Christopher J. Brady - Vice President of the company and President of General Dynamics Mission Systems since January 2019; Vice President, Engineering of General Dynamics Mission Systems, January 2015 - December 2018; Vice President, Engineering of General Dynamics C4 Systems, May 2013 - December 2014; Vice President, Assured Communications Systems of General Dynamics C4 Systems, August 2004 - May 2013
56 | | | Mark L. Burns - Vice President of the company and President of Gulfstream Aerospace Corporation since July 2015; Vice President of the company since February 2014; President, Product Support of Gulfstream Aerospace Corporation, June 2008 - June 2015 | 5659 | | | John P. Casey - Executive Vice President, Marine Systems, since May 2012; Vice President of the company and President of Electric Boat Corporation, October 2003 - May 2012; Vice President of Electric Boat Corporation, October 1996 - October 2003 | 6164 | | | Gregory S. Gallopoulos - Senior Vice President, General Counsel and Secretary since January 2010; Vice President and Deputy General Counsel, July 2008 - January 2010; Managing Partner of Jenner & Block LLP, January 2005 - June 2008 | 5659 | | |
| | | Jeffrey S. Geiger - Vice President of the company and President of Electric Boat Corporation since November 2013; Vice President of the company and President of Bath Iron Works Corporation, April 2009 - November 2013; Senior Vice President, Operations and Engineering of Bath Iron Works Corporation, March 2008 - March 2009 | 5457 | | | M. Amy Gilliland - Senior Vice President of the company since April 2015; President of General Dynamics Information Technology since September 2017; Deputy for Operations of General Dynamics Information Technology, April 2017 - September 2017; Senior Vice President, Human Resources and Administration, since April 2015;2015 - March 2017; Vice President, Human Resources, February 2014 - March 2015; Staff Vice President, Strategic Planning, MarchJanuary 2013 - February 2014; Staff Vice President, Investor Relations, June 2008 - MarchJanuary 2013 | 4144 | | | Robert W. Helm - Senior Vice President, Planning and Development since May 2010; Vice President, Government Relations, of Northrop Grumman Corporation, August 1989 - April 2010
| 64 | | | S. Daniel Johnson - Executive Vice President, Information Systems and Technology, and President of General Dynamics Information Technology since January 2015; Vice President of the company and President of General Dynamics Information Technology, April 2008 - December 2014; Executive Vice President of General Dynamics Information Technology, July 2006 - March 2008 | 6867 | | | Kimberly A. Kuryea - Senior Vice President, Human Resources and Administration since April 2017; Vice President and Controller, since September 2011;2011 - March 2017; Chief Financial Officer of General Dynamics Advanced Information Systems, November 2007 - August 2011; Staff Vice President, Internal Audit, March 2004 - October 2007 | 4851 | | | Christopher Marzilli - Executive Vice President, IT & Mission Systems Segments since January 2019; Vice President of the company and President of General Dynamics Mission Systems, since January 2015;2015 - December 2018; Vice President of the company and President of General Dynamics C4 Systems, January 2006 - December 2014; Senior Vice President and Deputy General Manager of General Dynamics C4 Systems, November 2003 - January 2006 | 5659 | | | William A. Moss - Vice President and Controller since April 2017; Staff Vice President, Internal Audit, May 2015 - March 2017; Staff Vice President, Accounting, August 2010 - May 2015 | 55 | | | Phebe N. Novakovic - Chairman and Chief Executive Officer since January 2013; President and Chief Operating Officer, May 2012 - December 2012; Executive Vice President, Marine Systems, May 2010 - May 2012; Senior Vice President, Planning and Development, July 2005 - May 2010; Vice President, Strategic Planning, October 2002 - July 2005 | 5861 | | | Mark C. Roualet - Executive Vice President, Combat Systems, since March 2013; Vice President of the company and President of General Dynamics Land Systems, October 2008 - March 2013; Senior Vice President and Chief Operating Officer of General Dynamics Land Systems, July 2007 - October 2008 | 5760 | | | Gary L. Whited - Vice President of the company and President of General Dynamics Land Systems since March 2013; Senior Vice President of General Dynamics Land Systems, September 2011 - March 2013; Vice President and Chief Financial Officer of General Dynamics Land Systems, June 2006 - September 2011 | 5558 |
PART II ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange. The high and low sales prices of our common stock andExchange under the cash dividends declared on our common stock for each quarter of 2014 and 2015 are included in the Supplementary Data contained in Item 8.trading symbol “GD.”
On January 31, 2016,27, 2019, there were approximately 13,00011,000 holders of record of our common stock. For information regarding securities authorized for issuance under our equity compensation plans, see Note OP to the Consolidated Financial Statements contained in Item 8. We did not make any unregistered sales of equity securities in 2015.2018. The following table provides information about our fourth-quarter repurchasespurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended: | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (a) | | Maximum Number of Shares That May Yet Be Purchased Under the Program (a) | Pursuant to Share Buyback Program | | | | | 10/1/18-10/28/18 | | 300,000 |
| | $ | 169.65 |
| | 300,000 |
| | 4,760,168 |
| 10/29/18-11/25/18 | | 2,630,000 |
| | 178.28 |
| | 2,630,000 |
| | 2,130,168 |
| 11/26/18-12/31/18 | | 4,650,000 |
| | 164.27 |
| | 4,650,000 |
| | 7,480,168 |
| | | | | | | | | | Shares Delivered or Withheld Pursuant to Restricted Stock Vesting (b) | | | | | 10/1/18-10/28/18 | | 250 |
| | 194.28 |
| | | | | 10/29/18-11/25/18 | | — |
| | — |
| | | | | 11/26/18-12/31/18 | | 521 |
| | 193.41 |
| | | | | | | 7,580,771 |
| | $ | 169.35 |
| | | | |
| | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program* | | Maximum Number of Shares That May Yet Be Purchased Under the Program* | Pursuant to Share Buyback Program | | | | | 10/5/15-11/1/15 | | 305,000 |
| | $ | 148.91 |
| | 305,000 |
| | 2,806,468 |
| 11/2/15-11/29/15 | | 2,002,000 |
| | $ | 144.90 |
| | 2,002,000 |
| | 804,468 |
| 11/30/15-12/31/15 | | 1,200,000 |
| | $ | 140.56 |
| | 1,200,000 |
| | 9,604,468 |
| Total | | 3,507,000 |
| | $ | 143.76 |
| | | | |
*(a) On December 2, 2015,5, 2018, the board of directors authorized management to repurchase 10 million additional shares of common stock.
(b) Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the statutory tax withholding due upon vesting of the restricted shares. For additional information relating to our repurchasespurchases of common stock during the past three years, see Financial Condition, Liquidity and Capital Resources - Financing Activities - Share Repurchases contained in Item 7.
The following performance graph compares the cumulative total return to shareholders on our common stock, assuming reinvestment of dividends, with similar returns for the Standard & Poor’s® 500 Index and the Standard & Poor’s® Aerospace & Defense Index, both of which include General Dynamics.
Cumulative Total Return Based on Investments of $100 Beginning December 31, 20102013 (Assumes Reinvestment of Dividends)
ITEM 6. SELECTED FINANCIAL DATA The following table presents selected historical financial data derived from the Consolidated Financial Statements and other company information for each of the five years presented. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the Consolidated Financial Statements and the Notes thereto.thereto in Item 8. | | (Dollars and shares in millions, except per-share and employee amounts) | | | | | | |
| | | | | | | | | | |
| | | | | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | Summary of Operations | | | | | | | | | | | | | | | | | | | | | Revenue | | $ | 31,469 |
| | $ | 30,852 |
| | $ | 30,930 |
| | $ | 30,992 |
| | $ | 32,122 |
| | $ | 36,193 |
| | $ | 30,973 |
| | $ | 30,561 |
| | $ | 31,781 |
| | $ | 30,852 |
| Operating earnings | | 4,178 |
| | 3,889 |
| | 3,689 |
| | 765 |
| | 3,747 |
| | 4,457 |
| | 4,236 |
| | 3,744 |
| | 4,494 |
| | 4,047 |
| Operating margin | | 13.3 | % | | 12.6 | % | | 11.9 | % | | 2.5% |
| | 11.7 | % | | 12.3 | % | | 13.7 | % | | 12.3 | % | | 14.1 | % | | 13.1 | % | Interest, net | | (83 | ) | | (86 | ) | | (86 | ) | | (156 | ) | | (141 | ) | | (356 | ) | | (103 | ) | | (91 | ) | | (83 | ) | | (86 | ) | Provision for income tax, net | | 1,137 |
| | 1,129 |
| | 1,125 |
| | 854 |
| | 1,139 |
| | (727 | ) | | (1,165 | ) | | (977 | ) | | (1,183 | ) | | (1,129 | ) | Earnings (loss) from continuing operations | | 2,965 |
| | 2,673 |
| | 2,486 |
| | (381 | ) | | 2,500 |
| | Earnings from continuing operations | | | 3,358 |
| | 2,912 |
| | 2,679 |
| | 3,036 |
| | 2,673 |
| Return on sales (a) | | 9.4 | % | | 8.7 | % | | 8.0 | % | | (1.2 | )% | | 7.8 | % | | 9.3 | % | | 9.4 | % | | 8.8 | % | | 9.6 | % | | 8.7 | % | Discontinued operations, net of tax | | — |
| | (140 | ) | | (129 | ) | | 49 |
| | 26 |
| | (13 | ) | | — |
| | (107 | ) | | — |
| | (140 | ) | Net earnings (loss) | | 2,965 |
| | 2,533 |
| | 2,357 |
| | (332 | ) | | 2,526 |
| | Diluted earnings (loss) per share: | | | | | | | | | | | | Net earnings | | | 3,345 |
| | 2,912 |
| | 2,572 |
| | 3,036 |
| | 2,533 |
| Diluted earnings per share: | | | | | | | | | | | | Continuing operations (b) | | 9.08 |
| | 7.83 |
| | 7.03 |
| | (1.08 | ) | | 6.80 |
| | 11.22 |
| | 9.56 |
| | 8.64 |
| | 9.29 |
| | 7.83 |
| Net earnings (loss) (b) | | 9.08 |
| | 7.42 |
| | 6.67 |
| | (0.94 | ) | | 6.87 |
| | Net earnings | | | 11.18 |
| | 9.56 |
| | 8.29 |
| | 9.29 |
| | 7.42 |
| Cash Flows | | | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | $ | 2,499 |
| | $ | 3,728 |
| | $ | 3,111 |
| | $ | 2,606 |
| | $ | 3,150 |
| | $ | 3,148 |
| | $ | 3,876 |
| | $ | 2,163 |
| | $ | 2,607 |
| | $ | 3,830 |
| Net cash provided (used) by investing activities | | 200 |
| | (1,102 | ) | | (363 | ) | | (642 | ) | | (1,961 | ) | | Net cash used by financing activities | | (4,259 | ) | | (3,575 | ) | | (725 | ) | | (1,382 | ) | | (1,201 | ) | | Net cash (used) provided by investing activities | | | (10,234 | ) | | (788 | ) | | (391 | ) | | 200 |
| | (1,103 | ) | Net cash provided (used) by financing activities | | | 5,086 |
| | (2,399 | ) | | (2,169 | ) | | (4,367 | ) | | (3,676 | ) | Net cash (used) provided by discontinued operations | | (43 | ) | | 36 |
| | (18 | ) | | 65 |
| | 48 |
| | (20 | ) | | (40 | ) | | (54 | ) | | (43 | ) | | 36 |
| Cash dividends declared per common share | | 2.76 |
| | 2.48 |
| | 2.24 |
| | 2.04 |
| | 1.88 |
| | 3.72 |
| | 3.36 |
| | 3.04 |
| | 2.76 |
| | 2.48 |
| Financial Position | | | | | | | | | | | | | | | | | | | | | Cash and equivalents | | $ | 2,785 |
| | $ | 4,388 |
| | $ | 5,301 |
| | $ | 3,296 |
| | $ | 2,649 |
| | $ | 963 |
| | $ | 2,983 |
| | $ | 2,334 |
| | $ | 2,785 |
| | $ | 4,388 |
| Total assets | | 31,997 |
| | 35,337 |
| | 35,473 |
| | 34,285 |
| | 34,954 |
| | 45,408 |
| | 35,046 |
| | 33,172 |
| | 32,538 |
| | 34,648 |
| Short- and long-term debt | | 3,399 |
| | 3,893 |
| | 3,888 |
| | 3,884 |
| | 3,921 |
| | 12,417 |
| | 3,982 |
| | 3,888 |
| | 3,399 |
| | 3,893 |
| Shareholders’ equity | | 10,738 |
| | 11,829 |
| | 14,501 |
| | 11,390 |
| | 13,232 |
| | 11,732 |
| | 11,435 |
| | 10,301 |
| | 10,440 |
| | 11,829 |
| Debt-to-equity (c)(b) | | 31.7 | % | | 32.9 | % | | 26.8 | % | | 34.1% |
| | 29.6 | % | | 105.8 | % | | 34.8 | % | | 37.7 | % | | 32.6 | % | | 32.9 | % | Book value per share (d)(c) | | 34.31 |
| | 35.61 |
| | 41.03 |
| | 32.20 |
| | 37.12 |
| | 40.64 |
| | 38.52 |
| | 34.06 |
| | 33.36 |
| | 35.61 |
| Other Information | | | | | | | | | | | | | | | | | | | | | Free cash flow from operations (e)(d) | | $ | 1,930 |
| | $ | 3,207 |
| | $ | 2,675 |
| | $ | 2,170 |
| | $ | 2,705 |
| | $ | 2,458 |
| | $ | 3,448 |
| | $ | 1,771 |
| | $ | 2,038 |
| | $ | 3,309 |
| Return on invested capital (f)(d) | | 17.4 | % | | 15.1 | % | | 14.1 | % | | 8.4% |
| | 14.7 | % | | 15.2 | % | | 16.8 | % | | 16.3 | % | | 18.1 | % | | 15.1 | % | Funded backlog | | 51,783 |
| | 52,929 |
| | 38,284 |
| | 44,376 |
| | 44,420 |
| | 55,826 |
| | 52,031 |
| | 51,783 |
| | 53,449 |
| | 52,929 |
| Total backlog | | 66,120 |
| | 72,410 |
| | 45,885 |
| | 51,132 |
| | 57,131 |
| | 67,871 |
| | 63,175 |
| | 62,206 |
| | 67,786 |
| | 72,410 |
| Shares outstanding | | 313.0 |
| | 332.2 |
| | 353.4 |
| | 353.7 |
| | 356.4 |
| | 288.7 |
| | 296.9 |
| | 302.4 |
| | 313.0 |
| | 332.2 |
| Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | Basic | | 321.3 |
| | 335.2 |
| | 350.7 |
| | 353.3 |
| | 364.1 |
| | 295.3 |
| | 299.2 |
| | 304.7 |
| | 321.3 |
| | 335.2 |
| Diluted | | 326.7 |
| | 341.3 |
| | 353.5 |
| | 353.3 |
| | 367.5 |
| | 299.2 |
| | 304.6 |
| | 310.4 |
| | 326.7 |
| | 341.3 |
| Employees | | 99,900 |
| | 99,500 |
| | 96,000 |
| | 92,200 |
| | 95,100 |
| | 105,600 |
| | 98,600 |
| | 98,800 |
| | 99,900 |
| | 99,500 |
|
Note: Prior periodAll prior-period information has been restated to reflectfor the reclassificationadoption of debt issuance costs from other assets to debt as discussed inAccounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, and ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. For further discussion of these two standards, see Note JA to the Consolidated Financial Statements in Item 8. 2014 information has not been restated for the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and is, therefore, not comparable to the 2018, 2017, 2016 and 2015 information. | | (a) | Return on sales is calculated as earnings (loss) from continuing operations divided by revenue. |
| | (b) | 2012 amounts exclude the dilutive effect of stock options and restricted stock as it was antidilutive. |
| | (c) | Debt-to-equity ratio is calculated as total debt divided by total equity as of year end. |
| | (d)(c) | Book value per share is calculated as total equity divided by total outstanding shares as of year end. |
| | (e)(d) | See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a reconciliation of net cash provided by operating activities to free cash flow from operations a non-GAAP management metric. |
| | (f) | See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the calculation of return on invested capital (ROIC), aboth of which are non-GAAP management metric. 2012 ROIC was adjusted for a $2 billion goodwill impairment and associated $199 tax benefit.metrics. |
(Dollars in millions, except per-share amounts or unless otherwise noted)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per-share amounts or unless otherwise noted) For an overview of our business groups,operating segments, including a discussion of our major products and services, provided, see the Business discussion contained in Item 1. The following discussion should be read in conjunction with our Consolidated Financial Statements included in Item 8.
