
$
|
8,455
|
|
|
$
|
6,241
|
|
|
$
|
8,269
|
|
|
$
|
4,726
|
|
|
$
|
8,502
|
|
|
$
|
36,193
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government:
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD
|
$
|
189
|
|
|
$
|
2,702
|
|
|
$
|
1,802
|
|
|
$
|
3,027
|
|
|
$
|
7,721
|
|
|
$
|
15,441
|
|
Non-DoD
|
—
|
|
|
8
|
|
|
2,340
|
|
|
556
|
|
|
—
|
|
|
2,904
|
|
FMS
|
42
|
|
|
374
|
|
|
22
|
|
|
46
|
|
|
192
|
|
|
676
|
|
Total U.S. government
|
231
|
|
|
3,084
|
|
|
4,164
|
|
|
3,629
|
|
|
7,913
|
|
|
19,021
|
|
U.S. commercial
|
3,885
|
|
|
220
|
|
|
214
|
|
|
108
|
|
|
71
|
|
|
4,498
|
|
Non-U.S. government
|
210
|
|
|
2,580
|
|
|
32
|
|
|
607
|
|
|
13
|
|
|
3,442
|
|
Non-U.S. commercial
|
3,803
|
|
|
65
|
|
|
—
|
|
|
137
|
|
|
7
|
|
|
4,012
|
|
Total revenue
|
$
|
8,129
|
|
|
$
|
5,949
|
|
|
$
|
4,410
|
|
|
$
|
4,481
|
|
|
$
|
8,004
|
|
|
$
|
30,973
|
|
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 year ended December 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, which contributed to growth in contract assets as further discussed in Note H.
Revenue recognized in 2019, 2018 and 2017 that was included in the contract liability balance at the beginning of each year was $4.5 billion, $4.3 billion and $4.3 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 M 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):
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
2018
|
2017
|
Basic weighted average shares outstanding
|
288,286
|
|
295,262
|
|
299,172
|
|
Dilutive effect of stock options and restricted stock/RSUs*
|
2,550
|
|
3,898
|
|
5,465
|
|
Diluted weighted average shares outstanding
|
290,836
|
|
299,160
|
|
304,637
|
|
* 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 year and, therefore, the effect of including these options would be antidilutive. These options totaled 4,985 in 2019, 3,143 in 2018 and 1,547 in 2017.
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 December 31, 2019 or 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 Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on December 31, 2019 and 2018, and the basis for determining their fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
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
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. U.S. federal tax reform was enacted on December 22, 2017, and has several key provisions impacting the accounting for and reporting of income taxes. The most significant provision reduced the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. We recorded the effect of the change in tax law in the fourth quarter of 2017.
The provision for income taxes and effective tax rate in 2017 included a $119 unfavorable impact from the change in tax law. The impact was due primarily to the remeasurement of our U.S. federal deferred tax assets and liabilities at the tax rate expected to apply when the temporary differences are realized/settled (remeasured at a rate of 21% versus 35% for the majority of our deferred tax assets and liabilities).
The U.S. Treasury Department and the Internal Revenue Service (IRS) are expected to issue further guidance related to tax reform that could impact our provision for income taxes in future periods. As a result, we believe it is reasonably possible there may be changes to provisional interpretations and
assumptions we made in our application of tax reform provisions. We do not expect the impact of any changes to have a material impact on our results of operations, financial condition or cash flows.
The following is a summary of our net provision for income taxes for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
471
|
|
|
$
|
587
|
|
|
$
|
656
|
|
State
|
36
|
|
|
48
|
|
|
31
|
|
International
|
119
|
|
|
95
|
|
|
77
|
|
Total current
|
626
|
|
|
730
|
|
|
764
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
49
|
|
|
(37
|
)
|
|
215
|
|
State
|
1
|
|
|
8
|
|
|
7
|
|
International
|
42
|
|
|
26
|
|
|
60
|
|
Adjustment for enacted change in U.S. tax law
|
—
|
|
|
—
|
|
|
119
|
|
Total deferred
|
92
|
|
|
(3
|
)
|
|
401
|
|
Provision for income taxes, net
|
$
|
718
|
|
|
$
|
727
|
|
|
$
|
1,165
|
|
Net income tax payments
|
$
|
572
|
|
|
$
|
532
|
|
|
$
|
617
|
|
The reported tax provision differs from the amounts paid because some income and expense items are recognized in different time periods for financial reporting than for income tax purposes. State and local income taxes allocable to U.S. government contracts are included in operating costs and expenses in the Consolidated Statement of Earnings and, therefore, are not included in the provision above.
The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State tax on commercial operations, net of federal benefits
|
0.7
|
|
|
1.1
|
|
|
0.6
|
|
Impact of international operations
|
0.2
|
|
|
0.6
|
|
|
(4.5
|
)
|
Domestic production deduction
|
—
|
|
|
—
|
|
|
(1.5
|
)
|
Foreign derived intangible income
|
(1.4
|
)
|
|
(1.2
|
)
|
|
—
|
|
Equity-based compensation
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(2.6
|
)
|
Domestic tax credits
|
(2.0
|
)
|
|
(1.1
|
)
|
|
(0.8
|
)
|
Contract close-outs
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
Adoption impact of enacted change in U.S. tax law
|
—
|
|
|
—
|
|
|
2.9
|
|
Other, net
|
(0.3
|
)
|
|
(1.0
|
)
|
|
(0.5
|
)
|
Effective income tax rate
|
17.1
|
%
|
|
17.8
|
%
|
|
28.6
|
%
|
Net Deferred Tax Liability. The tax effects of temporary differences between reported earnings and taxable income consisted of the following:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Retirement benefits
|
$
|
1,097
|
|
|
$
|
1,055
|
|
Lease assets
|
418
|
|
|
—
|
|
Tax loss and credit carryforwards
|
323
|
|
|
393
|
|
Salaries and wages
|
167
|
|
|
160
|
|
Workers’ compensation
|
148
|
|
|
138
|
|
Other
|
367
|
|
|
351
|
|
Deferred assets
|
2,520
|
|
|
2,097
|
|
Valuation allowances
|
(291
|
)
|
|
(336
|
)
|
Net deferred assets
|
$
|
2,229
|
|
|
$
|
1,761
|
|
|
|
|
|
Intangible assets
|
$
|
(1,070
|
)
|
|
$
|
(1,061
|
)
|
Lease liabilities
|
(418
|
)
|
|
—
|
|
Contract accounting methods
|
(375
|
)
|
|
(530
|
)
|
Property, plant and equipment
|
(291
|
)
|
|
(265
|
)
|
Capital Construction Fund qualified ships
|
(164
|
)
|
|
(160
|
)
|
Other
|
(359
|
)
|
|
(284
|
)
|
Deferred liabilities
|
$
|
(2,677
|
)
|
|
$
|
(2,300
|
)
|
Net deferred tax liability
|
$
|
(448
|
)
|
|
$
|
(539
|
)
|
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:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Deferred tax asset
|
$
|
33
|
|
|
$
|
38
|
|
Deferred tax liability
|
(481
|
)
|
|
(577
|
)
|
Net deferred tax liability
|
$
|
(448
|
)
|
|
$
|
(539
|
)
|
We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized.
Our deferred tax balance associated with our retirement benefits includes a deferred tax asset of $1.2 billion on December 31, 2019 and $1 billion on December 31, 2018, related to the amounts recorded in accumulated other comprehensive loss (AOCL) to recognize the funded status of our retirement plans. See Notes M and R for additional details.
One of our deferred tax liabilities results from our participation in the Capital Construction Fund (CCF), a program established by the U.S. government and administered by the Maritime Administration that supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. The program allows us to defer federal and state income taxes on earnings derived from eligible programs as long as the proceeds are deposited in the fund and withdrawals are used for qualified activities. We had U.S. government accounts receivable pledged (and thereby deposited) to the CCF of $340 and $483 on December 31, 2019 and 2018, respectively.
On December 31, 2019, we had net operating loss carryforwards of $989, substantially all of which are associated with jurisdictions that have an indefinite carryforward period. We had tax credit carryforwards of $68 that began to expire in 2020. Most of these carryforwards are subject to valuation allowances.
Tax Uncertainties. We participate in the 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 currently reviewing 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 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 December 31, 2019, 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. ACCOUNTS RECEIVABLE
Accounts receivable represent amounts billed and currently due from customers. Payment is typically received from our customers either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Non-U.S. government
|
$
|
1,847
|
|
|
$
|
2,035
|
|
U.S. government
|
1,076
|
|
|
1,189
|
|
Commercial
|
621
|
|
|
535
|
|
Total accounts receivable
|
$
|
3,544
|
|
|
$
|
3,759
|
|
Receivables from non-U.S. government customers included amounts related to long-term production programs for the Spanish Ministry of Defence of $1.7 billion and $1.9 billion on December 31, 2019 and 2018, respectively. A different ministry, the Spanish Ministry of Industry, has funded work on these programs in advance of costs incurred by the company. The cash advances are reported on the Consolidated Balance Sheet in current customer advances and deposits and will be repaid to the Ministry of Industry as we collect on the outstanding receivables from the Ministry of Defence. The net amounts for these programs on December 31, 2019 and 2018, were advance payments of $295 and $338, respectively. With respect to our other receivables, we expect to collect substantially all of the year-end 2019 balance during 2020.
H. 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:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Unbilled revenue
|
$
|
33,481
|
|
|
$
|
27,908
|
|
Advances and progress billings
|
(25,624
|
)
|
|
(21,332
|
)
|
Net unbilled receivables
|
$
|
7,857
|
|
|
$
|
6,576
|
|
The increase in net unbilled receivables in 2019 was due primarily to a large international wheeled armored vehicle contract in our Combat Systems segment. At December 31, 2019, the net unbilled receivable related to this contract was $2.9 billion. Our contract is through the Canadian government to the 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. In January 2020, we received a $500 progress payment in connection with the outstanding balance. We expect to collect the full amount currently outstanding. Other than the balance related to the large international vehicle contract, we expect to bill substantially all of the remaining year-end 2019 net unbilled receivables balance during 2020. The amount not expected to be billed in 2020 results primarily from the agreed-upon contractual billing terms.
G&A costs in unbilled revenue on December 31, 2019 and 2018, were $441 and $381, respectively. Contract costs also may include estimated contract recoveries for matters such as contract changes and claims for unanticipated contract costs. We record revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable.
I. INVENTORIES
The majority of our inventories are for business-jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Work in process
|
$
|
4,419
|
|
|
$
|
4,357
|
|
Raw materials
|
1,733
|
|
|
1,504
|
|
Finished goods
|
30
|
|
|
33
|
|
Pre-owned aircraft
|
124
|
|
|
83
|
|
Total inventories
|
$
|
6,306
|
|
|
$
|
5,977
|
|
The increase in total inventories was due primarily to the ramp-up in production of the new G600 aircraft in our Aerospace segment. Customer deposits associated with these aircraft, which are reflected in customer advances and deposits and other noncurrent liabilities on the Consolidated Balance Sheet, have also increased.
We received both type and production certification from the U.S. Federal Aviation Administration (FAA) for the G600 aircraft in June 2019 and delivered the first G600 aircraft in the third quarter of 2019. The increase in total inventories was also driven by production of initial units of the newly announced G700 aircraft.
J. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. PP&E by major asset class consisted of the following:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Machinery and equipment
|
$
|
5,441
|
|
|
$
|
5,152
|
|
Buildings and improvements
|
3,232
|
|
|
2,962
|
|
Land and improvements
|
400
|
|
|
386
|
|
Construction in process
|
688
|
|
|
472
|
|
Total PP&E
|
9,761
|
|
|
8,972
|
|
Accumulated depreciation
|
(5,286
|
)
|
|
(4,994
|
)
|
PP&E, net
|
$
|
4,475
|
|
|
$
|
3,978
|
|
We depreciate most of our assets using the straight-line method and the remainder using accelerated methods. Buildings and improvements are depreciated over periods of up to 50 years. Machinery and equipment are depreciated over periods of up to 30 years. Our government customers provide certain facilities and equipment for our use that are not included above.
K. DEBT
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2019
|
|
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
|
2.568% at December 31, 2018
|
—
|
|
|
850
|
|
Other
|
Various
|
505
|
|
|
168
|
|
Total debt principal
|
|
12,005
|
|
|
12,518
|
|
Less unamortized debt issuance costs
and discounts
|
|
75
|
|
|
101
|
|
Total debt
|
|
11,930
|
|
|
12,417
|
|
Less current portion
|
|
2,920
|
|
|
973
|
|
Long-term debt
|
|
$
|
9,010
|
|
|
$
|
11,444
|
|
Interest payments associated with our debt were $434 in 2019, $312 in 2018 and $93 in 2017.
Our fixed- and floating-rate notes are fully and unconditionally guaranteed by several of our 100%-owned subsidiaries. See Note T for condensed consolidating financial statements. We have the option to redeem the fixed-rate notes prior to their maturity in whole or in part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.
The aggregate amounts of scheduled principal maturities of our debt are as follows:
|
|
|
|
|
Year Ended December 31
|
Debt
Principal
|
2020
|
$
|
2,922
|
|
2021
|
3,009
|
|
2022
|
1,009
|
|
2023
|
1,255
|
|
2024
|
505
|
|
Thereafter
|
3,305
|
|
Total debt principal
|
$
|
12,005
|
|
On December 31, 2019, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. 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 December 31, 2019.
L. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
Salaries and wages
|
$
|
941
|
|
|
$
|
952
|
|
Workers’ compensation
|
306
|
|
|
244
|
|
Retirement benefits
|
296
|
|
|
272
|
|
Operating lease liabilities
|
252
|
|
|
—
|
|
Fair value of cash flow hedges
|
32
|
|
|
141
|
|
Other (a)
|
1,744
|
|
|
1,708
|
|
Total other current liabilities
|
$
|
3,571
|
|
|
$
|
3,317
|
|
|
|
|
|
Retirement benefits
|
$
|
5,172
|
|
|
$
|
4,422
|
|
Operating lease liabilities
|
1,251
|
|
|
—
|
|
Customer deposits on commercial contracts
|
709
|
|
|
726
|
|
Deferred income taxes
|
481
|
|
|
577
|
|
Other (b)
|
1,840
|
|
|
1,768
|
|
Total other liabilities
|
$
|
9,453
|
|
|
$
|
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.
M. SHAREHOLDERS’ EQUITY
Authorized Stock. Our authorized capital stock consists of 500 million shares of $1 per share par value common stock and 50 million shares of $1 per share par value preferred stock. The preferred stock is issuable in series, with the rights, preferences and limitations of each series to be determined by our board of directors.
Shares Issued and Outstanding. On December 31, 2019, we had 481,880,634 shares of common stock issued and 289,610,336 shares of common stock outstanding, including unvested restricted stock of 657,692 shares. On December 31, 2018, we had 481,880,634 shares of common stock issued and 288,698,149 shares of common stock outstanding. No shares of our preferred stock were outstanding on either date. The only changes in our shares outstanding during 2019 and 2018 resulted from shares repurchased in the open market and share activity under our equity compensation plans. See Note Q for additional details.
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 2019, we repurchased 1.1 million of our outstanding shares for $184. On December 31, 2019, 6.4 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased 10.1 million shares for $1.8 billion in 2018 and 7.8 million shares for $1.5 billion in 2017.
Dividends per Share. Our board of directors declared dividends per share of $4.08 in 2019, $3.72 in 2018 and $3.36 in 2017. We paid cash dividends of $1.2 billion in 2019, $1.1 billion in 2018 and $986 in 2017.
Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of 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, 2016
|
$
|
(345
|
)
|
$
|
14
|
|
$
|
69
|
|
$
|
(3,125
|
)
|
$
|
(3,387
|
)
|
Other comprehensive income, pretax
|
341
|
|
9
|
|
348
|
|
20
|
|
718
|
|
Provision for income tax, net
|
(90
|
)
|
(4
|
)
|
(15
|
)
|
(42
|
)
|
(151
|
)
|
Other comprehensive income, net of tax
|
251
|
|
5
|
|
333
|
|
(22
|
)
|
567
|
|
December 31, 2017
|
(94
|
)
|
19
|
|
402
|
|
(3,147
|
)
|
(2,820
|
)
|
Cumulative-effect adjustments*
|
(4
|
)
|
(19
|
)
|
—
|
|
(615
|
)
|
(638
|
)
|
Other comprehensive loss, pretax
|
36
|
|
—
|
|
(300
|
)
|
(61
|
)
|
(325
|
)
|
Benefit from income tax, net
|
(9
|
)
|
—
|
|
—
|
|
14
|
|
5
|
|
Other comprehensive loss, net of tax
|
27
|
|
—
|
|
(300
|
)
|
(47
|
)
|
(320
|
)
|
December 31, 2018
|
(71
|
)
|
—
|
|
102
|
|
(3,809
|
)
|
(3,778
|
)
|
Other comprehensive loss, pretax
|
97
|
|
—
|
|
186
|
|
(886
|
)
|
(603
|
)
|
Benefit from income tax, net
|
(24
|
)
|
—
|
|
—
|
|
186
|
|
162
|
|
Other comprehensive loss, net of tax
|
73
|
|
—
|
|
186
|
|
(700
|
)
|
(441
|
)
|
December 31, 2019
|
$
|
2
|
|
$
|
—
|
|
$
|
288
|
|
$
|
(4,509
|
)
|
$
|
(4,219
|
)
|
* Reflects the cumulative effects 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 $318 in 2019, $355 in 2018 and $358 in 2017. This was offset partially by pretax amortization of prior service credit of $22 in 2019, $50 in 2018 and $69 in 2017. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note R for additional details.
N. 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 one-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 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 December 31, 2019, we held $902 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 December 31, 2019, these marketable securities totaled $207 and were reflected at fair value on the 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 $5 billion and $5.8 billion on December 31, 2019 and 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 in any of the past three years. Net gains and losses reclassified to earnings from AOCL related to qualified hedges were also not material to our results of operations in any of the past three years, 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 December 31, 2019 or 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 in any of the past three years. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in any of the past three years.
O. 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 which had been 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 engaged in discussions with the U.S. government.
In the third quarter of 2019, the Department of Justice declined to intervene in the qui tam action, noting that its investigation continues, and the court unsealed the relator’s complaint. In the first quarter of 2020, the relator filed an amended complaint. 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.
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 $1.5 billion on December 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 December 31, 2019, the estimated change in fair market values from the date of the commitments was not material.