BUSINESS ENVIRONMENT With approximately 55 percent65% of our revenue from the U.S. government, our financial performance is impacted by U.S. government spending levels, particularly defense spending.spending, influence our financial performance. Over the past several years, U.S. defense spending has been reduced as mandated by the Budget Control Act of 2011 (BCA) and its related sequester mechanism.. The BCA restricts discretionaryestablishes spending caps over a ten-year10-year period through 2021, by establishing spending caps. In 2015, the Bipartisan Budget Act of 2015 (BBA) raisedincluding a sequester mechanism that would impose additional defense cuts if an annual defense appropriations bill is enacted above the spending capcap.
On February 9, 2018, the Congress approved increases to the BCA spending caps and a budget for government fiscal year (FY) 2016 and2019. On September 28, 2018, the FY 2017 by $252019 defense appropriations bill was signed into law. It totaled $671 billion and $15included $602 billion respectively. In accordancein the base budget in compliance with the BBA, the Congress appropriated $514modified BCA spending caps and $69 billion in FY 2016 for the Department of Defense (DoD), including approximately $188 billion for procurement and research and development (R&D) budgets, also known as investment accounts. These investment accounts are the source of the majority of our U.S. government revenue. An additional $59 billion appropriated for overseas contingency operations bringsoperations. However, as of the total defensefiling of this Form 10-K on February 13, 2019, seven other appropriations bills funding multiple federal civilian agencies have not been enacted. These federal agencies had been operating since the beginning of the government’s fiscal year under a series of continuing resolutions (CRs), which funded the agencies at FY 2018 spending bill passedlevels. The last in this series of CRs expired on December 21, 2018, resulting in a partial government shutdown for these agencies. On January 25, 2019, a new CR was approved, providing funding for these federal agencies through February 15, 2019. Our greatest concentration of work for the impacted agencies is in our Information Technology segment, where this work represents less than 5% of the segment’s revenue. Additionally, our Aerospace segment was affected by the Congress in December 2015 to $573 billion,shutdown of the U.S. Federal Aviation Administration (FAA), which impacted the type certification process for the new G600 aircraft. The partial government shutdown did not have a 2 percent increase over FY 2015.material impact on our results of operations, financial condition or cash flows, and we do not anticipate that the current CR, or subsequent extensions, will have a material impact. However, if another partial government shutdown occurred, the longer the shutdown continued, the risk of a material impact would increase. The long-term outlook for our U.S. defense business is influenced by the relevance of our programs to the U.S. military’s funding priorities, the diversity of our programs and customers, our insight into customer requirements stemming from our incumbency on core programs, our ability to evolve our products to address a fast-changing threat environment and our proven track record of successful contract execution. We continue to pursue international opportunities presented byInternational demand for military equipment and information technologies frompresents opportunities for our non-U.S. operations and through exports from our North American businesses. While the revenue potential can be significant, these opportunitiesthere are subjectrisks to doing business in foreign countries, including changing budget priorities and overall spending pressures unique to each country.
In our Aerospace group, business-jet orders weresegment, we continue to experience strong in 2015 and reflected demand across our product portfolio. We expect our continued investment in the development of new aircraft products and technologies to support the Aerospace group’ssegment’s long-term growth. Similarly, we believe the aircraft services business will continue to be a strong source of revenue as the global business-jet fleet grows. In navigating the current business environment, we continuecontinues to focus on improving operating earnings, expanding margin and the efficient conversion of earnings into cash. We emphasize effective program execution, anticipate trends and react to changing circumstances in our business environment, and drive cost-reduction activities across our business.grow.
RESULTS OF OPERATIONS INTRODUCTION An understanding of our accounting practices is important to evaluatenecessary in the evaluation of our financial statements and operating results. We recognize the majority of our revenue using the percentage-of-completion method of accounting. The following paragraphs explain how this method is applied in recognizingwe recognize revenue and operating costs in our business groups.operating segments. We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. In the Aerospace group,segment, we record revenue on contracts for new aircraft have two major phases:when the manufacturecustomer obtains control of the “green” aircraftasset, which is generally upon delivery and the aircraft’s outfitting, which includes exterior painting and installation of customer-selected interiors. We record revenue on these contracts at the completion of these two phases: when green aircraft are delivered to and acceptedacceptance by the customer and when the customer accepts final delivery of the fully outfitted aircraft. We do not recognize revenue at green delivery unless (1) a contract has been executed with the customer and (2) the customer can be expected to satisfy its obligations under the contract, as evidenced by the receipt of significant deposits from the customer and other factors. Revenue associated with the group’ssegment’s custom completions of other original equipment manufacturers’ (OEMs)narrow-body and wide-body aircraft and the group’ssegment’s services businesses areis recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, (green and outfitted), progress on aircraft completions, and the level and type of aircraft service activityservices performed during the period. The majority of the Aerospace group’ssegment’s operating costs relaterelates to new aircraft production on firm orders and consistconsists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at green aircraft delivery based on the estimated average unit cost in a production lot. While changes in the estimated average unit cost for a production lot impact the level of operating costs, the amount of operating costs reported in a given period is based largely on the number and type of aircraft delivered. Operating costs in the Aerospace group’ssegment’s completions and services businesses are recognized generally as incurred. For new aircraft, operating earnings and margin are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft, and the mix of higher-marginultra-large-cabin, large-cabin and lower-margin mid-cabin aircraft deliveries. Additional factors affecting the group’ssegment’s earnings and margin include the volume, mix and profitability of completions and services work performed, the volume of and market for pre-owned aircraft, and the level of general and administrative (G&A) and net R&Dresearch and development (R&D) costs incurred by the group.segment. In the three defense groups,segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as either products are produced or as services are rendered. As a result, variations inTypically, revenue are discussed generally in termsis 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 volume, typically measured bycontrol to the level of activity on individual contracts or programs. Year-over-year variances attributed to volume are due to changes in production or service levels and delivery schedules. Operatingcustomer. Contract costs for the defense groups consist ofinclude labor, material, subcontractor, overhead and, when appropriate, G&A costs and are recognized generally as incurred.expenses. Variances in costs recognized from period to period reflect primarily reflect increases and decreases in production or activity levels on individual contracts and, therefore, result largely from the same factors that drivecontracts. Because costs are used as a measure of progress, year-over-year variances in revenue.cost result in corresponding variances in revenue, which we generally refer to as volume.
Operating earnings and margin in the defense groupssegments are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on revisionsadjustments to estimates at completion on individual contracts. These revisionsadjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared
with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- vs.versus lower-margin work. Additionally, higherHigher or lower margins can be inherent in theresult from a number of factors,
including contract type (e.g., fixed-price/cost-reimbursable) orand type of work (e.g., development/production).
CONSOLIDATED OVERVIEW 20152018 IN REVIEW
Outstanding operating performance: | | ◦ | Revenue increased $617, or 2 percent, to $31.5Record-high revenue of $36.2 billion with growth in all of our Aerospace and defense groups.segments. |
| | ◦ | Operating earnings of $4.5 billion increased 5.2% from 2017. |
| | ◦ | Record-high operating earnings of $4.2 billion and operating margin of 13.3 percent increased 7.4 percent and 70 basis points, respectively, from 2014. |
| | ◦ | Return on sales increased 70 basis points from 2014 to 9.4 percent. |
| | ◦ | $9.08 of earnings from continuing operations per diluted share increased 16 percentof $11.22, an increase of 17.4% from 2014 to the highest level in our history.2017. |
Robust backlog providing stability well into the future, including increased Aerospace backlog from year-end 2014.
22.810.1 million outstanding shares repurchased for $3.2$1.8 billion and $873$1.1 billion paid in cash dividends, returning over 200 percent115% of our free cash flow from operations to shareholders.
Return on invested capital (ROIC)Robust backlog of 17.4 percent, 230 basis points higher than 2014.$67.9 billion increased $4.7 billion, or 7.4%, from 2017, supporting our long-term growth expectations.
| | ◦ | Several significant contract awards received in 2018 in our defense segments. |
REVIEW OF 20152018 VS. 20142017 | | Year Ended December 31 | 2015 | | 2014 | | Variance | 2018 | | 2017 | | Variance | Revenue | $ | 31,469 |
| | $ | 30,852 |
| | $ | 617 |
| | 2.0 | % | $ | 36,193 |
| | $ | 30,973 |
| | $ | 5,220 |
| | 16.9 | % | Operating costs and expenses | 27,291 |
| | 26,963 |
| | (328 | ) | | (1.2 | )% | (31,736 | ) | | (26,737 | ) | | (4,999 | ) | | 18.7 | % | Operating earnings | 4,178 |
| | 3,889 |
| | 289 |
| | 7.4 | % | 4,457 |
| | 4,236 |
| | 221 |
| | 5.2 | % | Operating margin | 13.3 | % | | 12.6 | % | | | | | 12.3 | % | | 13.7 | % | | | | |
We realized top-lineOur consolidated revenue increased 16.9% in 2018. The largest driver of the increase was the acquisition of CSRA in our Information Technology segment. Excluding CSRA, revenue increased by 5% driven by growth in 2015, driven primarily by higher ship construction and engineering activity inall of our Marine Systems group and additional deliveries of G650 aircraft in our Aerospace group. Revenue was down slightly in our Combat Systems and Information Systems and Technology groups. segments.
Operating costs and expenses increased less than revenue in 2015,2018 due primarily to the CSRA acquisition, including the impact of intangible asset amortization expense and one-time transaction-related charges associated with costs to complete the acquisition, resulting in robust levels of operating earnings and margin. Consolidateda lower margin compared with 2017. The 2018 operating margin expanded 70 basis points, due largelywas also impacted by a less favorable aircraft delivery mix in our Aerospace segment consistent with our expectation as we transition to improved performancethe new G500 and continued cost-reduction efforts in the Aerospace, Combat Systems and Information Systems and Technology groups.G600 aircraft.
REVIEW OF 20142017 VS. 20132016 | | Year Ended December 31 | 2014 | | 2013 | | Variance | 2017 | | 2016 | | Variance | Revenue | $ | 30,852 |
| | $ | 30,930 |
| | $ | (78 | ) | | (0.3 | )% | $ | 30,973 |
| | $ | 30,561 |
| | $ | 412 |
| | 1.3 | % | Operating costs and expenses | 26,963 |
| | 27,241 |
| | 278 |
| | 1.0 | % | (26,737 | ) | | (26,817 | ) | | 80 |
| | (0.3 | )% | Operating earnings | 3,889 |
| | 3,689 |
| | 200 |
| | 5.4 | % | 4,236 |
| | 3,744 |
| | 492 |
| | 13.1 | % | Operating margin | 12.6 | % | | 11.9 | % | | |
| | |
| 13.7 | % | | 12.3 | % | | |
| | |
|
We realized top-line growth in 2017 driven by higher volume across our Combat Systems segment and increased revenue from aircraft deliveries and aircraft services in our Aerospace segment. These increases were offset partially by lower revenue in our Mission Systems segment driven by funding delays caused by the extended FY 2017 CR. While our revenue was essentially flatincreased, operating costs and expenses decreased, resulting in 2014 compared with 2013,a 13.1% increase in operating earnings and margin increasedgrowth of 140 basis points. Operating earnings and margin grew at each of our segments in 2014. Decreased U.S. Army spending affected our Information Systems and Technology and Combat Systems groups. This was essentially offset by higher Aerospace and Marine Systems revenue due to increased aircraft deliveries and higher ship construction activity, respectively. We reduced our operating costs and expenses more than our revenue declined in 2014, resulting in positive operating leverage. The primary drivers of the decrease in operating costs and expenses were improved performance in aircraft manufacturing and outfitting activities in the Aerospace group and significant cost reductions in the Information Systems and Technology group. The resulting consolidated operating margin of 12.6 percent was up 70 basis points over 2013.2017.
REVIEW OF BUSINESS GROUPSOPERATING SEGMENTS | | Year Ended December 31 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | Revenue | | Operating Earnings | | Revenue | | Operating Earnings | | Revenue | | Operating Earnings | Revenue | | Operating Earnings | | Revenue | | Operating Earnings | | Revenue | | Operating Earnings | Aerospace | $ | 8,851 |
| | $ | 1,706 |
| | $ | 8,649 |
| | $ | 1,611 |
| | $ | 8,118 |
| | $ | 1,416 |
| $ | 8,455 |
| | $ | 1,490 |
| | $ | 8,129 |
| | $ | 1,577 |
| | $ | 7,815 |
| | $ | 1,394 |
| Combat Systems | 5,640 |
| | 882 |
| | 5,732 |
| | 862 |
| | 5,832 |
| | 908 |
| 6,241 |
| | 962 |
| | 5,949 |
| | 937 |
| | 5,530 |
| | 831 |
| Information Systems and Technology | 8,965 |
| | 903 |
| | 9,159 |
| | 785 |
| | 10,268 |
| | 795 |
| | Information Technology | | 8,269 |
| | 608 |
| | 4,410 |
| | 373 |
| | 4,428 |
| | 340 |
| Mission Systems | | 4,726 |
| | 659 |
| | 4,481 |
| | 638 |
| | 4,716 |
| | 601 |
| Marine Systems | 8,013 |
| | 728 |
| | 7,312 |
| | 703 |
| | 6,712 |
| | 666 |
| 8,502 |
| | 761 |
| | 8,004 |
| | 685 |
| | 8,072 |
| | 595 |
| Corporate | — |
| | (41 | ) | | — |
| | (72 | ) | | — |
| | (96 | ) | — |
| | (23 | ) | | — |
| | 26 |
| | — |
| | (17 | ) | Total | $ | 31,469 |
| | $ | 4,178 |
| | $ | 30,852 |
| | $ | 3,889 |
| | $ | 30,930 |
| | $ | 3,689 |
| $ | 36,193 |
| | $ | 4,457 |
| | $ | 30,973 |
| | $ | 4,236 |
| | $ | 30,561 |
| | $ | 3,744 |
|
Following is a discussion of operating results and outlook for each of our business groups.operating segments. For the Aerospace group,segment, results are analyzed forby specific types of products and services, consistent with how the groupsegment is managed. For the defense groups,segments, the discussion is based on the lines of products and services each group offersoffered with a supplemental discussion of specific contracts and programs when significant to the group’s results. Additional information regarding our business groupssegments can be found in Note QR to the Consolidated Financial Statements in Item 8.