Labor Agreements. On December 31, 2019, approximately one-fifth of the employees of our subsidiaries were working under collectively bargained terms and conditions, including 60 collective agreements that we have negotiated directly with unions and works councils. A number of these agreements expire within any given year. Historically, we have been successful at renegotiating these labor agreements without any material disruption of operating activities. In 2020, we expect to negotiate the terms of 28 agreements covering approximately 10,000 employees. We do not expect the renegotiations will, either individually or in the aggregate, have a material impact on our results of operations, financial condition or cash flows.
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 each of the past three years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
480
|
|
|
$
|
467
|
|
|
$
|
474
|
|
Warranty expense
|
258
|
|
|
129
|
|
|
146
|
|
Payments
|
(105
|
)
|
|
(102
|
)
|
|
(123
|
)
|
Adjustments
|
(14
|
)
|
|
(14
|
)
|
|
(30
|
)
|
Ending balance
|
$
|
619
|
|
|
$
|
480
|
|
|
$
|
467
|
|
P. 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 an ROU asset and lease liability for leases with terms of 12 months or less. Some 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:
|
|
|
|
|
Year Ended December 31
|
2019
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
$
|
86
|
|
Interest on lease liabilities
|
24
|
|
Operating lease cost
|
332
|
|
Short-term lease cost
|
75
|
|
Variable lease cost
|
14
|
|
Sublease income
|
(13
|
)
|
Total lease costs, net
|
$
|
518
|
|
As we have not restated prior-year information for our adoption of ASC Topic 842, total operating lease expense under ASC Topic 840 was $380 in 2018 and $309 in 2017.
Additional information related to leases was as follows:
|
|
|
|
|
Year Ended December 31
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
325
|
|
Operating cash flows from finance leases
|
24
|
|
Financing cash flows from finance leases
|
57
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
Operating leases
|
365
|
|
Finance leases
|
50
|
|
Additional quantitative lease information was as follows:
|
|
|
|
December 31
|
2019
|
Weighted-average remaining lease term:
|
|
Operating leases
|
10.7 years
|
|
Finance leases
|
6.1 years
|
|
Weighted-average discount rate:
|
|
Operating leases
|
3
|
%
|
Finance leases
|
8
|
%
|
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the Consolidated Balance Sheet on December 31, 2019:
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
Operating Leases
|
|
Finance Leases
|
2020
|
$
|
302
|
|
|
$
|
91
|
|
2021
|
261
|
|
|
83
|
|
2022
|
212
|
|
|
83
|
|
2023
|
163
|
|
|
36
|
|
2024
|
136
|
|
|
19
|
|
Thereafter
|
790
|
|
|
131
|
|
Total future lease payments
|
1,864
|
|
|
443
|
|
Less imputed interest
|
361
|
|
|
89
|
|
Present value of future lease payments
|
1,503
|
|
|
354
|
|
Less current portion of lease liabilities
|
252
|
|
|
67
|
|
Long-term lease liabilities
|
$
|
1,251
|
|
|
$
|
287
|
|
ROU assets
|
$
|
1,432
|
|
|
$
|
391
|
|
Lease liabilities are included on the Consolidated Balance Sheet in current and noncurrent other liabilities, while ROU assets are included in noncurrent other assets.
As we have not restated prior-year information for our adoption of ASC Topic 842, the gross amount of assets recorded under capital leases under ASC Topic 840 was $485 with accumulated amortization of $61 as of December 31, 2018.
On December 31, 2019, we had additional future payments on leases that had not yet commenced of $116. These leases will commence in 2020, and have lease terms of 1 to 20 years.
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.
Q. EQUITY COMPENSATION PLANS
Equity Compensation Overview. We have equity compensation plans for employees, as well as for non-employee members of our board of directors. The equity compensation plans seek to provide an effective means of attracting and retaining directors, officers and key employees, and to provide them with incentives to enhance our growth and profitability. Under the equity compensation plans, awards may be granted to officers, employees or non-employee directors in common stock, options to purchase common stock, restricted shares of common stock, participation units or any combination of these.
Annually, we grant awards of stock options, restricted stock and RSUs to participants in our equity compensation plans in early March. Additionally, we may make limited ad hoc grants on a quarterly basis for new hires or promotions. We issue common stock under our equity compensation plans from treasury stock. On December 31, 2019, in addition to the shares reserved for issuance upon the exercise of outstanding stock options, approximately 26 million shares have been authorized for awards that may be granted in the future.
Equity-based Compensation Expense. Equity-based compensation expense is included in G&A expenses. The following table details the components of equity-based compensation expense recognized in net earnings in each of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Stock options
|
$
|
43
|
|
|
$
|
45
|
|
|
$
|
34
|
|
Restricted stock/RSUs
|
62
|
|
|
65
|
|
|
46
|
|
Total equity-based compensation expense, net of tax
|
$
|
105
|
|
|
$
|
110
|
|
|
$
|
80
|
|
Stock Options. Stock options granted under our equity compensation plans are issued with an exercise price at the fair value of our common stock determined by the average of the high and low stock prices as listed on the New York Stock Exchange (NYSE) on the date of grant. The majority of our outstanding stock options vest over three years, with 50% of the options vesting after two years and the remaining 50% vesting the following year, and expire 10 years after the grant date.
We recognize compensation expense related to stock options on a straight-line basis over the vesting period of the awards, net of estimated forfeitures. Estimated forfeitures are based on our historical forfeiture experience. We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model with the following assumptions for each of the past three years:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Expected volatility
|
19.7-20.0%
|
|
|
17.6-18.2%
|
|
|
17.3-19.4%
|
|
Weighted average expected volatility
|
19.7
|
%
|
|
17.6
|
%
|
|
19.4
|
%
|
Expected term (in months)
|
64
|
|
|
68
|
|
|
68
|
|
Risk-free interest rate
|
1.7-2.6%
|
|
|
2.6-2.9%
|
|
|
2.0-2.2%
|
|
Expected dividend yield
|
2.0
|
%
|
|
1.8
|
%
|
|
1.8
|
%
|
We determine the above assumptions based on the following:
|
|
•
|
Expected volatility is based on the historical volatility of our common stock over a period equal to the expected term of the option.
|
|
|
•
|
Expected term is based on assumptions used by a set of comparable peer companies.
|
|
|
•
|
Risk-free interest rate is the yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option at the grant date.
|
|
|
•
|
Expected dividend yield is based on our historical dividend yield.
|
The resulting weighted average fair value per stock option granted (in dollars) was $29.06 in 2019, $37.42 in 2018 and $33.09 in 2017. Stock option expense reduced pretax operating earnings (and on a diluted per-share basis) by $55 ($0.15) in 2019, $57 ($0.15) in 2018 and $53 ($0.11) in 2017. Compensation expense for stock options is reported as a Corporate expense for segment reporting purposes (see Note S). On December 31, 2019, we had $70 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.8 years.
A summary of stock option activity during 2019 follows:
|
|
|
|
|
|
|
|
In Shares and Dollars
|
Shares Under Option
|
|
Weighted Average
Exercise Price Per Share
|
Outstanding on December 31, 2018
|
10,765,195
|
|
|
$
|
143.43
|
|
Granted
|
2,115,740
|
|
|
167.92
|
|
Exercised
|
(2,757,815
|
)
|
|
91.34
|
|
Forfeited/canceled
|
(355,371
|
)
|
|
195.59
|
|
Outstanding on December 31, 2019
|
9,767,749
|
|
|
$
|
161.54
|
|
Vested and expected to vest on December 31, 2019
|
9,538,150
|
|
|
$
|
161.10
|
|
Exercisable on December 31, 2019
|
5,484,562
|
|
|
$
|
137.92
|
|
Summary information with respect to our stock options’ intrinsic value and remaining contractual term on December 31, 2019, follows:
|
|
|
|
|
|
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic
Value
|
Outstanding
|
6.4
|
|
$
|
242
|
|
Vested and expected to vest
|
6.4
|
|
241
|
|
Exercisable
|
4.8
|
|
225
|
|
In the table above, intrinsic value is calculated as the excess, if any, of the market price of our stock on the last trading day of the year over the exercise price of the options. For stock options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the exercise price. The total intrinsic value of stock options exercised was $244 in 2019, $147 in 2018 and $215 in 2017.
Restricted Stock/RSUs. The fair value of restricted stock and RSUs equals the average of the high and low market prices of our common stock as listed on the NYSE on the date of grant. Grants of restricted stock are awards of shares of common stock. Participation units represent obligations that have a value derived from or related to the value of our common stock. These include stock appreciation rights, phantom stock units and RSUs, and are payable in cash or common stock.
Restricted stock and RSUs generally vest over a three-year restriction period after the grant date, during which recipients may not sell, transfer, pledge, assign or otherwise convey their restricted shares to another party. During this period, restricted stock recipients receive cash dividends on their restricted shares and are entitled to vote those shares, while RSU recipients receive dividend-equivalent units instead of cash dividends and are not entitled to vote their RSUs or dividend-equivalent units.
We grant RSUs with one or more performance measures determined by the compensation committee of the board of directors as described in our proxy statement. Depending on the company’s performance, the number of RSUs earned may be less than, equal to or greater than the original number of RSUs awarded subject to a payout range.
We generally recognize compensation expense related to restricted stock and RSUs on a straight-line basis over the vesting period of the awards. Compensation expense related to restricted stock and RSUs reduced pretax operating earnings (and on a diluted per-share basis) by $79 ($0.21) in 2019, $83 ($0.22) in 2018 and $70 ($0.15) in 2017. Compensation expense for restricted stock and RSUs is reported as an operating expense for segment reporting purposes (see Note S). On December 31, 2019, we had $53 of unrecognized compensation cost related to restricted stock and RSUs, which is expected to be recognized over a weighted average period of 1.6 years.