AEROSPACE Review of 20152018 vs. 20142017 | | Year Ended December 31 | 2015 | | 2014 | | Variance | 2018 | | 2017 | | Variance | Revenue | $ | 8,851 |
| | $ | 8,649 |
| | $ | 202 |
| | 2.3 | % | $ | 8,455 |
| | $ | 8,129 |
| | $ | 326 |
| | 4.0 | % | Operating earnings | 1,706 |
| | 1,611 |
| | 95 |
| | 5.9 | % | 1,490 |
| | 1,577 |
| | (87 | ) | | (5.5 | )% | Operating margin | 19.3 | % | | 18.6 | % | | | | | 17.6 | % | | 19.4 | % | | | | | Gulfstream aircraft deliveries (in units): | | | | | | | | | Green | 147 | | 144 | | 3 |
| | 2.1 | % | | Outfitted | 154 | | 150 | | 4 |
| | 2.7 | % | | Gulfstream aircraft deliveries (in units) | | 121 |
| | 120 |
| | 1 |
| | 0.8 | % |
The increase in the Aerospace group’ssegment’s revenue in 20152018 consisted of the following: | | Aircraft manufacturing, outfitting and completions | $ | 173 |
| | Aircraft services | | $ | 353 |
| Aircraft manufacturing and completions | | (94 | ) | Pre-owned aircraft | 44 |
| 67 |
| Aircraft services | (15 | ) | | Total increase | $ | 202 |
| $ | 326 |
|
Aircraft services revenue increased due to higher demand for maintenance work and the acquisition in the second quarter of 2018 of Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East. Additionally, we had seven pre-owned aircraft sales in 2018 compared
with five in 2017. These increases were offset partially by a lower volume of custom completions of narrow-body and wide-body aircraft. The change in the segment’s operating earnings in 2018 consisted of the following: | | | | | Aircraft manufacturing and completions | $ | (206 | ) | Aircraft services | 64 |
| Pre-owned aircraft | 2 |
| G&A/other expenses | 53 |
| Total decrease | $ | (87 | ) |
Aircraft manufacturing outfitting and completions operating earnings were down due to a shift in the mix of Gulfstream aircraft deliveries and the typical lower margin associated with the initial units of a new aircraft model, as well as a performance challenge in the wide-body aircraft custom completions business. Aircraft services operating earnings were particularly strong due to favorable cost performance and the mix of services provided. In addition, operating earnings were impacted favorably by lower G&A/other expenses, including reduced R&D expenses as we completed the G500 development and certification program. Overall, the Aerospace segment’s operating margin decreased 180 basis points to 17.6%. Review of 2017 vs. 2016 | | | | | | | | | | | | | | | | Year Ended December 31 | 2017 | | 2016 | | Variance | Revenue | $ | 8,129 |
| | $ | 7,815 |
| | $ | 314 |
| | 4.0 | % | Operating earnings | 1,577 |
| | 1,394 |
| | 183 |
| | 13.1 | % | Operating margin | 19.4 | % | | 17.8 | % | | | | | Gulfstream aircraft deliveries (in units) | 120 |
| | 121 |
| | (1 | ) | | (0.8 | )% |
The Aerospace segment’s revenue increased in 20152017 due primarily to additional deliveries of the ultra-large-cabin G650 and mid-cabin G280 aircraft, offset partially by a decrease in the number of G450 and G550 large-cabin aircraft deliveries. Aircraft services revenue increased, driven by higher demand for maintenance work and the acquisition of a fixed base operation (FBO) in 2017. Operating earnings increased in 2017 due to favorable cost performance and the mix of ultra-large- and large-cabin aircraft deliveries. G&A/other expenses were higher in 2017 due primarily to increased R&D expenses associated with product-development efforts as the segment progressed with the certification of the G500 and G600 aircraft. Mid-cabinOverall, the Aerospace segment’s operating margin increased 160 basis points to 19.4%. 2019 Outlook We expect the Aerospace segment’s 2019 revenue to be around $9.7 billion. Operating margin is expected to be approximately 15.5%, down from 2018 as a result of mix shift as the segment continues its transition to the new G500 and G600 aircraft deliveries were also up slightly. We had sevenas well as higher anticipated pre-owned aircraft sales, in 2015 compared with three sales in 2014.which typically carry no margin.
COMBAT SYSTEMS Review of 2018 vs. 2017 | | | | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | Variance | Revenue | $ | 6,241 |
| | $ | 5,949 |
| | $ | 292 |
| | 4.9 | % | Operating earnings | 962 |
| | 937 |
| | 25 |
| | 2.7 | % | Operating margin | 15.4 | % | | 15.8 | % | | |
| | |
|
The increase in the group’s operating earningsCombat Systems segment’s revenue in 20152018 consisted of the following: | | | | | Aircraft manufacturing, outfitting and completions | $ | 100 |
| Aircraft services | 9 |
| Pre-owned aircraft | (7 | ) | G&A/other expenses | (7 | ) | Total increase | $ | 95 |
|
| | | | | U.S. military vehicles | $ | 130 |
| International military vehicles | 99 |
| Weapons systems and munitions | 63 |
| Total increase | $ | 292 |
|
Aircraft manufacturing, outfitting and completions earnings grewRevenue was up across all areas of the Combat Systems segment in 20152018. Revenue from U.S. military vehicles increased due to higher volume on the Army’s Abrams tank programs, including work to produce Abrams M1A2 System Enhancement Package Version 3 (SEPv3) tanks, offset partially by lower volume on Stryker wheeled combat-vehicle programs as we completed delivery of the Stryker 30-millimeter cannon upgrade vehicles. Revenue from international military vehicles increased due to the production ramp up of Piranha wheeled armored vehicles, offset partially by lower revenue on a large contract to produce wheeled armored vehicles for an increaseinternational customer. Weapons systems and munitions revenue was up due primarily to increased production of several products, including medium-caliber and tank ammunition programs.
The Combat Systems segment’s operating margin decreased 40 basis points compared with 2017 driven by contract mix in higher-priced G650 aircraft deliveries.our combat vehicles business. Review of 2017vs. 2016 | | | | | | | | | | | | | | | | Year Ended December 31 | 2017 | | 2016 | | Variance | Revenue | $ | 5,949 |
| | $ | 5,530 |
| | $ | 419 |
| | 7.6 | % | Operating earnings | 937 |
| | 831 |
| | 106 |
| | 12.8 | % | Operating margin | 15.8 | % | | 15.0 | % | | | | |
The Combat Systems segment’s revenue increased in 2017 due primarily to higher volume on the U.S. Army’s Abrams and Stryker programs. Additionally, revenue was up due to increased production of several products, including bombs and Hydra-70 rockets for the U.S. government. Revenue from international military vehicles increased due to the ramp up in production on the British AJAX armoured fighting vehicle program and several international light armored vehicle (LAV) programs, offset largely by lower revenue on a large contract to produce wheeled armored vehicles for an international customer as the segment transitioned from engineering to production. The Combat Systems segment’s operating margin increased 80 basis points in 2017 driven by improved operating performance across the segment’s portfolio. Operating earnings in 2015 were also favorably affected by2016 included the impact of a first-quarter 2015 supplier settlement associated with aircraft componentloss on the design and delivery delays. The group’s services performance reflected a favorable mixdevelopment phase of work. Partially offsetting these increases, the group’s performance was impacted by slightly higher net R&D expenses (included in G&A/other expenses above) associated with ongoing product-development efforts. Overall, the Aerospace group's operating margin increased 70 basis points to 19.3 percent in 2015.British AJAX armoured fighting vehicle program.
Review of 2014 vs. 2013
| | | | | | | | | | | | | | | | Year Ended December 31 | 2014 | | 2013 | | Variance | Revenue | $ | 8,649 |
| | $ | 8,118 |
| | $ | 531 |
| | 6.5 | % | Operating earnings | 1,611 |
| | 1,416 |
| | 195 |
| | 13.8 | % | Operating margin | 18.6 | % | | 17.4 | % | | | | | Gulfstream aircraft deliveries (in units): | | | | | | | | Green | 144 | | 139 | | 5 |
| | 3.6 | % | Outfitted | 150 | | 144 | | 6 |
| | 4.2 | % |
The Aerospace group’s revenue and earnings increased in 2014 due primarily to additional deliveries of large-cabin aircraft. Operating earnings also increased in 2014 due to improved operating performance on our large- and mid-cabin aircraft production, offset partially by higher net R&D expenses.
20162019 Outlook
We expect the group’s 2016Combat Systems segment’s 2019 revenue to be modestly higherbetween $6.5 and $6.6 billion with operating earnings of $965 to $975. INFORMATION TECHNOLOGY Review of 2018 vs. 2017 | | | | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | Variance | Revenue | $ | 8,269 |
| | $ | 4,410 |
| | $ | 3,859 |
| | 87.5 | % | Operating earnings | 608 |
| | 373 |
| | 235 |
| | 63.0 | % | Operating margin | 7.4 | % | | 8.5 | % | | | | |
The Information Technology segment’s revenue increased due primarily to the CSRA acquisition in the second quarter of 2018. Operating margin somewhat lowerdecreased 110 basis points compared with 2015.2017 due to intangible asset amortization expense from the CSRA acquisition. Excluding the impact of this amortization, the segment’s margin would have been 9.6%, reflecting the favorable impact of CSRA’s mix of higher-margin, fixed-price work. In the fourth quarter of 2018, we sold the Information Technology segment’s contact-center business, which had a small unfavorable impact on revenue. COMBATReview of 2017 vs. 2016
| | | | | | | | | | | | | | | | Year Ended December 31 | 2017 | | 2016 | | Variance | Revenue | $ | 4,410 |
| | $ | 4,428 |
| | $ | (18 | ) | | (0.4 | )% | Operating earnings | 373 |
| | 340 |
| | 33 |
| | 9.7 | % | Operating margin | 8.5 | % | | 7.7 | % | | | | |
Revenue in the Information Technology segment was essentially flat in 2017 as delays in procurement activities across a number of programs, particularly in our federal civilian business, offset growth in the segment’s intelligence business and the acquisition in late 2017 of a provider of mission-critical support services. Despite the lower revenue, operating earnings increased, and operating margin expanded 80 basis points. The margin growth was driven primarily by strong program performance and favorable contract mix across the portfolio. 2019 Outlook We expect the Information Technology segment’s 2019 revenue to be approximately $8.3 billion, a slight increase from 2018, reflecting a full year of CSRA’s results, offset partially by divestiture activities. We expect the segment’s operating margin to be around 7.5%.
MISSION SYSTEMS Review of 20152018 vs. 20142017 | | Year Ended December 31 | 2015 | | 2014 | | Variance | 2018 | | 2017 | | Variance | Revenue | $ | 5,640 |
| | $ | 5,732 |
| | $ | (92 | ) | | (1.6 | )% | $ | 4,726 |
| | $ | 4,481 |
| | $ | 245 |
| | 5.5 | % | Operating earnings | 882 |
| | 862 |
| | 20 |
| | 2.3 | % | 659 |
| | 638 |
| | 21 |
| | 3.3 | % | Operating margin | 15.6 | % | | 15.0 | % | | |
| | |
| 13.9 | % | | 14.2 | % | | | | |
The slight decreaseincrease in the CombatMission Systems group’ssegment’s revenue in 20152018 consisted of the following: | | | | | U.S. military vehicles | $ | (44 | ) | Weapons systems and munitions | (38 | ) | International military vehicles | (10 | ) | Total decrease | $ | (92 | ) |
| | | | | Space, intelligence and cyber systems | $ | 118 |
| Ground systems and products | 69 |
| Naval, air and electronic systems | 58 |
| Total increase | $ | 245 |
|
In 2015,Revenue was up across the Mission Systems segment in 2018. Revenue from space, intelligence and cyber systems increased due primarily to demand for our portfolio of encryption products. The growth in ground systems and products revenue was driven by increased activity on U.S. Army mobile communications networking programs and the ramp up of a program to design and develop the next-generation tactical communication and information system for the United Kingdom. Revenue from naval, air and electronic systems increased due primarily to higher volume on our U.S. military vehicles declinedNavy program for combat and seaframe control systems on Independence-variant Littoral Combat Ships.
The Mission Systems segment’s operating margin decreased 30 basis points in 2018 due to variations in program performance and mix. Review of 2017 vs. 2016 | | | | | | | | | | | | | | | | Year Ended December 31 | 2017 | | 2016 | | Variance | Revenue | $ | 4,481 |
| | $ | 4,716 |
| | $ | (235 | ) | | (5.0 | )% | Operating earnings | 638 |
| | 601 |
| | 37 |
| | 6.2 | % | Operating margin | 14.2 | % | | 12.7 | % | | | | |
The Mission Systems segment’s revenue decreased in 2017 as a result of funding delays across a number of programs, including the completion ofU.S. Army’s mobile communications network and computing and communications equipment programs, caused by the Ground Combat Vehicle (GCV) design and development program. This decrease was offset partially by a ramp-up in work onseven-month FY 2017 CR. Despite the Stryker Engineering Change Proposal (ECP) upgrade program. Weapons systems and munitions revenue decreased in 2015 due primarily to lower volume of Hydra-70 rockets and decreased ammunition production for U.S. allies. Revenue from international military vehicles decreased slightly in 2015 due to lower revenue, on several mature international contracts that are nearing completion, offset largely by growth on new international programs that are ramping up for customers in the United Kingdomoperating earnings increased, and the Middle East. Translation of our international businesses’ revenue into U.S. dollars in 2015 has been affected negatively by foreign currency exchange rate fluctuations, due primarily to the strengthening of the U.S. dollar against the Canadian dollar and the euro. Had foreign currency exchange rates in 2015 held constant from 2014, 2015 revenue would have grown by 6 percent over 2014.
The Combat Systems group's operating margin increased 60expanded 150 basis points in 2015.points. The operating results reflect the group'smargin growth was driven primarily by strong operatingprogram performance and cost cutting across the business, including reduced overhead costs following restructuring activities completed in 2014.favorable contract mix.