A summary of restricted stock and RSU activity during 2019 follows:
|
|
|
|
|
|
|
|
In Shares and Dollars
|
Shares/
Share-Equivalent
Units
|
|
Weighted Average
Grant-Date Fair Value Per Share
|
Nonvested at December 31, 2018
|
1,262,276
|
|
|
$
|
171.62
|
|
Granted
|
556,922
|
|
|
161.43
|
|
Vested
|
(541,997
|
)
|
|
138.73
|
|
Forfeited
|
(52,837
|
)
|
|
183.81
|
|
Nonvested at December 31, 2019
|
1,224,364
|
|
|
$
|
181.11
|
|
The total fair value of vesting shares was $88 in 2019, $242 in 2018 and $200 in 2017.
R. RETIREMENT PLANS
We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits. Substantially all of our plans use a December 31 measurement date consistent with our fiscal year.
Retirement Plan Summary Information
Defined-contribution Benefits. We provide eligible employees the opportunity to participate in defined-contribution savings plans (commonly known as 401(k) plans), which permit contributions on a before-tax and after-tax basis. Employees may contribute to various investment alternatives. In most of these plans, we match a portion of the employees’ contributions. Our contributions to these plans totaled $333 in 2019, $302 in 2018 and $274 in 2017. The defined-contribution plans held approximately 20 million shares of our common stock, representing approximately 7% of our outstanding shares on December 31, 2019 and 2018.
Pension Benefits. We have twelve noncontributory and five contributory trusteed, qualified defined-benefit pension plans covering eligible government business employees, and two noncontributory and four contributory plans covering eligible commercial business employees, including some employees of our international operations. The primary factors affecting the benefits earned by participants in our pension plans are employees’ years of service and compensation levels. Our primary government pension plans, which comprise the majority of our unfunded obligation, were closed to new salaried participants on January 1, 2007. Additionally, we made changes to these plans for certain participants effective in 2014 that limit or cease the benefits that accrue for future service. We made similar changes to our primary
commercial pension plan in 2015. We made additional changes to some of our pension plans effective in 2019 that further limit or cease the benefits that accrue for future service.
We also sponsor one funded and several unfunded non-qualified supplemental executive retirement plans, which provide participants with additional benefits, including excess benefits over limits imposed on qualified plans by federal tax law.
Other Post-retirement Benefits. We maintain plans that provide post-retirement healthcare and life insurance coverage for certain employees and retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. The plans provide health and life insurance benefits only to those employees who retire directly from our service and not to those who terminate service prior to eligibility for retirement.
Contributions and Benefit Payments
It is our policy to fund our defined-benefit retirement plans in a manner that optimizes the tax deductibility and contract recovery of contributions considered within our capital deployment framework. Therefore, we may make discretionary contributions in addition to the required contributions determined in accordance with IRS regulations. We contributed $185 to our pension plans in 2019. In 2020, our required contributions are approximately $470.
We maintain several tax-advantaged accounts, primarily Voluntary Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations for some of our other post-retirement benefit plans. For non-funded plans, claims are paid as received. Contributions to our other post-retirement benefit plans were not material in 2019 and are not expected to be material in 2020.
We expect the following benefits to be paid from our retirement plans over the next 10 years:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other Post-retirement
Benefits
|
2020
|
$
|
853
|
|
|
$
|
66
|
|
2021
|
880
|
|
|
65
|
|
2022
|
905
|
|
|
64
|
|
2023
|
929
|
|
|
63
|
|
2024
|
957
|
|
|
62
|
|
2025-2029
|
5,020
|
|
|
286
|
|
Government Contract Considerations
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, we defer the excess in other contract costs in other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. See Note A for a discussion of our other contract costs. 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.
Defined-benefit Retirement Plan Summary Financial Information
Estimating retirement plan assets, liabilities and costs requires the extensive use of actuarial assumptions. These include the long-term rate of return on plan assets, the interest rates used to discount projected benefit payments, healthcare cost trend rates and future salary increases. Given the long-term nature of the assumptions being made, actual outcomes can and often do differ from these estimates.
Our annual benefit cost consists of four primary elements: the cost of benefits earned by employees for services rendered during the year, an interest charge on our plan liabilities, an assumed return on our plan assets for the year, and other gains and losses, which result from changes in actuarial assumptions, differences between the actual and assumed long-term rate of return on assets, and changes we make to plan benefit terms. These gains and losses are initially deferred in AOCL and then amortized over future years as a component of our annual benefit cost. We amortize actuarial differences under qualified plans on a straight-line basis over the average remaining service period of eligible employees. If all or almost all of a plan’s participants are inactive or are not accruing additional benefits, we amortize these differences over the average remaining life expectancy of the plan participants. We recognize the difference between the actual and expected return on plan assets for qualified plans over five years. The deferral of these differences reduces the volatility of our annual benefit cost that can result either from year-to-year changes in the assumptions or from actual results that are not necessarily representative of the long-term financial position of these plans. We recognize differences under nonqualified plans immediately.
Net annual defined-benefit pension and other post-retirement benefit cost (credit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
111
|
|
|
$
|
180
|
|
|
$
|
168
|
|
Interest cost
|
600
|
|
|
532
|
|
|
453
|
|
Expected return on plan assets
|
(911
|
)
|
|
(856
|
)
|
|
(679
|
)
|
Recognized net actuarial loss
|
326
|
|
|
359
|
|
|
362
|
|
Amortization of prior service credit
|
(19
|
)
|
|
(46
|
)
|
|
(66
|
)
|
Net annual benefit cost
|
$
|
107
|
|
|
$
|
169
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-retirement Benefits
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
9
|
|
Interest cost
|
35
|
|
|
33
|
|
|
30
|
|
Expected return on plan assets
|
(36
|
)
|
|
(40
|
)
|
|
(34
|
)
|
Recognized net actuarial gain
|
(8
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Amortization of prior service credit
|
(3
|
)
|
|
(4
|
)
|
|
(3
|
)
|
Net annual benefit credit
|
$
|
(4
|
)
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
The service cost component of net annual benefit cost (credit) is reported separately from the other components of net annual benefit cost (credit) in accordance with ASU 2017-07.
We recognize an asset or liability on the Consolidated Balance Sheet equal to the funded status of each of our defined-benefit retirement plans. The funded status is the difference between the fair value of the plan’s assets and its benefit obligation. The following is a reconciliation of the benefit obligations and plan/trust assets, and the resulting funded status, of our defined-benefit retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
Year Ended December 31
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
(15,720
|
)
|
|
$
|
(14,212
|
)
|
|
$
|
(935
|
)
|
|
$
|
(996
|
)
|
Service cost
|
(111
|
)
|
|
(180
|
)
|
|
(8
|
)
|
|
(10
|
)
|
Interest cost
|
(600
|
)
|
|
(532
|
)
|
|
(35
|
)
|
|
(33
|
)
|
Acquisitions
|
—
|
|
|
(2,758
|
)
|
|
—
|
|
|
(62
|
)
|
Amendments
|
(3
|
)
|
|
15
|
|
|
(8
|
)
|
|
—
|
|
Actuarial (loss) gain
|
(2,446
|
)
|
|
1,183
|
|
|
(101
|
)
|
|
78
|
|
Settlement/curtailment/other
|
(33
|
)
|
|
23
|
|
|
(4
|
)
|
|
21
|
|
Benefits paid
|
806
|
|
|
741
|
|
|
64
|
|
|
67
|
|
Benefit obligation at end of year
|
$
|
(18,107
|
)
|
|
$
|
(15,720
|
)
|
|
$
|
(1,027
|
)
|
|
$
|
(935
|
)
|
Change in Plan/Trust Assets
|
|
|
|
|
|
|
|
Fair value of assets at beginning of year
|
$
|
11,532
|
|
|
$
|
10,130
|
|
|
$
|
570
|
|
|
$
|
541
|
|
Actual return on plan assets
|
2,206
|
|
|
(749
|
)
|
|
117
|
|
|
(4
|
)
|
Acquisitions
|
—
|
|
|
2,328
|
|
|
—
|
|
|
77
|
|
Employer contributions
|
185
|
|
|
571
|
|
|
2
|
|
|
1
|
|
Settlement/curtailment/other
|
39
|
|
|
(26
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(785
|
)
|
|
(722
|
)
|
|
(45
|
)
|
|
(45
|
)
|
Fair value of assets at end of year
|
$
|
13,177
|
|
|
$
|
11,532
|
|
|
$
|
644
|
|
|
$
|
570
|
|
Funded status at end of year
|
$
|
(4,930
|
)
|
|
$
|
(4,188
|
)
|
|
$
|
(383
|
)
|
|
$
|
(365
|
)
|
The overall increase in our pension benefit obligation for the year ended December 31, 2019, was due primarily to actuarial losses created by the change in the weighted-average discount rate, which decreased from 4.28% at December 31, 2018, to 3.19% at December 31, 2019.
The overall increases in our pension benefit obligation and assets for the year ended December 31, 2018, were due primarily to the acquisition of CSRA retirement plans. The increase in the obligation due to acquired plans was offset partially by actuarial gains created by the change in the weighted-average discount rate, which increased from 3.69% at December 31, 2017, to 4.28% at December 31, 2018.