Review of 2014vs. 2013
| | | | | | | | | | | | | | | | Year Ended December 31 | 2014 | | 2013 | | Variance | Revenue | $ | 5,732 |
| | $ | 5,832 |
| | $ | (100 | ) | | (1.7 | )% | Operating earnings | 862 |
| | 908 |
| | (46 | ) | | (5.1 | )% | Operating margin | 15.0 | % | | 15.6 | % | | | | |
In 2014, lower U.S. military vehicles revenue was offset largely by higher revenue associated with international military vehicles. U.S. military vehicle revenue was down in 2014 due to a decrease in U.S. Army spending as the U.S. involvement in the Iraqi and Afghan conflicts wound down. This impacted our primary U.S. vehicle programs, including Stryker, Abrams, Buffalo, and Mine Resistant, Ambush Protected (MRAP) vehicles. Revenue also decreased on the completed GCV design and development program. Revenue for international military vehicles was up significantly in 2014 as work commenced on a major international order received in the first quarter of 2014.
The Combat Systems group's operating margin decreased 60 basis points in 2014 due primarily to a mix shift from more mature programs nearing completion to the start up of new programs. Somewhat offsetting this shift in contract mix, operating margin was up in our European and weapons systems businesses as a result of reduced overhead costs following restructuring activities completed in 2013 and early 2014.
20162019 Outlook
We expect the CombatMission Systems group’ssegment’s 2019 revenue to be between $4.8 and $4.9 billion, an increase slightly in 2016. Operatingof between 2 and 3% over 2018, with operating margin is expected to remain strong in the mid-15 percent range consistent with 2015.mid- to high-13% range. INFORMATION
MARINE SYSTEMS AND TECHNOLOGY Review of 2015 2018vs. 20142017 | | Year Ended December 31 | 2015 | | 2014 | | Variance | 2018 | | 2017 | | Variance | Revenue | $ | 8,965 |
| | $ | 9,159 |
| | $ | (194 | ) | | (2.1 | )% | $ | 8,502 |
| | $ | 8,004 |
| | $ | 498 |
| | 6.2 | % | Operating earnings | 903 |
| | 785 |
| | 118 |
| | 15.0 | % | 761 |
| | 685 |
| | 76 |
| | 11.1 | % | Operating margin | 10.1 | % | | 8.6 | % | | | | | 9.0 | % | | 8.6 | % | | | | |
The Informationincrease in the Marine Systems and Technology group’ssegment’s revenue in 2015 was slightly lower than 2014. The decrease from the prior year2018 consisted of the following: | | | | | Information technology (IT) services | $ | (155 | ) | C4ISR solutions* | (39 | ) | Total decrease | $ | (194 | ) |
| | | | | U.S. Navy ship construction | $ | 424 |
| Commercial ship construction | 171 |
| U.S. Navy ship engineering, repair and other services | (97 | ) | Total increase | $ | 498 |
|
* Command, control, communication, computing (C4), intelligence, surveillance and reconnaissance (ISR) solutions
IT services revenue decreased in 2015 due to lower volume on several programs, including our commercial wireless work. These decreases were offset partially by revenueRevenue from the late 2014 acquisition of a provider of IT support to U.S. special operations forces. Revenue decreased slightly in our C4ISR
solutions business due in part to lower volume on the Handheld, Manpack and Small Form Fit (HMS) radio program.
The group’s operating margin increased 150 basis points in 2015. This margin expansion was driven primarily by improved program performance and rightsizing across the group, including the favorable impact from the early 2015 consolidation of two of our businesses to form General Dynamics Mission Systems. Operating earnings in 2015 also included a gain of $23 on the sale of a commercial cyber security product business, a 30 basis-point impact.
Review of 2014 vs. 2013
| | | | | | | | | | | | | | | | Year Ended December 31 | 2014 | | 2013 | | Variance | Revenue | $ | 9,159 |
| | $ | 10,268 |
| | $ | (1,109 | ) | | (10.8 | )% | Operating earnings | 785 |
| | 795 |
| | (10 | ) | | (1.3 | )% | Operating margin | 8.6 | % | | 7.7 | % | | | | |
In 2014, revenue was down across the Information Systems and Technology group. Revenue decreased in the C4ISR solutions business in 2014 primarily as a result of lower U.S. Army spending on several programs. Revenue decreased in 2014 in our IT services business due to lower volume on multiple programs, including our commercial wireless work, offset partially by increased contact-center services work under our contract with the Centers for Medicare & Medicaid Services. Despite the revenue decline, the group's operating margin increased 90 basis points in 2014, the result of solid operating performance and ongoing cost-reduction efforts across our businesses.
2016 Outlook
We expect 2016 revenue in the Information Systems and Technology group to be consistent with 2015. Operating margins are expected to approach double-digits.
MARINE SYSTEMS
Review of 2015vs.2014
| | | | | | | | | | | | | | | | Year Ended December 31 | 2015 | | 2014 | | Variance | Revenue | $ | 8,013 |
| | $ | 7,312 |
| | $ | 701 |
| | 9.6 | % | Operating earnings | 728 |
| | 703 |
| | 25 |
| | 3.6 | % | Operating margin | 9.1 | % | | 9.6 | % | | | | |
The increase in the Marine Systems group’s revenue in 2015 consisted of the following:
| | | | | U.S. Navy ship construction | $ | 327 |
| U.S. Navy ship engineering, repair and other services | 210 |
| Commercial ship construction | 164 |
| Total increase | $ | 701 |
|
The increase in U.S. Navy ship construction revenue in 2015 is due toincreased with higher volume on the Virginia-class submarine program. In 2015, we completed the ramp-up in construction from one to two Virginia-class submarines per year. This increase wasprogram, Arleigh Burke-class (DDG-51) destroyer program and John Lewis class (T-AO-205) fleet replenishment oiler contract, offset partially by lower volume on the Navy’s Expeditionary MobileSea Base (ESB) program. Commercial ship construction revenue increased as work ramped up on a contract for two container ships. Revenue from U.S. Navy ship engineering, repair and other services decreased driven by a lower volume of submarine repair work and the timing of surface ship repair work, offset partially by increased work on the Columbia-class submarine development program and Virginia-class submarine design enhancements.
The Marine Systems segment’s operating margin increased 40 basis points in 2018 reflecting solid operating performance across all of our shipyards.
Review of 2017 vs. 2016
| | | | | | | | | | | | | | | | Year Ended December 31 | 2017 | | 2016 | | Variance | Revenue | $ | 8,004 |
| | $ | 8,072 |
| | $ | (68 | ) | | (0.8 | )% | Operating earnings | 685 |
| | 595 |
| | 90 |
| | 15.1 | % | Operating margin | 8.6 | % | | 7.4 | % | | |
| | |
|
Revenue in 2017 was down from Jones Act commercial construction following the delivery of six ships in 2016 and two ships in 2017. Additionally, revenue decreased due to timing on the Virginia-class submarine program, offset partially by higher volume on the ESB program. These decreases were offset partially by additional work related to the Columbia-class submarine development program and Virginia-class submarine design enhancements, and a higher-volume of submarine repair work.
2015Operating margin increased 120 basis points due primarily to development work on the Ohio-class submarine replacement program. Commercial ship construction revenue increased in 2015 as work ramped up on the group's construction2016 impact of Jones Act ships.
Operating margin decreased 50 basis points in 2015 due primarily to a shift in contract mix, including a gap in production on the mature ESB program that was replaced by Jones Act commercial ship contracts and the transition from Block III to Block IV of the Virginia-class submarine program. The group's operating margin was also affected unfavorably by cost growth on the Navy's DDG-1000 program andassociated with the restart of the Navy’s DDG-51 program. The segment’s operating margin in 2017 was also affected favorably by a decrease in lower-margin commercial ship work.
2019 Outlook We expect the Marine Systems segment’s 2019 revenue to be approximately $9 billion, an increase of 6% from 2018. Operating margin is expected to be around 8.5%.
CORPORATE Corporate operating results consisted of the following: | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | 2016 | Operating (expense) income | $ | (23 | ) | | $ | 26 |
| | $ | (17 | ) |
Corporate operating results in 2018 included one-time transaction-related charges of approximately $45 associated with the costs to complete the CSRA acquisition. Excluding these charges, Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. As discussed in Note A to the Consolidated Financial Statements in Item 8, Corporate operating results are impacted by Accounting Standards Update (ASU) 2017-07. ASU 2017-07 requires the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) to be reported in other income (expense) in the Consolidated Statement of Earnings. In our defense segments, pension and other post-retirement benefit costs are allocable contract costs. For these segments, we report the offset for the non-service cost components in Corporate operating results. This amount exceeded our stock option expense in 2018 and 2017. We expect Corporate operating costs of approximately $20 in 2019, reflecting projected stock option expense in excess of the projected offset of non-service cost components of pension and other post-retirement benefit cost for our defense segments.
OTHER INFORMATION PRODUCT AND SERVICE REVENUE AND OPERATING COSTS Review of 20142018 vs. 20132017 | | | | | | | | | | | | | | | | Year Ended December 31 | 2014 | | 2013 | | Variance | Revenue | $ | 7,312 |
| | $ | 6,712 |
| | $ | 600 |
| | 8.9 | % | Operating earnings | 703 |
| | 666 |
| | 37 |
| | 5.6 | % | Operating margin | 9.6 | % | | 9.9 | % | | |
| | |
|
| | | | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | Variance | Revenue: | | | | | | | | Products | $ | 20,149 |
| | $ | 19,016 |
| | $ | 1,133 |
| | 6.0 | % | Services | 16,044 |
| | 11,957 |
| | 4,087 |
| | 34.2 | % | Operating Costs: | | | | | | | | Products | $ | (15,894 | ) | | $ | (14,773 | ) | | $ | (1,121 | ) | | 7.6 | % | Services | (13,584 | ) | | (9,958 | ) | | (3,626 | ) | | 36.4 | % |
The Marine Systems group’sincrease in product revenue in 2018 consisted of the following: | | | | | Ship construction | $ | 598 |
| Military vehicle production | 307 |
| Other, net | 228 |
| Total increase | $ | 1,133 |
|
Ship construction revenue increased in 2014 due primarily to higher volume on the Virginia-class submarine program, including long-lead materials for the Block IVDDG-51 destroyer program, the T-AO-205 fleet replenishment oiler contract and commercial container ship construction. Military vehicle production revenue increased workdue to higher volume on the group’sU.S. Army’s
Abrams tank programs and the ramp up of production on Piranha vehicles for international customers. The primary drivers of the increase in product operating costs were the changes in volume on the programs described above. The increase in service revenue in 2018 consisted of the following: | | | | | IT services | $ | 3,859 |
| Aircraft services | 353 |
| Other, net | (125 | ) | Total increase | $ | 4,087 |
|
IT services revenue increased due primarily to the CSRA acquisition in the second quarter of 2018. The aircraft services revenue increase was due to higher demand for maintenance work and the acquisition of Hawker Pacific in the second quarter of 2018. Service operating costs increased at a higher rate than revenue due primarily to intangible asset amortization expense from the CSRA acquisition. Review of 2017 vs. 2016 | | | | | | | | | | | | | | | | Year Ended December 31 | 2017 | | 2016 | | Variance | Revenue: | | | | | | | | Products | $ | 19,016 |
| | $ | 19,010 |
| | $ | 6 |
| | — | % | Services | 11,957 |
| | 11,551 |
| | 406 |
| | 3.5 | % | Operating Costs: | | | | | | | | Products | $ | (14,773 | ) | | $ | (15,155 | ) | | $ | 382 |
| | (2.5 | )% | Services | (9,958 | ) | | (9,741 | ) | | (217 | ) | | 2.2 | % |
The increase in product revenue in 2017 consisted of the following: | | | | | Military vehicle production | $ | 261 |
| Aircraft manufacturing and completions | 246 |
| Ship construction | (310 | ) | C4ISR products* | (173 | ) | Other, net | (18 | ) | Total increase | $ | 6 |
|
* C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions in our Mission Systems segment Military vehicle production revenue increased due to higher volume on the U.S. Army’s Abrams and Stryker programs and the ramp up in production on the AJAX program and several international LAV contracts. Aircraft manufacturing and completions revenue increased due to additional deliveries of the ultra-large-cabin G650 and mid-cabin G280 aircraft. These increases were offset largely by decreased ship construction ofrevenue driven by timing on the Virginia-class submarine program and reduced Jones Act ships. commercial ship construction volume, and decreased revenue from C4ISR products driven by funding delays caused by the extended FY 2017 CR. While product revenue was steady in 2017, product operating costs decreased due to strong operating performance in our Aerospace and Mission Systems segments and the impact of DDG-51 program cost growth in 2016 in our Marine Systems segment.
The increase in service revenue in 2017 consisted of the following: | | | | | Ship engineering, repair and other services | $ | 243 |
| Aircraft services | 118 |
| Other, net | 45 |
| Total increase | $ | 406 |
|
Revenue for Navyfrom ship engineering, repair and other services decreasedincreased due to additional work related to the Columbia-class submarine development program and Virginia-class submarine design enhancements, and a higher volume of submarine repair work. Aircraft services revenue increased driven by higher demand for maintenance work and the acquisition of an FBO in 2014 caused by2017. Service operating costs increased in 2017 at a lower spending byrate than revenue due primarily to strong operating performance in our Information Technology segment. G&A EXPENSES As a percentage of revenue, G&A expenses were 6.2% in 2018, 6.5% in 2017 and 6.3% in 2016. We expect G&A expenses as a percentage of revenue in 2019 to be generally consistent with 2018. INTEREST, NET Net interest expense was $356 in 2018, $103 in 2017 and $91 in 2016. The increase in 2018 was due primarily to the Navy on submarine-related overhaulimpact of financing the CSRA acquisition, including the issuance of $7.5 billion of fixed- and repair services. Operating margin decreased 30 basis pointsfloating-rate notes in 2014the second quarter of 2018. The increase in 2017 was due primarily to a shift$500 net increase in contract mix as work on the Block IV Virginia-class and Jones Act commercial ship contracts ramped up and volume decreased on mature contracts, including ESB and Blocks II and III of the Virginia-class program. In addition, construction progressed on the first of the three DDG-1000 ships and two of the DDG-51 shipslong-term debt beginning in the Navy’s restartthird quarter of the program. 2016 Outlook
We expect the Marine Systems group’s 2016 revenue to be consistent with 2015. Operating margin is expected to improve to the mid-9 percent range.
CORPORATE
Corporate results consist primarily of compensation expense for stock options. Corporate costs totaled $41 in 2015, $72 in 2014and $96 in 2013. The decrease in 2015 is due primarily to lower compensation expense for stock options, as options granted beginning in 2015 have a three-year vesting period versus a two-year vesting period for prior option grants.2016. See Note OK to the Consolidated Financial Statements in Item 8 for additional information regarding our equity compensation plans,debt obligations, including changes made to our equity compensation plans in 2015.interest rates. We expect Corporate operating costs in 2016 of approximately $45.
OTHER INFORMATION
PRODUCT AND SERVICE REVENUE AND OPERATING COSTS
Review of 2015 vs. 2014
| | | | | | | | | | | | | | | | Year Ended December 31 | 2015 | | 2014 | | Variance | Revenue: | | | | | | | | Products | $ | 20,280 |
| | $ | 19,564 |
| | $ | 716 |
| | 3.7 | % | Services | 11,189 |
| | 11,288 |
| | (99 | ) | | (0.9 | )% | Operating Costs: | | | | | | | | Products | $ | 15,871 |
| | $ | 15,335 |
| | $ | 536 |
| | 3.5 | % | Services | 9,468 |
| | 9,644 |
| | (176 | ) | | (1.8 | )% |
The increase in product revenue in 2015 consisted of the following:
| | | | | Ship construction | $ | 476 |
| Aircraft manufacturing, outfitting and completions | 200 |
| Other, net | 40 |
| Total increase | $ | 716 |
|
Ship construction revenue increased in 2015 due to higher volume on the Virginia-class submarine program and commercial Jones Act ships. Aircraft manufacturing, outfitting and completions revenue increased in 2015 due to additional deliveries of G650 aircraft.
Product operating costs increased in 2015 due primarily to higher volume on the programs described above.
The decrease in service revenue in 2015 consisted of the following:
| | | | | Ship engineering, repair and other services | $ | 224 |
| IT services | (176 | ) | Military vehicle services | (65 | ) | Other, net | (82 | ) | Total decrease | $ | (99 | ) |
Ship engineering, repair and other services revenue was up in 2015 due to increased development work on the Ohio-class submarine replacement program. IT services revenue decreased in 2015 due to lower volume on several programs. Military vehicle services revenue decreased in 2015 due primarily to the completion of the GCV design and development program.
Service operating costs decreased in 2015 due primarily to lower volume on the programs described above, as well as cost-reduction efforts in the Information Systems and Technology group.
Review of 2014 vs. 2013
| | | | | | | | | | | | | | | | Year Ended December 31 | 2014 | | 2013 | | Variance | Revenue: | | | | | | | | Products | $ | 19,564 |
| | $ | 19,100 |
| | $ | 464 |
| | 2.4 | % | Services | 11,288 |
| | 11,830 |
| | (542 | ) | | (4.6 | )% | Operating Costs: | | | | | | | | Products | $ | 15,335 |
| | $ | 15,065 |
| | $ | 270 |
| | 1.8 | % | Services | 9,644 |
| | 10,137 |
| | (493 | ) | | (4.9 | )% |
The increase in product revenue in 2014 consisted of the following:
| | | | | Ship construction | $ | 626 |
| Aircraft manufacturing, outfitting and completions | 619 |
| C4ISR products | (541 | ) | Pre-owned aircraft | (143 | ) | Other, net | (97 | ) | Total increase | $ | 464 |
|
Ship construction revenue increased in 2014 due to higher volume on the Virginia-class submarine program and commercial Jones Act ships. Aircraft manufacturing, outfitting and completions revenue increased due to additional deliveries of large-cabin aircraft. Offsetting these increases, lower U.S. Army spending negatively impacted revenue from C4ISR products. Pre-owned aircraft sales were down as there were fewer aircraft trade-ins and resulting sales in 2014.
Product operating costs increased in 2014 due primarily to higher volume on the programs described above. Costs in 2014 were also affected by higher net R&D expenses in the Aerospace group associated with ongoing product development efforts.
The decrease in service revenue in 2014 consisted of the following:
| | | | | Military vehicle services | $ | (194 | ) | C4ISR services | (224 | ) | IT services | (155 | ) | Other, net | 31 |
| Total decrease | $ | (542 | ) |
C4ISR services and military vehicle services revenue was lower due to decreased U.S. Army spending, while IT services revenue decreased due to reduced commercial wireless work.
Service operating costs decreased in 2014 due primarily to lower volume on the programs described above.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.2 percent in 2015, 6.4 percent in 2014 and 6.6 percent in 2013. G&A expenses in 2014 included $29 of severance-related charges in our European military vehicles
business in the Combat Systems group. We expect G&A expenses in 2016 to be generally consistent with 2015.
INTEREST, NET
Net interest expense was $83 in 2015 and $86 in 2014 and 2013. We expect full-year 20162019 net interest expense to be approximately $95, up$430, an increase from 20152018, reflecting a full year of financing for the CSRA acquisition.
OTHER, NET Net other expense was $16 in 2018 and $56 in 2017, and net other income was $3 in 2016. Net other expense/income represents primarily the non-service cost components of pension and other post-retirement benefit cost, including amounts from legacy CSRA plans assumed as of the acquisition date. The 2018 expense also includes approximately $30 of transaction costs associated with the CSRA acquisition. In 2019, we expect net other income to be approximately $60 due primarily to less interestthe investment income on lower cash balances expected in 2016.from our commercial pension plans. PROVISION FOR INCOME TAX, NET Our effective tax rate was 27.7 percent17.8% in 20152018, 29.7 percent28.6% in 20142017 and 31.2 percent26.7% in 2013.2016. The decrease in theour effective tax rate in 2015 was2018 is due primarily to the favorablereduction of the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018, resulting from the enactment of the Tax Cuts and Jobs Act (tax reform) on December 22, 2017. The effective tax rate in 2018 also includes the impact of contract close-outstax benefits associated with equity-based compensation and a discretionary pension plan contribution. The effective tax rate in 2015.2017 included a $119 unfavorable impact, or 290 basis points, resulting from tax reform. For further discussion, andincluding a reconciliation of our effective tax rate from the statutory federal rate, see Note EF to the Consolidated Financial Statements in Item 8. WeFor 2019, we anticipate thea full-year effective tax rate to be in the mid-29 percent range in 2016.between 18 and 18.5%.
DISCONTINUED OPERATIONS, NET OF TAX Concurrent with the acquisition of CSRA, we were required by a government customer to dispose of certain CSRA operations to address an organizational conflict of interest with respect to services provided to the customer. In 2014,2018, we entered into an agreement to sell our axle businesssold these operations. In accordance with U.S. generally accepted accounting principles (GAAP), the sale did not result in a gain for financial reporting purposes. However, the Combat Systems group and recognizedsale generated a $146 loss, nettaxable gain, resulting in tax expense of tax (the sale was completed in January 2015). $13. In 2013, we recognized a $129 loss, net of tax, from the settlement of oursettled litigation with the U.S. Navy related to the terminated A-12 aircraft contract in the company’s discontinuedformer tactical military aircraft business. See Note AIn connection with the settlement, we released some rights to reimbursement of costs on ships under contract at our Bath, Maine, shipyard. As we progressed through the Consolidated Financial Statementsshipbuilding process, we determined that the cost associated with this settlement was greater than anticipated. Therefore, in Item 8 for further discussion2016, we recognized an$84 loss, net of these transactions.tax, to adjust the previously recognized settlement value. In addition, we recognized $23 of losses, net of tax, in 2016 related to other former operations of the company.
BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE Our total backlog, including funded and unfunded portions, was $66.1$67.9 billion on December 31, 2018, up 7.4% from $63.2 billion at the end of 2015, compared with $72.4 billion on December 31, 2014.2017. Our total backlog is equal to our remaining performance obligations under contracts that meet the criteria in ASC Topic 606 as discussed in Note C to the Consolidated Financial Statements in Item 8. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $90.6$103.4 billion on December 31, 2015. Estimated potential contract value includes work awarded on unfunded indefinite delivery, indefinite quantity (IDIQ) contracts or unexercised options associated with existing firm contracts. Contract options in our defense business represent agreements to perform additional work under existing contracts2018, up 17.5% from $88 billion at the
election end of the customer. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value. We recognize options in backlog when the customer exercises the option and establishes a firm order.2017.
AEROSPACE Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace groupsegment ended 20152018 with backlog of $13.4$11.4 billion up from $13.2compared with $12.5 billion at year-end 2014.2017. Orders in 20152018 reflected strongsolid demand across our product and services portfolio. We continued to build our backlog with additional orders for the new family of business jets introduced in 2014, the G500 and G600 aircraft, which are expected to enter into service in 2018 and 2019, respectively, as well asreceived orders for all models of in-production aircraft. In addition, we received severalGulfstream aircraft, including additional orders in 2015 for custom completions of narrow-the G500 and wide-bodyG600 aircraft. Beyond total backlog, estimated potential contract value represents primarily options and other agreements with existing customers to purchase new aircraft in our Jet Aviation business. Estimatedand aircraft services. On December 31, 2018, estimated potential contract value in the Aerospace group primarily represents options to purchase new aircraft and long-term agreements with fleet customers. Estimated potential contract valuesegment was $2.4$3.1 billion, on December 31, 2015, down slightlyup 60.1% from $2.7$2 billion at year-end 2014.2017. This increase was due largely to a multi-aircraft, multi-year agreement entered into with an existing corporate customer in the fourth quarter of 2018.
Demand for Gulfstream aircraft remains strong across customer types and geographic regions, generating orders from public and privateprivately held companies, individuals, and governments around the world. Geographically, U.S. customers represented approximately 45 percent65% of the group’ssegment’s orders in 2018 and 55% of the segment’s backlog on December 31, 2015, up from year-end 2014 given2018, demonstrating continued strong domestic demand.
DEFENSE GROUPSSEGMENTS The total backlog in our three defense groupssegments represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog includes items that have been authorized and appropriated by the U.S. Congress and funded by the customer,customers, as well as commitments by international customers that are similarly approved and funded similarly by their governments. We have included in total backlog
firm contracts atThe unfunded portion includes the amounts that we believe are likely to receive funding,be funded, but there is no guarantee that future budgets and appropriations will provide the same funding necessarylevel currently anticipated for a given program.
Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and work awarded on unfunded indefinite delivery, indefinite quantity (IDIQ)
contracts. Contract options in our defense business represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value. Total backlog in our defense groupssegments was $52.7$56.5 billion on December 31, 2015, down2018, up 11.4% from $59.2$50.7 billion at the end of 2014. 2017. The most significant drivers of the growth in 2018 were the CSRA acquisition in our Information Technology segment and contracts totaling $4.8 billion awarded by the U.S. Navy for the construction of five Arleigh Burke-class (DDG-51) guided-missile destroyers. Each of our segments achieved an organic book-to-bill ratio equal to or greater than 1-to-1 in 2018. Estimated potential contract value in our defense segments was $22$32.4 billion on December 31, 2015, compared with $23.92018, up 41.7% from $22.8 billion at year-end 2014.2017 due in large part to the CSRA acquisition and a multibillion-dollar IDIQ contract awarded by the U.S. Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program. COMBAT SYSTEMS After tripling in 2014,The Combat Systems’Systems segment’s total backlog was $19$16.6 billion at the end of 2015, down slightly from $19.82018, compared with $17.6 billion at year-end 2014.2017. The group’ssegment’s backlog includes the work remaining on two majorsignificant multi-year contracts awarded in 2014:
$8.14.5 billion remaining on a $10 billion contract to provide wheeled armored vehicles and logistics support to a Middle Easternan international customer through 2028, plus an additional potential $2.5 billion of vehicles and services; and2024. $5.53.4 billion from the U.K.U.K Ministry of Defence to produce AJAX armoured fighting vehicles scheduled for delivery to the British Army between 2017 andthrough 2024 and related in-service support. We received a $610 award for the in-service support in 2015.
The Combat Systems group alsosegment has severala variety of additional international military vehicle production contractsprograms in backlog, notably: $600940 to produce overPiranha armored vehicles for several non-U.S. customers, including $365 to produce more than 300 armored personnel carriers (APCs) for the Danish DefenceDefense Acquisition and Logistics Organization;Organization and $255 to deliver up to 227 Piranha vehicles in six variants to the Romanian Armed Forces. $495380 for light armored vehicles (LAVs)LAVs for various internationalseveral non-U.S. customers, including $250$200 for the upgrade and modernization of LAV III combat vehicles for the Canadian Army. The$270 to upgrade Duro tactical vehicles for the Swiss government through 2022.
One of the U.S. Army’s top priorities is readiness of its platform products through critical modernization efforts, including upgrades for both the Abrams main battle tank and Stryker wheeled combat vehicle program represented $670combat-vehicle programs. The segment received $1.4 billion of the group’s backlog on December 31, 2015, with vehicles scheduled for delivery through 2017. The group received $590 of Stryker orders in 2015, including awards for double-V-hulled vehicles, contractor logistics support and engineering services. The group’s backlog on December 31, 2015, included $780 for Abrams main battle tank modernization and upgrade programs for the U.S. Army and U.S. allies aroundpartners in 2018, ending the world, including $275year with backlog of $2.7 billion. For the Army, backlog included $1.5 billion to refurbishproduce M1A2 SEPv3 tanks, deliver M1A2 SEP components, and upgrade 150provide associated program support, and $300 to design and develop SEPv4 prototypes with upgraded sensors. Backlog included $640 to modernize Abrams main battle tanks tofor U.S. partners. An additional $395 for Abrams tank programs is included in our estimated potential contract value at year end. The Army’s Stryker wheeled combat-vehicle program represented $820 of the situational awareness configuration for the Kingdom of Morocco.
The Combat Systems group’ssegment’s backlog on December 31, 2015,2018, with vehicles scheduled for delivery through 2021. The segment received $1 billion of Stryker orders in 2018, including awards to produce double-V-hull vehicles, upgrade vehicles with integrated short-range air defense capabilities, and provide support and engineering services.
The backlog at year end also included $2.3$325 to develop and deliver 12 prototype vehicles for the Mobile Protected Firepower (MPF) program, which will increase the firepower for the Army’s Infantry Brigade Combat Teams (IBCTs). The Combat Systems segment’s backlog on December 31, 2018, also included $2.5 billion for multiple weapons systems and munitions programs, including $125 received in 2015 from$415 to produce Hydra-70 rockets for the Army for production of Hydra-70 rockets.Army. Combat Systems’The segment’s estimated potential contract value was $5.1$4.2 billion on December 31, 2015, down slightly2018, up 32.8% from $5.5$3.2 billion at year-end 2014.2017. Estimated potential contract value increased in 2018 driven by unexercised options associated with 2018 awards to develop and deliver prototype vehicles for the MPF program, to produce Piranha vehicles for the Romanian Armed Forces and to deliver various rounds of medium-caliber ammunition to the U.S. Air Force.
INFORMATION SYSTEMS AND TECHNOLOGY Unlike our other defense businesses, theThe Information Systems and Technology group’ssegment’s backlog consists of thousands of contracts and task orders, and approximately 15-20% of its portfolio is reconstitutedrecompeted each year with new programs and task order awards.year. The group’ssegment’s total backlog was $8.6$8 billion at the end of 2015, unchanged2018, up 120.6% from $3.6 billion at year-end 2014.2017 due to the CSRA acquisition in the second quarter of 2018. This amount does not include $14.7$17.1 billion of estimated potential contract value associated with its anticipated share of IDIQ contracts and unexercised options. In 2015, funding underoptions on December 31, 2018. Funding from IDIQ contracts and options contributed over $4added $4.2 billion to the group’ssegment’s backlog in 2018, over 50% of the segment’s orders.