Amounts recognized on the Consolidated Balance Sheet consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
December 31
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Noncurrent assets
|
$
|
61
|
|
|
$
|
67
|
|
|
$
|
94
|
|
|
$
|
74
|
|
Current liabilities
|
(166
|
)
|
|
(131
|
)
|
|
(130
|
)
|
|
(141
|
)
|
Noncurrent liabilities
|
(4,825
|
)
|
|
(4,124
|
)
|
|
(347
|
)
|
|
(298
|
)
|
Net liability recognized
|
$
|
(4,930
|
)
|
|
$
|
(4,188
|
)
|
|
$
|
(383
|
)
|
|
$
|
(365
|
)
|
Amounts deferred in AOCL for our retirement plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
December 31
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net actuarial loss (gain)
|
$
|
5,784
|
|
|
$
|
4,959
|
|
|
$
|
(9
|
)
|
|
$
|
(37
|
)
|
Prior service (credit) cost
|
(73
|
)
|
|
(95
|
)
|
|
12
|
|
|
1
|
|
Total amount recognized in AOCL, pretax
|
$
|
5,711
|
|
|
$
|
4,864
|
|
|
$
|
3
|
|
|
$
|
(36
|
)
|
The following is a reconciliation of the change in AOCL for our retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
Year Ended December 31
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net actuarial loss (gain)
|
$
|
1,151
|
|
|
$
|
422
|
|
|
$
|
20
|
|
|
$
|
(34
|
)
|
Prior service credit (cost)
|
3
|
|
|
(15
|
)
|
|
8
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
Net actuarial (loss) gain from prior
years
|
(326
|
)
|
|
(359
|
)
|
|
8
|
|
|
4
|
|
Prior service credit
|
19
|
|
|
46
|
|
|
3
|
|
|
4
|
|
Other*
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(2
|
)
|
Change in AOCL, pretax
|
$
|
847
|
|
|
$
|
89
|
|
|
$
|
39
|
|
|
$
|
(28
|
)
|
* Includes foreign exchange translation, curtailment and other adjustments.
A pension plan’s funded status is the difference between the plan’s assets and its projected benefit obligation (PBO). The PBO is the present value of future benefits attributed to employee services rendered to date, including assumptions about future compensation levels. On December 31, 2019 and 2018, most of our pension plans had a PBO that exceeded the plans’ assets. Summary information for those plans follows:
|
|
|
|
|
|
|
|
|
December 31
|
2019
|
|
2018
|
PBO
|
$
|
(17,651
|
)
|
|
$
|
(15,354
|
)
|
Fair value of plan assets
|
12,673
|
|
|
11,116
|
|
A retirement plan’s accumulated benefit obligation (ABO) is the present value of future benefits attributed to employee services rendered to date, excluding assumptions about future compensation levels for pension plans. The ABO for all defined-benefit pension plans was $17.8 billion and $15.5 billion on December 31, 2019 and 2018, respectively. The ABO for all other post-retirement plans was $1 billion and $935 on December 31, 2019 and 2018, respectively. On December 31, 2019 and 2018, most of our retirement plans had an ABO that exceeded the plans’ assets. Summary information for those plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
December 31
|
2019
|
|
2018
|
|
2019
|
|
2018
|
ABO
|
$
|
(17,080
|
)
|
|
$
|
(14,856
|
)
|
|
$
|
(783
|
)
|
|
$
|
(709
|
)
|
Fair value of plan assets
|
12,354
|
|
|
10,832
|
|
|
301
|
|
|
264
|
|
Retirement Plan Assumptions
We calculate the plan assets and liabilities for a given year and the net annual benefit cost for the subsequent year using assumptions determined as of December 31 of the year in question.
The following table summarizes the weighted average assumptions used to determine our benefit obligations:
|
|
|
|
|
|
|
Assumptions on December 31
|
2019
|
|
2018
|
Pension Benefits
|
|
|
|
Benefit obligation discount rate
|
3.19
|
%
|
|
4.28
|
%
|
Rate of increase in compensation levels
|
2.68
|
%
|
|
2.79
|
%
|
Other Post-retirement Benefits
|
|
|
|
Benefit obligation discount rate
|
3.18
|
%
|
|
4.24
|
%
|
Healthcare cost trend rate:
|
|
|
|
Trend rate for next year
|
6.00
|
%
|
|
6.50
|
%
|
Ultimate trend rate
|
5.00
|
%
|
|
5.00
|
%
|
Year rate reaches ultimate trend rate
|
2024
|
|
|
2024
|
|
The following table summarizes the weighted average assumptions used to determine our net annual benefit cost:
|
|
|
|
|
|
|
|
|
|
Assumptions for Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
Pension Benefits
|
|
|
|
|
|
Discount rates:
|
|
|
|
|
|
Benefit obligation
|
4.28
|
%
|
|
3.69
|
%
|
|
4.19
|
%
|
Service cost
|
3.81
|
%
|
|
3.51
|
%
|
|
4.13
|
%
|
Interest cost
|
3.92
|
%
|
|
3.34
|
%
|
|
3.56
|
%
|
Expected long-term rate of return on assets
|
7.46
|
%
|
|
7.45
|
%
|
|
7.43
|
%
|
Rate of increase in compensation levels
|
2.77
|
%
|
|
2.79
|
%
|
|
2.90
|
%
|
Other Post-retirement Benefits
|
|
|
|
|
|
Discount rates:
|
|
|
|
|
|
Benefit obligation
|
4.24
|
%
|
|
3.64
|
%
|
|
4.11
|
%
|
Service cost
|
4.23
|
%
|
|
3.79
|
%
|
|
4.34
|
%
|
Interest cost
|
3.88
|
%
|
|
3.27
|
%
|
|
3.43
|
%
|
Expected long-term rate of return on assets
|
6.84
|
%
|
|
7.75
|
%
|
|
7.76
|
%
|
We base the discount rates on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period. We use the spot rate approach to identify individual spot rates along the yield curve that correspond with the timing of each projected service cost and discounted benefit obligation payment.
We determine the long-term rates of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy. We decreased the expected long-term rate of return on assets in our primary U.S. government and commercial pension plans by 75 basis points beginning in 2017, and 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 beginning in 2019, both following an assessment of the historical and expected long-term returns of our various asset classes.
Retirement plan assumptions are based on our best judgment, including consideration of current and future market conditions. Changes in these estimates impact future pension and other post-retirement benefit cost. As discussed above, we defer recognition of the cumulative benefit cost for our government plans in
excess of costs allocated to contracts and included in revenue. Therefore, the impact of annual changes in financial reporting assumptions on the cost for these plans does not immediately affect our operating results.
Plan Assets
A committee of our board of directors is responsible for the strategic oversight of our defined-benefit retirement plan assets held in trust. Management develops investment policies and provides oversight of a third-party investment manager who reports to the committee on a regular basis. The outsourced third-party investment manager develops investment strategies and makes all day-to-day investment decisions related to defined-benefit retirement plan assets in accordance with our investment policy and target allocation percentages.
Our investment policy endeavors to strike the appropriate balance among capital preservation, asset growth and current income. The objective of our investment policy is to generate future returns consistent with our assumed long-term rates of return used to determine our benefit obligations and net annual benefit cost. Target allocation percentages vary over time depending on the perceived risk and return potential of various asset classes and market conditions. At the end of 2019, our asset allocation policy ranges were:
|
|
|
Equities
|
48-68%
|
Fixed income
|
20-48%
|
Cash
|
0-5%
|
Other asset classes
|
0-16%
|
More than 90% of our pension plan assets are held in a single trust for our primary U.S. government and commercial pension plans. On December 31, 2019, the trust was invested largely in publicly traded equities, fixed-income securities and commingled funds comprised of equity securities. The trust also invests in other asset classes consistent with our investment policy. Our investment policy allows the use of derivative instruments when appropriate to reduce anticipated asset volatility, to gain exposure to an asset class or to adjust the duration of fixed-income assets.
We hold assets in VEBA trusts for some of our other post-retirement benefit plans. These assets are managed by a third-party investment manager with oversight by management and are generally invested in publicly traded equities, fixed-income securities and commingled funds comprised of equity and fixed-income securities. Our asset allocation strategy for the VEBA trusts considers potential fluctuations in our other post-retirement benefit obligation, the taxable nature of certain VEBA trusts, tax deduction limits on contributions and the regulatory environment.
Our retirement plan assets are reported at fair value. See Note E for a discussion of the hierarchy for determining fair value. Our Level 1 assets include investments in publicly traded equity securities. These securities are actively traded and valued using quoted prices for identical securities from the market exchanges. Our Level 2 assets consist of fixed-income securities and commingled funds whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally 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 plan assets that are invested in commingled funds are valued using a unit price or net asset value (NAV) that is based on the underlying investments of the fund. Our Level 3 assets include real estate funds, insurance deposit contracts, retirement annuity contracts and direct private equity investments.
Certain investments valued using NAV as a practical expedient are excluded from the fair value hierarchy. These investments are redeemable at NAV on a monthly or quarterly basis and have redemption
notice periods of up to 90 days. The unfunded commitments related to these investments were not material on December 31, 2019 or 2018.