The group receivedIn 2018, the segment achieved a numberbook-to-bill ratio of 1-to-1 for the fourth consecutive year driven by several significant contract awards in 2015,during the year, including the following:
$425375 from the New York State Department of Health to provide engineering and technical improvements to the state’s health benefits exchange. $195 from the U.S. ArmyAir Force for ruggedized computing equipmentthe Battlefield Information Collection and Exploitation System (BICES) program to provide information sharing support to coalition operations. $145 to provide operations and maintenance support services for a Department of Homeland Security (DHS) data center. $110 from the U.S. Naval Air Warfare Center for design, development and support of shipboard and airborne platforms. The segment’s backlog at year-end 2018 also included the following key programs: $1.1 billion to provide classified IT infrastructure services to an agency of the DoD with an additional $1.1 billion of estimated potential contract value remaining under the CHS-4 program. $735contract. $210 to provide supply chain management services to the U.S. Department of State (DoS). $170 from the New York State Department of Health to manage the state’s Medicaid Management Information System. $120 of estimated potential contract value remains under thisthe contract. $160 to provide turnkey training and simulation services for the U.S. Army’s Aviation Center of Excellence in Fort Rucker, Alabama. An additional $495 of estimated potential contract value remains under the contract.
MISSION SYSTEMS Similar to the Information Technology segment, the Mission Systems segment’s backlog consists of thousands of contracts and task orders. The segment’s total backlog remained steady at $5.3 billion at the end of 2018 compared with year-end 2017. This amount does not include $7.4 billion of estimated potential contract value associated with its anticipated share of IDIQ contract;contracts and unexercised options on December 31, 2018. Estimated potential contract value increased 55.6% from year-end 2017 driven by a multibillion-dollar IDIQ contract awarded by the U.S. Army for computing and communications equipment under the CHS-5 program. Funding of IDIQ contracts and options added $2.6 billion to the segment’s backlog in 2018, over 50% of the segment’s orders. In 2018, the segment achieved a book-to-bill ratio of 1-to-1 or higher for the fourth consecutive year driven by several significant contract awards during the year, including the following: $295400 from the Army for computing and communications equipment under the CHS-4 and CHS-5 programs. $395 from the U.S. Department of State to provide supply chain management services; $270 from the U.S. Navy to provide fire control system modifications for ballistic-missile (SSBN) and guided-missile (SSGN) submarines;
$180 from the Canadian Department of National Defence for the procurement of components for a fleet of CP140 aircraft and the upgrade of data management software for the aircraft; and
$155 for combat and seaframe control systems on two U.S. NavyIndependence-variant Littoral Combat Ships (LCS)(LCSs).
Backlog$210 from the Army for its mobile communications network.
$205 from the National Aeronautics and Space Administration (NASA) for the Space Network Ground Segment Sustainment (SGSS) program to modernize NASA’s ground infrastructure systems for its satellite network. The segment’s backlog at year-end 20152018 also included the following key programs: $815780 for the Canadian Maritime Helicopter Project (MHP) to provide integrated mission systems, training and support for 28 Canadian marine helicopters;helicopters.
$425630 for combat and seaframe control systems for the WIN-T mobile communications network program. The group has an additional $100 of estimated potential contract value associated with this IDIQ contract;Navy Independence-variant LCSs. $285 for contact-center services for260 to design and develop the Centers for Medicare & Medicaid Services; $510next-generation tactical communication and information system in the initial phase of support and modernization work for the intelligence community, the DoD and the Department of Homeland Security, including the St. Elizabeths campus, New Campus East and Enterprise Transport infrastructure programs; and
$190 for long-term support and capability upgrades for the U.K.’s Bowman tactical communication system.Morpheus program.
$235 to provide fire control system modifications for ballistic-missile (SSBN) submarines.
MARINE SYSTEMS The Marine Systems group’ssegment’s backlog consists of long-term submarine and surface ship construction programs, as well as numerous engineering and repair contracts. The group periodically receives large contract awards that providesegment’s book-to-bill ratio exceeded 1-to-1 in 2018, resulting in backlog for several years. This backlog then decreases over subsequent years as the group performs on these contracts. Consistent with this pattern, backlog decreasedgrowth of 9.8% from $24.2 billion at year-end 2017 to $25.1 billion on December 31, 2015, compared with $30.8$26.6 billion at the end of 2014.2018. The Virginia-class submarine program was the company’s largest program in 20152018 and the largest contract in the company’s backlog. In 2014, we received a contract for the construction of 10 submarines in Block IV of the program. The group’ssegment’s backlog at year-end 20152018 included $17.4$8.8 billion for 1611 Virginia-class submarines scheduled for delivery through 2023. Navy destroyer programs represented $3.9$8.2 billion of the group’ssegment’s backlog at year-end 2015. We have2018, an increase of 106.9% driven by contracts totaling $4.8 billion awarded by the Navy for the construction of five DDG-51 guided-missile destroyers. As of year end, we had construction contracts for seven11 DDG-51 destroyers scheduled for delivery through 2022.2027. Backlog at year end 2015year-end 2018 also included three shipsone ship under the DDG-1000 program scheduled for delivery through 2019.in 2020. The Marine Systems group’ssegment’s backlog on December 31, 2015,2018, included $420$95 for construction of ESB auxiliary support ships. The groupsegment has delivered the first threefour ships in the program, and construction is underway on the fourthfifth ship, scheduled for delivery in 2018.2019. During 2018, the segment received funding for long-lead materials for a sixth ship. In 2016, we were awarded a design and construction contract for the lead ship in the Navy’s new class of T-AO-205 fleet replenishment oilers, along with options for five additional ships. During 2018, the Navy exercised the options for three additional ships. Backlog at year-end 2018 was $1.8 billion for the program, and estimated potential contract value totaled $1 billion for the program. The year-end backlog also included $350a contract from a commercial customer for onetwo liquefied natural gas (LNG)-powered and seven LNG-conversion-ready-capable Jones Act ships for commercial customers scheduled for delivery through 2017.2020.
Complementing these ship construction programs, engineering services represented approximately $1.8$6.2 billion of the Marine Systems group’ssegment’s backlog on December 31, 2015, including $1.2 billion for design2018. Design and prototype development efforts on the Ohio-classColumbia-class submarine replacement program. Additionally, year-endprogram represented $5.1 billion of this amount.
Year-end backlog for ship and submarine maintenance, repair and other services totaled $1.4 billion.$1.2 billion, including $955 for surface-ship repair operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES We place a strong emphasis on cash flow generation. This focus gives us the flexibility for capital deployment while preserving a strong balance sheet to position us for future opportunities. Cash generated by operating activities over the past three years was deployed to pay dividends, fund capital expenditures and business acquisitions, and repurchase our common stock, pay dividends and fund capital expenditures. Our cash balances are invested primarily in time deposits from highly rated banks and commercial paper rated A1/P1 or higher. On December 31, 2015, $1.1 billion of our cash was held by non-U.S. operations. Should this cash be repatriated, it generally would be subject to U.S. federal income tax but would generate offsetting foreign tax credits.stock.
| | | | | | | | | | | | | Year Ended December 31 | 2015 | | 2014 | | 2013 | Net cash provided by operating activities | $ | 2,499 |
| | $ | 3,728 |
| | $ | 3,111 |
| Net cash provided (used) by investing activities | 200 |
| | (1,102 | ) | | (363 | ) | Net cash used by financing activities | (4,259 | ) | | (3,575 | ) | | (725 | ) | Net cash (used) provided by discontinued operations | (43 | ) | | 36 |
| | (18 | ) | Net (decrease) increase in cash and equivalents | (1,603 | ) | | (913 | ) | | 2,005 |
| Cash and equivalents at beginning of year | 4,388 |
| | 5,301 |
| | 3,296 |
| Cash and equivalents at end of year | 2,785 |
| | 4,388 |
| | 5,301 |
| Marketable securities | — |
| | 500 |
| | — |
| Short- and long-term debt | (3,399 | ) | | (3,893 | ) | | (3,888 | ) | Net (debt) cash | $ | (614 | ) | | $ | 995 |
| | $ | 1,413 |
| Debt-to-equity (a) | 31.7 | % | | 32.9 | % | | 26.8 | % | Debt-to-capital (b) | 24.0 | % | | 24.8 | % | | 21.1 | % |
Note: Prior period information has been restated to reflect the reclassification of debt issuance costs from other assets to debt as discussed in Note J to the Consolidated Financial Statements in Item 8. | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | 2016 | Net cash provided by operating activities | $ | 3,148 |
| | $ | 3,876 |
| | $ | 2,163 |
| Net cash used by investing activities | (10,234 | ) | | (788 | ) | | (391 | ) | Net cash provided (used) by financing activities | 5,086 |
| | (2,399 | ) | | (2,169 | ) | Net cash used by discontinued operations | (20 | ) | | (40 | ) | | (54 | ) | Net (decrease) increase in cash and equivalents | (2,020 | ) | | 649 |
| | (451 | ) | Cash and equivalents at beginning of year | 2,983 |
| | 2,334 |
| | 2,785 |
| Cash and equivalents at end of year | 963 |
| | 2,983 |
| | 2,334 |
| Short- and long-term debt | (12,417 | ) | | (3,982 | ) | | (3,888 | ) | Net debt | $ | (11,454 | ) | | $ | (999 | ) | | $ | (1,554 | ) | Debt-to-equity (a) | 105.8 | % | | 34.8 | % | | 37.7 | % | Debt-to-capital (b) | 51.4 | % | | 25.8 | % | | 27.4 | % |
| | (a) | Debt-to-equity ratio is calculated as total debt divided by total equity.equity as of year end. |
| | (b) | Debt-to-capital ratio is calculated as total debt divided by the sum of total debt plus total equity.equity as of year end. |
Our net debt position, defined as debt less cash and equivalents and marketable securities increased in 2018 due primarily to financing the CSRA acquisition. We expect to continue to generate funds in excess of our short- and long-term liquidity needs. We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy. The following is a discussion of our major operating, investing and financing activities for each of the past three years, as classified on the Consolidated StatementsStatement of Cash Flows in Item 8.
OPERATING ACTIVITIES We generated cash from operating activities of $2.5$3.1 billion in 20152018, $3.73.9 billion in 20142017 and $3.12.2 billion in 2013. In all three years, the2016. The primary driver of cash flowsinflows in all three years was net earnings. OperatingHowever, cash flows in 2013 benefited from deposits received in the Marine Systems group for commercial ship orders. In 2014, operating cash flows included significant customer deposits related to a large contract for a Middle Eastern customer awarded in our Combat Systems group. In 2015, operating cash flowsall three years were affected negatively affected by the utilization of these deposits coupled with growth in operating working capital, particularly on an international wheeled armored vehicle contract in our Combat Systems segment (for further discussion, see Note H to the Consolidated Financial Statements in Item 8). Additionally, cash flows in 2018 reflected a discretionary pension plan contribution of $255. In 2017 and 2016, the build-up of inventory related to the new G500 and G600 aircraft programs in our Aerospace group consistent with building test aircraft forsegment also negatively affected operating cash flows. However, the G500 and G600 programs.2017 growth in operating working capital was offset by lower income tax payments.
INVESTING ACTIVITIES Cash provided byused for investing activities was $200$10.2 billion in 2015 compared with a use of cash for2018, $788 in 2017 and $391 in 2016. Our investing activities of $1.1 billion in 2014include cash paid for business acquisitions and $363 in 2013. Our primary investing activities were capital expendituresexpenditures; proceeds from asset sales; and purchases, sales and maturities of marketable securities. Business Acquisitions. The primary use of cash for investing activities in 2018 was business acquisitions. In 2018, we acquired six businesses for an aggregate of $10.1 billion, including $9.7 billion for CSRA. In 2017, we acquired four businesses for an aggregate of $399. In 2016, we acquired two businesses for an aggregate of $58. Capital Expenditures. Capital expenditures were $569$690 in 20152018, $521428 in 20142017 and $436$392 in 2013.2016. Capital expenditures increased in 2018 to support growth at Gulfstream and our shipyards. We expect capital expenditures ofto be approximately 2 percent3% of revenue in 2016. Marketable Securities. In 2015, we received $500 of proceeds from maturing held-to-maturity securities purchased in 2014. Other net purchases, sales and maturities of marketable securities in all three years were not material.2019.
Other, Net. Investing activities also include proceeds from the sale of assets and cash paid for business acquisitions.asset sales. In 2015,2018, we completed the sale of our axle business in the Combat Systems group and a commercial cyber security businessthree businesses in our Information SystemsTechnology segment: a commercial health products business, certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer, and Technology group. In 2014, we completed an acquisition in our Information Systems and Technology group.a public-facing contact-center business.
FINANCING ACTIVITIES We used $4.3Cash provided by financing activities was $5.1 billion in 20152018, $3.6compared with cash used by financing activities of $2.4 billion in 20142017 and $725$2.2 billion in 2013 for2016. Net cash from financing activities.activities includes proceeds received from debt and commercial paper issuances and employee stock option exercises. Our financing activities includedalso include repurchases of common stock, payment of dividends and debt repayments. Net cash from financing activities also included proceeds received from stock option exercises.
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. We repurchased 22.810.1 million of our outstanding shares for $1.8 billion in 2015 for $3.2 billion, 292018, 7.8 million shares for $1.5 billion in 2014 for $3.4 billion2017 and 9.414.2 million shares for $2 billion in 2013 for $740.2016. As a result, we have reduced our shares outstanding by approximately 12 percent8% since the end of 2012.2015. On December 31, 2015, 9.62018, 7.5 million shares remained authorized by our board of directors for repurchase, approximately 3 percent3% of our total shares outstanding. Dividends. On March 4, 2015,7, 2018, our board of directors declared an increased quarterly dividend of $0.69$0.93 per share, the 18th21st consecutive annual increase. Previously, the board had increased the quarterly dividend to $0.62$0.84 per share in March 20142017 and $0.56$0.76 per share in March 2013.2016. Cash dividends paid were $873$1.1 billion in 2015, $8222018, $986 in 20142017 and $591$911 in 2013. We did not pay any dividends in the first three months of 2013 because we accelerated our first-quarter dividend payment to December 2012.2016. Debt and Commercial Paper Issuances and Repayments. In January 2015,2018, we issued $7.5 billion of fixed- and floating-rate notes to finance the acquisition of CSRA. Additionally, in 2018, we paid $450 to satisfy obligations under CSRA’s accounts receivable purchase agreement. In the third quarter of 2017, we issued $1 billion of fixed-rate notes that were used to repay $900 of fixed-rate notes that matured in the fourth quarter of 2017 and for general corporate purposes. In 2016, we repaid $500 of fixed-rate notes on their scheduled maturity date with the proceeds from the maturing marketable securities discussed above. cash on hand and issued $1 billion of fixed-rate notes for general corporate purposes. We have no additional material repayments of long-term debt scheduled until $500 of fixed-rate notes mature in July 2016. As we approach the maturity date of this debt, we will determine whether to repay these notes with cash on hand or refinance the obligation.2019. See Note JK to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including scheduled debt maturities and interest rates. We ended 2015 with no
On December 31, 2018, we had $850 of commercial paper outstanding. We have $2$5 billion in committed bank credit facilities that remain available, including a $1 billion facility expiring in July 2018 and a $1 billion facility expiring in November 2020. These facilities are for general corporate purposes and working capital needs and are required by rating agencies to support our commercial paper issuances. These credit facilities include a $2 billion 364-day facility expiring in March 2019, a $1 billion multi-year facility expiring in November 2020 and a $2 billion multi-year facility expiring in March 2023. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.