The fair value of our pension plan assets by investment category and the corresponding level within the fair value hierarchy were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Asset Category
|
December 31, 2019
|
Cash and equivalents
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
—
|
|
Equity securities (a):
|
|
|
|
|
|
|
|
U.S. companies
|
958
|
|
|
958
|
|
|
—
|
|
|
—
|
|
Non-U.S. companies
|
128
|
|
|
128
|
|
|
—
|
|
|
—
|
|
Private equity investments
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
Corporate bonds (b)
|
2,163
|
|
|
—
|
|
|
2,163
|
|
|
—
|
|
Treasury securities
|
1,855
|
|
|
—
|
|
|
1,855
|
|
|
—
|
|
Commingled funds:
|
|
|
|
|
|
|
|
Equity funds
|
6,494
|
|
|
—
|
|
|
6,494
|
|
|
—
|
|
Fixed-income funds
|
365
|
|
|
—
|
|
|
365
|
|
|
—
|
|
Real estate funds
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Other investments:
|
|
|
|
|
|
|
|
Insurance deposit contracts
|
137
|
|
|
—
|
|
|
—
|
|
|
137
|
|
Retirement annuity contracts
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Total plan assets in fair value hierarchy
|
$
|
12,301
|
|
|
$
|
1,086
|
|
|
$
|
10,933
|
|
|
$
|
282
|
|
Plan assets measured using NAV as a practical expedient (c):
|
|
|
|
|
|
|
|
Real estate funds
|
443
|
|
|
|
|
|
|
|
Hedge funds
|
419
|
|
|
|
|
|
|
|
Equity funds
|
14
|
|
|
|
|
|
|
|
Total pension plan assets
|
$
|
13,177
|
|
|
|
|
|
|
|
(a)No single equity holding amounted to more than 1% of the total fair value.
(b)Our corporate bond investments had an average rating of A.
(c)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Asset Category
|
December 31, 2018
|
Cash and equivalents
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
—
|
|
Equity securities (a):
|
|
|
|
|
|
|
|
U.S. companies
|
732
|
|
|
732
|
|
|
—
|
|
|
—
|
|
Non-U.S. companies
|
117
|
|
|
117
|
|
|
—
|
|
|
—
|
|
Private equity investments
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
Corporate bonds (b)
|
1,600
|
|
|
—
|
|
|
1,600
|
|
|
—
|
|
Treasury securities
|
1,410
|
|
|
—
|
|
|
1,410
|
|
|
—
|
|
Commingled funds:
|
|
|
|
|
|
|
|
Equity funds
|
5,243
|
|
|
—
|
|
|
5,243
|
|
|
—
|
|
Fixed-income funds
|
624
|
|
|
—
|
|
|
624
|
|
|
—
|
|
Real estate funds
|
68
|
|
|
—
|
|
|
—
|
|
|
68
|
|
Other investments:
|
|
|
|
|
|
|
|
Insurance deposit contracts
|
128
|
|
|
—
|
|
|
—
|
|
|
128
|
|
Total plan assets in fair value hierarchy
|
$
|
10,015
|
|
|
$
|
849
|
|
|
$
|
8,950
|
|
|
$
|
216
|
|
Plan assets measured using NAV as a practical expedient (c):
|
|
|
|
|
|
|
|
Hedge funds
|
910
|
|
|
|
|
|
|
|
Real estate funds
|
420
|
|
|
|
|
|
|
|
Fixed-income funds
|
101
|
|
|
|
|
|
|
|
Equity funds
|
86
|
|
|
|
|
|
|
|
Total pension plan assets
|
$
|
11,532
|
|
|
|
|
|
|
|
|
|
|
(a)No single equity holding amounted to more than 1% of the total fair value.
(b)Our corporate bond investments had an average rating of A+.
(c)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
The fair value of our other post-retirement benefit plan assets by category and the corresponding level within the fair value hierarchy were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
Asset Category (a)
|
December 31, 2019
|
Cash and equivalents
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
Equity securities
|
92
|
|
|
92
|
|
|
—
|
|
Fixed-income securities
|
122
|
|
|
—
|
|
|
122
|
|
Commingled funds:
|
|
|
|
|
|
Equity funds
|
288
|
|
|
—
|
|
|
288
|
|
Fixed-income funds
|
113
|
|
|
—
|
|
|
113
|
|
Real estate funds
|
2
|
|
|
2
|
|
|
—
|
|
Total plan assets in fair value hierarchy
|
$
|
635
|
|
|
$
|
94
|
|
|
$
|
541
|
|
Plan assets measured using NAV as a practical expedient (b):
|
|
|
|
|
|
Real estate funds
|
5
|
|
|
|
|
|
Hedge funds
|
4
|
|
|
|
|
|
Total other post-retirement benefit plan assets
|
$
|
644
|
|
|
|
|
|
(a) We had no Level 3 investments on December 31, 2019.
(b) Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
Asset Category (a)
|
December 31, 2018
|
Cash and equivalents
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
Equity securities
|
80
|
|
|
80
|
|
|
—
|
|
Fixed-income securities
|
87
|
|
|
—
|
|
|
87
|
|
Commingled funds:
|
|
|
|
|
|
Equity funds
|
237
|
|
|
—
|
|
|
237
|
|
Fixed-income funds
|
111
|
|
|
—
|
|
|
111
|
|
Real estate funds
|
2
|
|
|
2
|
|
|
—
|
|
Total plan assets in fair value hierarchy
|
$
|
540
|
|
|
$
|
82
|
|
|
$
|
458
|
|
Plan assets measured using NAV as a practical expedient (b):
|
|
|
|
|
|
Hedge funds
|
22
|
|
|
|
|
|
Equity funds
|
3
|
|
|
|
|
|
Fixed-income funds
|
3
|
|
|
|
|
|
Real estate funds
|
2
|
|
|
|
|
|
Total other post-retirement benefit plan assets
|
$
|
570
|
|
|
|
|
|
|
|
(a) We had no Level 3 investments on December 31, 2018.
(b) Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
Changes in our Level 3 retirement plan assets during 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity Investments
|
|
Real Estate Funds
|
|
Insurance Deposits Contracts
|
|
Retirement Annuity Contracts
|
|
Total
Level 3 Assets
|
December 31, 2017
|
$
|
18
|
|
|
$
|
51
|
|
|
$
|
120
|
|
|
$
|
—
|
|
|
$
|
189
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Realized gains, net
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Purchases, sales and settlements, net
|
2
|
|
|
18
|
|
|
5
|
|
|
—
|
|
|
25
|
|
December 31, 2018
|
20
|
|
|
68
|
|
|
128
|
|
|
—
|
|
|
216
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net
|
5
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
17
|
|
Purchases, sales and settlements, net
|
1
|
|
|
10
|
|
|
3
|
|
|
35
|
|
|
49
|
|
December 31, 2019
|
$
|
26
|
|
|
$
|
84
|
|
|
$
|
137
|
|
|
$
|
35
|
|
|
$
|
282
|
|
S. 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
|
|
Revenue from U.S. Government
|
Year Ended December 31
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Aerospace
|
$
|
9,801
|
|
$
|
8,455
|
|
$
|
8,129
|
|
|
$
|
1,532
|
|
$
|
1,490
|
|
$
|
1,577
|
|
|
$
|
498
|
|
$
|
334
|
|
$
|
231
|
|
Combat Systems
|
7,007
|
|
6,241
|
|
5,949
|
|
|
996
|
|
962
|
|
937
|
|
|
4,048
|
|
3,228
|
|
3,084
|
|
Information
Technology
|
8,422
|
|
8,269
|
|
4,410
|
|
|
628
|
|
608
|
|
373
|
|
|
8,240
|
|
8,025
|
|
4,164
|
|
Mission Systems
|
4,937
|
|
4,726
|
|
4,481
|
|
|
683
|
|
659
|
|
638
|
|
|
3,994
|
|
3,774
|
|
3,629
|
|
Marine Systems
|
9,183
|
|
8,502
|
|
8,004
|
|
|
785
|
|
761
|
|
685
|
|
|
9,027
|
|
8,245
|
|
7,913
|
|
Corporate
|
—
|
|
—
|
|
—
|
|
|
24
|
|
(23
|
)
|
26
|
|
|
—
|
|
—
|
|
—
|
|
Total
|
$
|
39,350
|
|
$
|
36,193
|
|
$
|
30,973
|
|
|
$
|
4,648
|
|
$
|
4,457
|
|
$
|
4,236
|
|
|
$
|
25,807
|
|
$
|
23,606
|
|
$
|
19,021
|
|
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 R, 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. Corporate operating results in 2018 also included one-time charges of approximately $45 associated with the costs to complete the CSRA acquisition.
The following is additional summary financial information for each of our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
Capital Expenditures
|
|
Depreciation and Amortization
|
Year Ended December 31
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Aerospace
|
$
|
12,324
|
|
$
|
11,220
|
|
$
|
10,126
|
|
|
$
|
138
|
|
$
|
194
|
|
$
|
132
|
|
|
$
|
178
|
|
$
|
154
|
|
$
|
147
|
|
Combat Systems
|
11,220
|
|
9,853
|
|
9,846
|
|
|
109
|
|
91
|
|
84
|
|
|
85
|
|
87
|
|
86
|
|
Information
Technology
|
14,248
|
|
14,159
|
|
3,021
|
|
|
147
|
|
62
|
|
16
|
|
|
377
|
|
333
|
|
32
|
|
Mission Systems
|
6,205
|
|
5,984
|
|
5,856
|
|
|
75
|
|
49
|
|
47
|
|
|
60
|
|
65
|
|
60
|
|
Marine Systems
|
3,918
|
|
3,130
|
|
2,906
|
|
|
449
|
|
243
|
|
123
|
|
|
122
|
|
116
|
|
109
|
|
Corporate*
|
926
|
|
1,062
|
|
3,291
|
|
|
69
|
|
51
|
|
26
|
|
|
7
|
|
8
|
|
7
|
|
Total
|
$
|
48,841
|
|
$
|
45,408
|
|
$
|
35,046
|
|
|
$
|
987
|
|
$
|
690
|
|
$
|
428
|
|
|
$
|
829
|
|
$
|
763
|
|
$
|
441
|
|
* Corporate identifiable assets are primarily cash and equivalents.
See Note C for additional revenue information by segment.
The following table presents our revenue by geographic area based on the location of our customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
2019
|
|
2018
|
|
2017
|
North America:
|
|
|
|
|
|
United States
|
$
|
31,982
|
|
|
$
|
28,578
|
|
|
$
|
23,519
|
|
Other
|
852
|
|
|
755
|
|
|
915
|
|
Total North America
|
32,834
|
|
|
29,333
|
|
|
24,434
|
|
Europe
|
2,808
|
|
|
2,772
|
|
|
2,558
|
|
Asia/Pacific
|
1,670
|
|
|
2,252
|
|
|
2,011
|
|
Africa/Middle East
|
1,739
|
|
|
1,565
|
|
|
1,655
|
|
South America
|
299
|
|
|
271
|
|
|
315
|
|
Total revenue
|
$
|
39,350
|
|
|
$
|
36,193
|
|
|
$
|
30,973
|
|
Our revenue from non-U.S. operations was $4.4 billion in 2019, $4.2 billion in 2018 and $3.7 billion in 2017, and earnings from continuing operations before income taxes from non-U.S. operations were $600 in 2019, $578 in 2018 and $550 in 2017. The long-lived assets associated with these operations were 4% of our total long-lived assets on December 31, 2019, 3% on December 31, 2018, and 5% on December 31, 2017.
T. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed- and floating-rate notes described in Note K 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.
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Parent
|
Guarantors on a
Combined Basis
|
Other Subsidiaries
on a Combined Basis
|
Consolidating
Adjustments
|
Total
Consolidated
|
Revenue
|
$
|
—
|
|
$
|
30,566
|
|
$
|
8,784
|
|
$
|
—
|
|
$
|
39,350
|
|
Cost of sales
|
99
|
|
(25,120
|
)
|
(7,270
|
)
|
—
|
|
(32,291
|
)
|
G&A
|
(75
|
)
|
(1,725
|
)
|
(611
|
)
|
—
|
|
(2,411
|
)
|
Operating earnings
|
24
|
|
3,721
|
|
903
|
|
—
|
|
4,648
|
|
Interest, net
|
(426
|
)
|
1
|
|
(35
|
)
|
—
|
|
(460
|
)
|
Other, net
|
(60
|
)
|
15
|
|
59
|
|
—
|
|
14
|
|
Earnings before income tax
|
(462
|
)
|
3,737
|
|
927
|
|
—
|
|
4,202
|
|
Provision for income tax, net
|
117
|
|
(626
|
)
|
(209
|
)
|
—
|
|
(718
|
)
|
Equity in net earnings of subsidiaries
|
3,829
|
|
—
|
|
—
|
|
(3,829
|
)
|
—
|
|
Net earnings
|
$
|
3,484
|
|
$
|
3,111
|
|
$
|
718
|
|
$
|
(3,829
|
)
|
$
|
3,484
|
|
Comprehensive income
|
$
|
3,043
|
|
$
|
3,083
|
|
$
|
957
|
|
$
|
(4,040
|
)
|
$
|
3,043
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
Revenue
|
$
|
—
|
|
$
|
28,132
|
|
$
|
8,061
|
|
$
|
—
|
|
$
|
36,193
|
|
Cost of sales
|
67
|
|
(22,841
|
)
|
(6,704
|
)
|
—
|
|
(29,478
|
)
|
G&A
|
(90
|
)
|
(1,638
|
)
|
(530
|
)
|
—
|
|
(2,258
|
)
|
Operating earnings
|
(23
|
)
|
3,653
|
|
827
|
|
—
|
|
4,457
|
|
Interest, net
|
(326
|
)
|
—
|
|
(30
|
)
|
—
|
|
(356
|
)
|
Other, net
|
(81
|
)
|
12
|
|
53
|
|
—
|
|
(16
|
)
|
Earnings before income tax
|
(430
|
)
|
3,665
|
|
850
|
|
—
|
|
4,085
|
|
Provision for income tax, net
|
116
|
|
(677
|
)
|
(166
|
)
|
—
|
|
(727
|
)
|
Discontinued operations, net of tax
|
(13
|
)
|
—
|
|
—
|
|
—
|
|
(13
|
)
|
Equity in net earnings of subsidiaries
|
3,672
|
|
—
|
|
—
|
|
(3,672
|
)
|
—
|
|
Net earnings
|
$
|
3,345
|
|
$
|
2,988
|
|
$
|
684
|
|
$
|
(3,672
|
)
|
$
|
3,345
|
|
Comprehensive income
|
$
|
3,025
|
|
$
|
2,992
|
|
$
|
305
|
|
$
|
(3,297
|
)
|
$
|
3,025
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
Revenue
|
$
|
—
|
|
$
|
26,933
|
|
$
|
4,040
|
|
$
|
—
|
|
$
|
30,973
|
|
Cost of sales
|
76
|
|
(21,695
|
)
|
(3,112
|
)
|
—
|
|
(24,731
|
)
|
G&A
|
(48
|
)
|
(1,643
|
)
|
(315
|
)
|
—
|
|
(2,006
|
)
|
Operating earnings
|
28
|
|
3,595
|
|
613
|
|
—
|
|
4,236
|
|
Interest, net
|
(97
|
)
|
1
|
|
(7
|
)
|
—
|
|
(103
|
)
|
Other, net
|
(72
|
)
|
12
|
|
4
|
|
—
|
|
(56
|
)
|
Earnings before income tax
|
(141
|
)
|
3,608
|
|
610
|
|
—
|
|
4,077
|
|
Provision for income tax, net
|
154
|
|
(1,262
|
)
|
(57
|
)
|
—
|
|
(1,165
|
)
|
Equity in net earnings of subsidiaries
|
2,899
|
|
—
|
|
—
|
|
(2,899
|
)
|
—
|
|
Net earnings
|
$
|
2,912
|
|
$
|
2,346
|
|
$
|
553
|
|
$
|
(2,899
|
)
|
$
|
2,912
|
|
Comprehensive income
|
$
|
3,479
|
|
$
|
2,336
|
|
$
|
1,158
|
|
$
|
(3,494
|
)
|
$
|
3,479
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Parent*
|
Guarantors
on a
Combined
Basis
|
Other
Subsidiaries
on a
Combined
Basis
|
Consolidating
Adjustments
|
Total
Consolidated
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and equivalents
|
$
|
601
|
|
$
|
—
|
|
$
|
301
|
|
$
|
—
|
|
$
|
902
|
|
Accounts receivable
|
—
|
|
1,188
|
|
2,356
|
|
—
|
|
3,544
|
|
Unbilled receivables
|
—
|
|
2,826
|
|
5,031
|
|
—
|
|
7,857
|
|
Inventories
|
—
|
|
6,191
|
|
115
|
|
—
|
|
6,306
|
|
Other current assets
|
(300
|
)
|
989
|
|
482
|
|
—
|
|
1,171
|
|
Total current assets
|
301
|
|
11,194
|
|
8,285
|
|
—
|
|
19,780
|
|
Noncurrent assets:
|
|
|
|
|
|
PP&E
|
346
|
|
7,741
|
|
1,674
|
|
—
|
|
9,761
|
|
Accumulated depreciation of PP&E
|
(91
|
)
|
(4,260
|
)
|
(935
|
)
|
—
|
|
(5,286
|
)
|
Intangible assets, net
|
—
|
|
210
|
|
2,105
|
|
—
|
|
2,315
|
|
Goodwill
|
—
|
|
7,960
|
|
11,717
|
|
—
|
|
19,677
|
|
Other assets
|
203
|
|
1,278
|
|
1,113
|
|
—
|
|
2,594
|
|
Net investment in subsidiaries
|
29,693
|
|
—
|
|
—
|
|
(29,693
|
)
|
—
|
|
Total noncurrent assets
|
30,151
|
|
12,929
|
|
15,674
|
|
(29,693
|
)
|
29,061
|
|
Total assets
|
$
|
30,452
|
|
$
|
24,123
|
|
$
|
23,959
|
|
$
|
(29,693
|
)
|
$
|
48,841
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term debt and current portion of long-term debt
|
$
|
2,497
|
|
$
|
2
|
|
$
|
421
|
|
$
|
—
|
|
$
|
2,920
|
|
Customer advances and deposits
|
—
|
|
4,174
|
|
2,974
|
|
—
|
|
7,148
|
|
Other current liabilities
|
487
|
|
4,391
|
|
1,855
|
|
—
|
|
6,733
|
|
Total current liabilities
|
2,984
|
|
8,567
|
|
5,250
|
|
—
|
|
16,801
|
|
Noncurrent liabilities:
|
|
|
|
|
|
Long-term debt
|
8,928
|
|
67
|
|
15
|
|
—
|
|
9,010
|
|
Other liabilities
|
4,963
|
|
2,995
|
|
1,495
|
|
—
|
|
9,453
|
|
Total noncurrent liabilities
|
13,891
|
|
3,062
|
|
1,510
|
|
—
|
|
18,463
|
|
Total shareholders’ equity
|
13,577
|
|
12,494
|
|
17,199
|
|
(29,693
|
)
|
13,577
|
|
Total liabilities and shareholders’ equity
|
$
|
30,452
|
|
$
|
24,123
|
|
$
|
23,959
|
|
$
|
(29,693
|
)
|
$
|
48,841
|
|
|
|
*
|
Includes the funded status of the company’s primary domestic qualified defined-benefit pension plans as the Parent has the ultimate obligation for the plans.