NON-GAAP MANAGEMENT METRICSFINANCIAL MEASURES We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations and ROICreturn on invested capital (ROIC) to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures under U.S. generally accepted accounting principles (GAAP),GAAP, and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures. Free Cash Flow. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the Consolidated StatementsStatement of Cash Flows:Flows in Item 8: | | Year Ended December 31 | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | 2018 | | 2017 | | 2016 | | 2015 | | 2014* | Net cash provided by operating activities | $ | 2,499 |
| | $ | 3,728 |
| | $ | 3,111 |
| | $ | 2,606 |
| | $ | 3,150 |
| $ | 3,148 |
| | $ | 3,876 |
| | $ | 2,163 |
| | $ | 2,607 |
| | $ | 3,830 |
| Capital expenditures | (569 | ) | | (521 | ) | | (436 | ) | | (436 | ) | | (445 | ) | (690 | ) | | (428 | ) | | (392 | ) | | (569 | ) | | (521 | ) | Free cash flow from operations | $ | 1,930 |
| | $ | 3,207 |
| | $ | 2,675 |
| | $ | 2,170 |
| | $ | 2,705 |
| $ | 2,458 |
| | $ | 3,448 |
| | $ | 1,771 |
| | $ | 2,038 |
| | $ | 3,309 |
| Cash flow as a percentage of earnings from continuing operations: | | | | | | | | | | | Cash flows as a percentage of earnings from continuing operations: | | | | | | | | | | | Net cash provided by operating activities | 84 | % | | 139 | % | | 125 | % | | NM* |
| | 126 | % | 94 | % | | 133 | % | | 81 | % | | 86 | % | | 143 | % | Free cash flow from operations | 65 | % | | 120 | % | | 108 | % | | NM* |
| | 108 | % | 73 | % | | 118 | % | | 66 | % | | 67 | % | | 124 | % |
* Not meaningful (NM) due to net loss in 2012. As discussed previously, the decrease in free cash flow from operations in 20152014 information has not been restated for ASC Topic 606 and is, due primarilytherefore, not comparable to the utilization of customer deposits2018, 2017, 2016 and growth in operating working capital in our Aerospace group.2015 information.
Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as earnings from continuing operations plus after-tax interest and amortization expense.expense, calculated using the statutory federal income tax rate. Average invested capital is defined as the sum of the average debt and shareholders’ equity for the year. ROIC excludesexcluding accumulated other comprehensive loss,loss. ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of our operatingcompany performance.
ROIC is calculated as follows: | | | | | | | | | | | | | | | | | | | | | Year Ended December 31 | 2015 | | 2014 | | 2013 | | 2012* | | 2011 | Earnings from continuing operations | $ | 2,965 |
| | $ | 2,673 |
| | $ | 2,486 |
| | $ | 1,414 |
| | $ | 2,500 |
| After-tax interest expense | 64 |
| | 67 |
| | 67 |
| | 109 |
| | 101 |
| After-tax amortization expense | 75 |
| | 79 |
| | 93 |
| | 139 |
| | 141 |
| Net operating profit after taxes | $ | 3,104 |
| | $ | 2,819 |
| | $ | 2,646 |
| | $ | 1,662 |
| | $ | 2,742 |
| Average invested capital | $ | 17,858 |
| | $ | 18,673 |
| | $ | 18,741 |
| | $ | 19,887 |
| | $ | 18,601 |
| Return on invested capital | 17.4 | % | | 15.1 | % | | 14.1 | % | | 8.4 | % | | 14.7 | % |
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | 2016 | | 2015 | | 2014* | Earnings from continuing operations | $ | 3,358 |
| | $ | 2,912 |
| | $ | 2,679 |
| | $ | 3,036 |
| | $ | 2,673 |
| After-tax interest expense | 295 |
| | 76 |
| | 64 |
| | 64 |
| | 67 |
| After-tax amortization expense | 213 |
| | 51 |
| | 57 |
| | 75 |
| | 79 |
| Net operating profit after taxes | $ | 3,866 |
| | $ | 3,039 |
| | $ | 2,800 |
| | $ | 3,175 |
| | $ | 2,819 |
| Average invested capital | $ | 25,367 |
| | $ | 18,099 |
| | $ | 17,168 |
| | $ | 17,579 |
| | $ | 18,673 |
| Return on invested capital | 15.2 | % | | 16.8 | % | | 16.3 | % | | 18.1 | % | | 15.1 | % |
*2012 loss from continuing operations of ($381) 2014 information has not been adjustedrestated for a $2 billion goodwill impairmentASC Topic 606 and associated $199 tax benefit. 2012 shareholders’ equity, a component of average invested capital, has been similarly adjusted.is, therefore, not comparable to the 2018, 2017, 2016 and 2015 information.
ADDITIONAL FINANCIAL INFORMATION OFF-BALANCE SHEET ARRANGEMENTS On December 31, 2015,2018, other than operating leases, we had no material off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following tables present information about our contractual obligations and commercial commitments on December 31, 2015:2018: | | | | | Payments Due by Period | | | Payments Due by Period | Contractual Obligations | Total Amount Committed | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | Total Amount Committed | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | Long-term debt (a) | $ | 4,200 |
| | $ | 581 |
| | $ | 1,033 |
| | $ | 122 |
| | $ | 2,464 |
| | Debt (a) | | $ | 14,361 |
| | $ | 1,318 |
| | $ | 6,040 |
| | $ | 2,569 |
| | $ | 4,434 |
| Capital lease obligations | 32 |
| | 2 |
| | 4 |
| | 4 |
| | 22 |
| 433 |
| | 92 |
| | 162 |
| | 109 |
| | 70 |
| Operating leases | 1,037 |
| | 220 |
| | 315 |
| | 180 |
| | 322 |
| 1,689 |
| | 297 |
| | 430 |
| | 264 |
| | 698 |
| Purchase obligations (b) | 28,902 |
| | 12,401 |
| | 9,152 |
| | 4,443 |
| | 2,906 |
| 26,799 |
| | 14,703 |
| | 8,918 |
| | 2,495 |
| | 683 |
| Other long-term liabilities (c) | 18,240 |
| | 3,477 |
| | 2,268 |
| | 1,745 |
| | 10,750 |
| 23,842 |
| | 5,468 |
| | 3,215 |
| | 2,356 |
| | 12,803 |
| | $ | 52,411 |
| | $ | 16,681 |
| | $ | 12,772 |
| | $ | 6,494 |
| | $ | 16,464 |
| $ | 67,124 |
| | $ | 21,878 |
| | $ | 18,765 |
| | $ | 7,793 |
| | $ | 18,688 |
|
(a)Includes scheduled interest payments. See Note JK to the Consolidated Financial Statements in Item 8 for a discussion of long-term debt. (b)Includes amounts committed under legally enforceable agreements for goods and services with defined terms as to quantity, price and timing of delivery. This amount includes $21.1$17.7 billion of purchase obligations for products and services to be delivered under firm government contracts under which we would expect full recourse under normal contract termination clauses. (c)Represents other long-term liabilities on our Consolidated Balance Sheets,Sheet, including the current portion of these liabilities. The projected timing of cash flows associated with these obligations is based on management’s estimates, which are based largely on historical experience. This amount also includes all liabilities under our defined-benefit retirement plans. See Note PQ to the Consolidated Financial Statements in Item 8 for information regarding these liabilities and the plan assets available to satisfy them. | | | | | Amount of Commitment Expiration by Period | | | Amount of Commitment Expiration by Period | Commercial Commitments | Total Amount Committed | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | Total Amount Committed | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | Letters of credit and guarantees* | $ | 1,002 |
| | $ | 699 |
| | $ | 140 |
| | $ | 134 |
| | $ | 29 |
| $ | 1,658 |
| | $ | 1,173 |
| | $ | 195 |
| | $ | 165 |
| | $ | 125 |
| Trade-in options* | 66 |
| | 66 |
| | — |
| | — |
| | — |
| | Aircraft trade-in options* | | 98 |
| | 98 |
| | — |
| | — |
| | — |
| | $ | 1,068 |
| | $ | 765 |
| | $ | 140 |
| | $ | 134 |
| | $ | 29 |
| $ | 1,756 |
| | $ | 1,271 |
| | $ | 195 |
| | $ | 165 |
| | $ | 125 |
|
* See Note NO to the Consolidated Financial Statements in Item 8 for a discussion of letters of credit and aircraft trade-in options.
APPLICATION OF CRITICAL ACCOUNTING POLICIES Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that 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. On an ongoing basis, we evaluate our estimates including most pervasively those related to various assumptions and projections for our long-term contracts and programs. Other significant estimates include those related to goodwill and other intangible assets, income taxes, pension and other post-retirement benefits, workers’ compensation, warranty obligations and litigation and other contingencies. We employ judgment in making our estimates, but they are based on historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances. The results of theseThese estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. We believe that our judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented. In our opinion, the following policies are critical and require the use of significant judgment in their application: Revenue Recognition.Revenue. The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue and earnings using the percentage-of-completion method. Under this method,in accordance with ASC Topic 606, Revenue from Contracts with Customers. The unit of account in ASC Topic 606 is a performance obligation. A contract’s transaction price is allocated to each distinct performance obligation within that contract costs and revenue are recognized as revenue when, or as, the performance obligation is satisfied. Our performance obligations are satisfied over time as work progresses either asor at a point in time.
Substantially all of our revenue in the products are produced or as services are rendered. We determinedefense 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 using either input measures (e.g., costs incurred) or output measures (e.g., contract milestones or units delivered), as appropriatetoward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the circumstances. An input measurecustomer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. The majority of our revenue recognized at a point in time is usedfor the manufacture of business-jet aircraft in most cases unless an output measureour Aerospace segment. Revenue on these contracts is identified thatrecognized when the customer obtains control of the asset, which is reliably determinablegenerally upon delivery and representativeacceptance by the customer of progress toward completion. Wethe fully outfitted aircraft. 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. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the loss in the quarter it is identified. We generally measure progress toward completion on contracts in our defense business based on the proportion of costs incurred to date relative to total estimated costs at completion (input measure). For our contracts for the manufacture of business-jet aircraft, we record revenue at two contractual milestones: when green aircraft are delivered to and accepted by the customer and when the customer accepts final delivery of the fully outfitted aircraft (output measure). We do not recognize revenue at green delivery unless (1) a contract has been executed with the customer and (2) the customer can be expected to satisfy its obligations under the contract, as evidenced by the receipt of significant deposits from the customer and other factors.
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. 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 contract valuetransaction price when there is a basis to reasonably estimate the amount of the fee. Estimates
of award or incentive feesThese estimates are based on historical award experience, and anticipated performance. These estimates are based onperformance 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 our performance monthly and update our contract-related estimates at least annually and often quarterly, as well as when required by specific events and circumstances. regularly. We recognize changesadjustments in the estimated profit on contracts under the reallocationcumulative catch-up method. Under the reallocationthis method, the impact of the adjustment on profit recorded to date on a revision in estimatecontract is recognized prospectively over the remaining contract term. We use this method because we believe the majority of factors that typically result in changes in estimates on our long-term contracts affect the period in which the change is identified and future periods. These changes generally reflect our current expectations as to future performance and, therefore, the reallocation method is the method that best matches our profits to the periods in which they are earned. Most government contractors recognize the impact of a change in estimated profit immediately under the cumulative catch-up method. The impact on operating earnings in the period the changeadjustment is identified is generally lower underidentified. Revenue and profit in future periods of contract performance are recognized using the reallocation method as compared to the cumulative catch-up method. adjusted estimate.The netaggregate impact of revisionsadjustments in contract estimates onincreased our operating earnings (and on a diluted per-share basis) totaled favorable changes of $222earnings per share) by $345 ($0.44)0.91) in 2015, $1842018, $323 ($0.35)0.69) in 20142017 and $351$16 ($0.65)0.03) in 2013. No revisions2016. While no adjustment on any one contract werewas material to our Consolidated Financial Statements in 2015, 20142018, 2017 or 2013.2016, the amount in 2016 was negatively impacted by a loss on the design and development phase of the AJAX program in our Combat Systems segment and cost growth associated with the restart of the Navy’s DDG-51 program in our Marine Systems segment. Consistent with defense 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. All contractsThe 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. These assets and liabilities are reported on the Consolidated Balance Sheets in a net asset (contracts in process) or liability (customer advances and deposits) positionSheet on a contract-by-contract basis at the end of each reporting period. Our U.S. government customer generally asserts title CSRA Acquisition. We are required to estimate the fair value of the assets acquired and liabilities assumed in business combinations as of the acquisition date, including identified intangible assets. The amount of purchase price paid in excess of the net assets acquired is recorded as goodwill. The fair values are estimated in accordance with the principles of ASC 820, Fair Value Measurement, which defines fair value as the price that would be received to sell an asset or paid to transfer a security interestliability in inventoried costsan orderly transaction between market participants. The fair values of the net assets acquired are determined primarily using Level 3 inputs (inputs that are unobservable to the marketplace participant). The most significant of the fair value estimates is related to such contractslong-lived assets, specifically intangible assets subject to amortization. We have valued $2.1 billion of acquired intangible assets in connection with the CSRA acquisition. This amount was determined based primarily on CSRA’s projected cash flows. The projected cash flows include various assumptions, including the timing of work embedded in backlog, success in securing future business, profitability of work, and the appropriate risk-adjusted interest rate used to discount the projected cash flows. We are in various phases of valuing the assets acquired and liabilities assumed, and our estimate of these values was still preliminary on December 31, 2018. Therefore, these provisional amounts are subject to change as a result of advances and progress payments. We reflect these advances and progress payments as an offsetwe continue to evaluate information required to complete the related inventoried costs. Invaluations throughout the measurement period, which will extend into the second quarter of 2014,2019.
Reorganization of Operating Segments and Composition of Reporting Units. Concurrent with the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contractsacquisition of CSRA in April 2018, we reorganized our Information Systems and Technology operating
segment in accordance with Customers. ASU 2014-09 prescribes a single, common revenue standard that replaces most existing revenue recognition guidance in GAAP. The standard outlines a five-step model, whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. Several updates have been proposed since the issuance of ASU 2014-09. These updates are intended to allow for a more consistent interpretation and applicationnature of the principles outlined insegment’s products and services into the standard. Once these updates are issued byInformation Technology and Mission Systems segments. This reorganization similarly changed the FASB in 2016, the standard will be final. ASU 2014-09 is effective in the first quartercomposition of 2018 for public companies. However, entities can elect to adopt one year earlier in the first quarter of 2017. The standard permits the use of either the retrospective or cumulative effect transition method.