|
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
|
(251
|
)
|
647
|
|
518
|
|
—
|
|
914
|
|
Total current assets
|
209
|
|
10,431
|
|
7,549
|
|
—
|
|
18,189
|
|
Noncurrent assets:
|
|
|
|
|
|
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
|
|
—
|
|
2,585
|
|
Goodwill
|
—
|
|
8,031
|
|
11,563
|
|
—
|
|
19,594
|
|
Other assets
|
195
|
|
274
|
|
593
|
|
—
|
|
1,062
|
|
Net investment in subsidiaries
|
27,887
|
|
—
|
|
—
|
|
(27,887
|
)
|
—
|
|
Total noncurrent assets
|
28,272
|
|
11,662
|
|
15,172
|
|
(27,887
|
)
|
27,219
|
|
Total assets
|
$
|
28,481
|
|
$
|
22,093
|
|
$
|
22,721
|
|
$
|
(27,887
|
)
|
$
|
45,408
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Short-term debt and current portion of long-term debt
|
$
|
850
|
|
$
|
—
|
|
$
|
123
|
|
$
|
—
|
|
$
|
973
|
|
Customer advances and deposits
|
—
|
|
4,541
|
|
2,729
|
|
—
|
|
7,270
|
|
Other current liabilities
|
552
|
|
3,944
|
|
2,000
|
|
—
|
|
6,496
|
|
Total current liabilities
|
1,402
|
|
8,485
|
|
4,852
|
|
—
|
|
14,739
|
|
Noncurrent liabilities:
|
|
|
|
|
|
Long-term debt
|
11,398
|
|
39
|
|
7
|
|
—
|
|
11,444
|
|
Other liabilities
|
3,949
|
|
2,115
|
|
1,429
|
|
—
|
|
7,493
|
|
Total noncurrent liabilities
|
15,347
|
|
2,154
|
|
1,436
|
|
—
|
|
18,937
|
|
Total shareholders’ equity
|
11,732
|
|
11,454
|
|
16,433
|
|
(27,887
|
)
|
11,732
|
|
Total liabilities and shareholders’ equity
|
$
|
28,481
|
|
$
|
22,093
|
|
$
|
22,721
|
|
$
|
(27,887
|
)
|
$
|
45,408
|
|
|
|
*
|
Includes the funded status of the company’s primary domestic qualified defined-benefit pension plans as the Parent has the ultimate obligation for the plans.
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Parent
|
Guarantors
on a
Combined
Basis
|
Other
Subsidiaries
on a
Combined
Basis
|
Consolidating
Adjustments
|
Total
Consolidated
|
Net cash provided by operating activities*
|
$
|
(46
|
)
|
$
|
2,918
|
|
$
|
109
|
|
$
|
—
|
|
$
|
2,981
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(68
|
)
|
(718
|
)
|
(201
|
)
|
—
|
|
(987
|
)
|
Other, net
|
7
|
|
10
|
|
(24
|
)
|
—
|
|
(7
|
)
|
Net cash used by investing activities
|
(61
|
)
|
(708
|
)
|
(225
|
)
|
—
|
|
(994
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Dividends paid
|
(1,152
|
)
|
—
|
|
—
|
|
—
|
|
(1,152
|
)
|
Repayments of commercial paper, net
|
(850
|
)
|
—
|
|
—
|
|
—
|
|
(850
|
)
|
Purchases of common stock
|
(231
|
)
|
—
|
|
—
|
|
—
|
|
(231
|
)
|
Other, net
|
24
|
|
(2
|
)
|
214
|
|
—
|
|
236
|
|
Net cash used by financing activities
|
(2,209
|
)
|
(2
|
)
|
214
|
|
—
|
|
(1,997
|
)
|
Net cash used by discontinued operations
|
(51
|
)
|
—
|
|
—
|
|
—
|
|
(51
|
)
|
Cash sweep/funding by parent
|
2,508
|
|
(2,208
|
)
|
(300
|
)
|
—
|
|
—
|
|
Net decrease in cash and equivalents
|
141
|
|
—
|
|
(202
|
)
|
—
|
|
(61
|
)
|
Cash and equivalents at beginning of year
|
460
|
|
—
|
|
503
|
|
—
|
|
963
|
|
Cash and equivalents at end of year
|
$
|
601
|
|
$
|
—
|
|
$
|
301
|
|
$
|
—
|
|
$
|
902
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
Net cash provided by operating activities*
|
$
|
(579
|
)
|
$
|
2,954
|
|
$
|
773
|
|
$
|
—
|
|
$
|
3,148
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
(9,749
|
)
|
(74
|
)
|
(276
|
)
|
—
|
|
(10,099
|
)
|
Capital expenditures
|
(51
|
)
|
(513
|
)
|
(126
|
)
|
—
|
|
(690
|
)
|
Proceeds from sales of assets
|
90
|
|
472
|
|
—
|
|
—
|
|
562
|
|
Other, net
|
4
|
|
(12
|
)
|
1
|
|
—
|
|
(7
|
)
|
Net cash used by investing activities
|
(9,706
|
)
|
(127
|
)
|
(401
|
)
|
—
|
|
(10,234
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from fixed-rate notes
|
6,461
|
|
—
|
|
—
|
|
—
|
|
6,461
|
|
Purchases of common stock
|
(1,769
|
)
|
—
|
|
—
|
|
—
|
|
(1,769
|
)
|
Dividends paid
|
(1,075
|
)
|
—
|
|
—
|
|
—
|
|
(1,075
|
)
|
Proceeds from floating-rate notes
|
1,000
|
|
—
|
|
—
|
|
—
|
|
1,000
|
|
Proceeds from commercial paper, net
|
850
|
|
—
|
|
—
|
|
—
|
|
850
|
|
Repayment of CSRA accounts receivable purchase
agreement
|
—
|
|
—
|
|
(450
|
)
|
—
|
|
(450
|
)
|
Other, net
|
3
|
|
35
|
|
31
|
|
—
|
|
69
|
|
Net cash provided by financing activities
|
5,470
|
|
35
|
|
(419
|
)
|
—
|
|
5,086
|
|
Net cash used by discontinued operations
|
(20
|
)
|
—
|
|
—
|
|
—
|
|
(20
|
)
|
Cash sweep/funding by parent
|
3,365
|
|
(2,862
|
)
|
(503
|
)
|
—
|
|
—
|
|
Net decrease in cash and equivalents
|
(1,470
|
)
|
—
|
|
(550
|
)
|
—
|
|
(2,020
|
)
|
Cash and equivalents at beginning of year
|
1,930
|
|
—
|
|
1,053
|
|
—
|
|
2,983
|
|
Cash and equivalents at end of year
|
$
|
460
|
|
$
|
—
|
|
$
|
503
|
|
$
|
—
|
|
$
|
963
|
|
* Continuing operations only.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
Parent
|
Guarantors
on a
Combined
Basis
|
Other
Subsidiaries
on a
Combined
Basis
|
Consolidating
Adjustments
|
Total
Consolidated
|
Net cash provided by operating activities*
|
$
|
312
|
|
$
|
2,371
|
|
$
|
1,193
|
|
$
|
—
|
|
$
|
3,876
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(26
|
)
|
(330
|
)
|
(72
|
)
|
—
|
|
(428
|
)
|
Business acquisitions, net of cash acquired
|
—
|
|
(350
|
)
|
(49
|
)
|
—
|
|
(399
|
)
|
Other, net
|
10
|
|
31
|
|
(2
|
)
|
—
|
|
39
|
|
Net cash used by investing activities
|
(16
|
)
|
(649
|
)
|
(123
|
)
|
—
|
|
(788
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Purchases of common stock
|
(1,558
|
)
|
—
|
|
—
|
|
—
|
|
(1,558
|
)
|
Dividends paid
|
(986
|
)
|
—
|
|
—
|
|
—
|
|
(986
|
)
|
Proceeds from fixed-rate notes
|
985
|
|
—
|
|
—
|
|
—
|
|
985
|
|
Repayment of fixed-rate notes
|
(900
|
)
|
—
|
|
—
|
|
—
|
|
(900
|
)
|
Other, net
|
63
|
|
(3
|
)
|
—
|
|
—
|
|
60
|
|
Net cash used by financing activities
|
(2,396
|
)
|
(3
|
)
|
—
|
|
—
|
|
(2,399
|
)
|
Net cash used by discontinued operations
|
(40
|
)
|
—
|
|
—
|
|
—
|
|
(40
|
)
|
Cash sweep/funding by parent
|
2,816
|
|
(1,719
|
)
|
(1,097
|
)
|
—
|
|
—
|
|
Net increase in cash and equivalents
|
676
|
|
—
|
|
(27
|
)
|
—
|
|
649
|
|
Cash and equivalents at beginning of year
|
1,254
|
|
—
|
|
1,080
|
|
—
|
|
2,334
|
|
Cash and equivalents at end of year
|
$
|
1,930
|
|
$
|
—
|
|
$
|
1,053
|
|
$
|
—
|
|
$
|
2,983
|
|
* Continuing operations only.