We are utilizing a bottom-up approach to analyze the standard’s impact on our contract portfolio, taking a fresh look at historical accounting policies and practices and identifying potential differences from applying the requirementsreporting units. Accordingly, goodwill of the new standardInformation Systems and Technology reporting unit was reassigned to our contracts. While this assessment continues, we have not yet selectedthe Information Technology and Mission Systems reporting units using a transition date or method nor have we yet determined the effectrelative fair value allocation approach as of the standard on our Consolidated Financial Statements. We expect this determination will near completion in the second half of 2016. Because the new standard will impact our business processes, systems and controls, we have developed a comprehensive change management project plan to guide the implementation.
The required adoptiondate of the ASU will preclude our usereorganization.
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 reallocation methodasset may not be recoverable. We assess the recoverability of recognizing revisions inthe 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 profit on contracts discussed above. As changes in estimated profit will be recognized in the period they are identified (cumulative catch-up method), rather than prospectively over the remaining contract term, we expect the impact of revisions of contract estimates may be larger and potentially more variable from period to period. Anticipated losses on contracts will continue to be recognized in the quarter they are identified.fair value as determined by discounted projected cash flows. Goodwill and Intangible Assets.Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. Goodwill is not amortized but is subject to anacquired in a business combination. We review goodwill for impairment test on an annual basis andannually or when circumstances indicate that the likelihood of an impairment is more likelygreater than not.50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. The test for goodwill impairment is a two-step process thatto first identify potential goodwill impairment for each reporting unit by comparing the fair value of each of our reporting units to its respective carrying value and then, if necessary, measure the amount of the impairment loss. The process requires a significant level of estimation and use of judgment by management, particularly the estimate of the fair value of our reporting units. Our reporting units are consistent with our operating segments in Note R to the Consolidated Financial Statements in Item 8.
We estimate the fair value of our reporting units based primarily on the discounted projected cash flows of the underlying operations. This requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal value growth and earnings rates applied to the final year of projected cash flows. Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis. To assess the reasonableness of our discounted projected cash flows, we compare the sum of our reporting units’ fair value to our market capitalization and calculate an implied control premium (the excess of the market capitalization over the sum of the reporting units’ fair values over the market capitalization)values). Additionally, we evaluate the reasonableness of each reporting unit’s fair value by comparing the fair value to comparable peer companies and recent comparable market transactions. We completed the required annual goodwill impairment test as of December 31, 2015.2018. The first step of the goodwill impairment test compares the fair valuesvalue of each of our reporting units to theirits carrying values. Our reporting units are consistent with our business groups.value. The estimated fair valuesresults of the first-step test indicated that, for each of our reporting units, wereno impairment existed. The estimated fair value of each of our reporting units was substantially in excess of theirits respective carrying valuesvalue as of December 31, 2015. We review intangible assets subject2018, with the exception of our Information Technology reporting unit for which the excess was slightly more than 5%. This is due to amortization for impairment whenever events or changes in circumstances indicatethe significant size of the CSRA acquisition relative to the newly formed Information Technology reporting unit and its recent acquisition date. Given that the net book value of this business was recorded at its fair value during the current reporting period, the reporting unit’s carrying value, by default, closely approximates its fair value at year end. As 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 projected undiscounted cash flows. Impairment losses, where identified, are determined as the excess of the carrying value over the estimatedand fair value of the long-lived asset.Information Technology reporting unit are closely aligned, a material change in the fair value or carrying value would put the reporting unit at risk of goodwill impairment. For example, our ability to realize synergies from the acquisition of CSRA and the level of funding in the U.S. government budget
for contracts in our portfolio are key assumptions in our projections of revenue, earnings and cash flows. If our actual experience in future years falls significantly below our current projections, the fair value of the reporting unit could 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 our projections and assumptions are reasonable, but it is possible they could change, impacting our fair value estimate, or the carrying value could change. Commitments and Contingencies.We are subject to litigation and other legal proceedings arising either from the ordinarynormal course of our business or under provisions relating to the protection of the environment. Estimating liabilities and costs associated with these matters requires the use of judgment. We record a charge against earnings when a liability associated with claims or pending or threatened litigation is probable and when our exposure is reasonably estimable. The ultimate resolution of our exposure related to these matters may change as further facts and circumstances become known. DeferredOther Contract Costs. CertainOther contract costs incurred in the performance of ourrepresent amounts that are not currently allocable to government contracts, are recorded under GAAP but are not allocable currently to contracts. Such costs includesuch 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 have elected to defer or inventory these costs in contracts in processother current assets on the Consolidated Balance Sheet until they can be allocated to contracts. We expect to recover these costs through ongoing business, including existing
backlog and probable follow-on contracts. We regularly assess the probability of recovery of these costs. This assessment requires that we make assumptions about future contract costs, the extent of cost recovery under our contracts and the amount of future contract activity. These estimates are based on our best judgment. 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. Retirement Plans.Our defined-benefit pension and other post-retirement benefit costs and obligations depend on several assumptions and estimates. The key assumptions include interest rates used to discount estimated future liabilities and projected long-term rates of return on plan assets. 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 raterates of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy. We baseIn 2017, we decreased the discountexpected long-term rate of return on a current yield curve developed for a portfolioassets in our primary U.S. government and commercial pension plans by 75 basis points following an assessment of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. historical and expected long-term returns of our various asset classes. Beginning in 2016,2019, we refined the method used to determine the service and interest cost components of our net periodic benefit cost. Previously, the cost was determined using a single weighted-average discount rate derived from the yield curve. Under the refined method, known as the spot rate approach, we will use individual spot rates along the yield curve that correspond with the timing of each benefit payment. We believe this change provides a more precise measurement of service and interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. Compared to the previous method, the spot rate approach will decrease the serviceexpected long-term rates of return on assets in our primary U.S. other post-retirement benefit plans by 100 basis points, following an assessment of the historical and interest componentsexpected long-term returns of our benefit costs slightly in 2016. Therevarious asset classes. This decrease is nonot expected to have a material impact on the totalour 2019 benefit obligation. We will account for this change prospectively as a change in accounting estimate.costs. These retirement plan estimatesassumptions are based on our best judgment, including consideration of current and future market conditions. In the event any of the assumptions change, pension and other post-retirement benefit cost could increase or decrease. For further discussion, including the impact of hypothetical changes in the discount rate and expected long-term rate of return on plan assets, see Note PQ to the Consolidated Financial Statements in Item 8.
As discussed under DeferredOther Contract Costs, our contractual arrangements with the U.S. government provide for the recovery of benefit costs for our government retirement plans. We have elected to defer recognition of the benefit costs that cannot currentlyuntil such costs can be allocated to contracts to provide a better matchingcontracts. Therefore, the impact of revenue and expenses. Accordingly, the impactannual changes in financial reporting assumptions on the retirement benefit cost for these plans that results from annual changes in assumptions does not impactimmediately affect our earnings.operating results. New Accounting Standards.Standards Updates. There are severalSee Note A to the Consolidated Financial Statements in Item 8 for information regarding accounting standards we adopted in 2018 and other new accounting standards that have been issued by the FASB,Financial Accounting Standards Board (FASB) but are not yet effective.
ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs to be presented on the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Previously, debt issuance costs were presented as a deferred asset, separate from the related debt liability. ASU 2015-03 does not affect the recognition and measurement guidance for debt issuance costs. While ASU 2015-03 was not effective until January 1, 2016, we elected to early adopt the standard. See Notes A and J to the Consolidated Financial Statements in Item 8 for further discussion of ASU 2015-03.
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement principle for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value (NRV). The ASU also eliminates the requirement to consider replacement
cost or NRV less a normal profit margin when measuring inventory. We intend to adopt the standard prospectively on the effective date of January 1, 2017. We do not expect the adoption of ASU 2015-11 to have a material effect on our results of operations, financial condition or cash flows.
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the Consolidated Balance Sheets. ASU 2015-17 is effective on January 1, 2017, with early adoption permitted, and may be applied either prospectively or retrospectively. We have not yet selected a transition date or method nor have we determined the effect of the ASU on our Consolidated Balance Sheets. See Note E to the Consolidated Financial Statements in Item 8 for further discussion of our net deferred tax assets.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Specific to our business, ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income. The ASU eliminates the available-for-sale classification for equity investments that recognized changes in the fair value as a component of other comprehensive income. We intend to adopt the standard on the effective date with a cumulative-effect adjustment to the Consolidated Balance Sheets as of January 1,after December 31, 2018. We do not expect the adoption of ASU 2016-01 to have a material effect on our results of operations, financial condition or cash flows.
Other ASUs issued by the FASB but not yet effective are not expected to have a material effect on our Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. See Note MN to the Consolidated Financial Statements in Item 8 for a discussion of these risks. The following quantifies the market risk exposure arising from hypothetical changes in foreign currency exchange rates and interest rates. Foreign Currency.We had notional forward foreign exchange and interest rate swap contracts outstanding of $7.2$5.8 billion and $4.3 billion on December 31, 2015,2018 and $9.1 billion on December 31, 2014.2017, respectively. A 10 percent10% unfavorable exchange rate movement in our portfolio of foreign currency forward exchange and interest rate swap contracts would have resulted in the following hypothetical, incremental pretax losses:gains (losses):
| | | 2015 | | 2014 | | (Dollars in millions) | | 2018 | | 2017 | Recognized | $ | (8 | ) | | $ | (25 | ) | $ | 61 |
| | $ | (29 | ) | Unrecognized | (652 | ) | | (823 | ) | (135 | ) | | 33 |
|
ThisForeign Currency Risk. Our exchange-rate sensitivity relates primarily to changes in the U.S. dollar/Canadian dollar, euro/Canadian dollareuro, Swiss franc and euro/British pound exchange rates. These losses and gains would be offset by corresponding gains and losses in the remeasurement of the underlying transactions being hedged. We believe these foreign currency forward exchange contracts and the offsetting underlying commitments, when taken together, do not create material market risk.
Interest Rate Risk. Our financial instruments subject to interest rate risk include fixed-ratevariable-rate commercial paper and fixed- and floating-rate long-term debt obligations and variable-rate commercial paper.obligations. On December 31, 2015,2018, we had $3.4$10.5 billion par value of fixed-rate debt, $1 billion of floating-rate notes and no$850 of commercial paper outstanding. Our fixed-rate debt obligations are not putable, and we do not trade these securities in the market. A 10 percent10% unfavorable interest rate movement would not have a material impact on the fair value of our debt obligations.fixed-rate debt. As described in Note K to the Consolidated Financial Statements in Item 8, we entered into derivative financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest rate risk. 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, 2015,2018, we held $2.8 billion$963 in cash and equivalents, but held no marketable securities.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, 2018, these marketable securities totaled $202 and were reflected at fair value on the Consolidated Balance Sheet in other current and noncurrent assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTSSTATEMENT OF EARNINGS
| | | Year Ended December 31 | Year Ended December 31 | (Dollars in millions, except per-share amounts) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Revenue: | | | | | | | | | | | Products | $ | 20,280 |
| | $ | 19,564 |
| | $ | 19,100 |
| $ | 20,149 |
| | $ | 19,016 |
| | $ | 19,010 |
| Services | 11,189 |
| | 11,288 |
| | 11,830 |
| 16,044 |
| | 11,957 |
| | 11,551 |
| | 31,469 |
| | 30,852 |
| | 30,930 |
| 36,193 |
| | 30,973 |
| | 30,561 |
| Operating costs and expenses: | | | | | | | | | | | Products | 15,871 |
| | 15,335 |
| | 15,065 |
| (15,894 | ) | | (14,773 | ) | | (15,155 | ) | Services | 9,468 |
| | 9,644 |
| | 10,137 |
| (13,584 | ) | | (9,958 | ) | | (9,741 | ) | General and administrative (G&A) | 1,952 |
| | 1,984 |
| | 2,039 |
| (2,258 | ) | | (2,006 | ) | | (1,921 | ) | | 27,291 |
| | 26,963 |
| | 27,241 |
| (31,736 | ) | | (26,737 | ) | | (26,817 | ) | Operating earnings | 4,178 |
| | 3,889 |
| | 3,689 |
| 4,457 |
| | 4,236 |
| | 3,744 |
| Interest, net | (83 | ) | | (86 | ) | | (86 | ) | (356 | ) | | (103 | ) | | (91 | ) | Other, net | 7 |
| | (1 | ) | | 8 |
| (16 | ) | | (56 | ) | | 3 |
| Earnings from continuing operations before income tax | 4,102 |
| | 3,802 |
| | 3,611 |
| 4,085 |
| | 4,077 |
| | 3,656 |
| Provision for income tax, net | 1,137 |
| | 1,129 |
| | 1,125 |
| (727 | ) | | (1,165 | ) | | (977 | ) | Earnings from continuing operations | 2,965 |
| | 2,673 |
| | 2,486 |
| 3,358 |
| | 2,912 |
| | 2,679 |
| Discontinued operations, net of tax benefit of $7 in 2015, $16 in 2014 and $73 in 2013 | — |
| | (140 | ) | | (129 | ) | | Discontinued operations, net of tax provision of $13 in 2018 and tax benefit of $51 in 2016 | | (13 | ) | | — |
| | (107 | ) | Net earnings | $ | 2,965 |
| | $ | 2,533 |
| | $ | 2,357 |
| $ | 3,345 |
| | $ | 2,912 |
| | $ | 2,572 |
| | | | | | | | | | | | Earnings per share | | | | | | | | | | | Basic: | | | | | | | | | | | Continuing operations | $ | 9.23 |
| | $ | 7.97 |
| | $ | 7.09 |
| $ | 11.37 |
| | $ | 9.73 |
| | $ | 8.79 |
| Discontinued operations | — |
| | (0.41 | ) | | (0.37 | ) | (0.04 | ) | | — |
| | (0.35 | ) | Net earnings | $ | 9.23 |
| | $ | 7.56 |
| | $ | 6.72 |
| $ | 11.33 |
| | $ | 9.73 |
| | $ | 8.44 |
| Diluted: | | | | | | | | | | | Continuing operations | $ | 9.08 |
| | $ | 7.83 |
| | $ | 7.03 |
| $ | 11.22 |
| | $ | 9.56 |
| | $ | 8.64 |
| Discontinued operations | — |
| | (0.41 | ) | | (0.36 | ) | (0.04 | ) | | — |
| | (0.35 | ) | Net earnings | $ | 9.08 |
| | $ | 7.42 |
| | $ | 6.67 |
| $ | 11.18 |
| | $ | 9.56 |
| | $ | 8.29 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENTSSTATEMENT OF COMPREHENSIVE INCOME
| | | Year Ended December 31 | Year Ended December 31 | (Dollars in millions) | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 | Net earnings | | $ | 2,965 |
| | $ | 2,533 |
| | $ | 2,357 |
| | $ | 3,345 |
| | $ | 2,912 |
| | $ | 2,572 |
| (Losses) gains on cash flow hedges | | (394 | ) | | (279 | ) | | 3 |
| | Unrealized (losses) gains on securities | | (2 | ) | | 10 |
| | 12 |
| | Gains on cash flow hedges | | | 36 |
| | 341 |
| | 191 |
| Unrealized gains (losses) on marketable securities | | | — |
| | 9 |
| | (9 | ) | Foreign currency translation adjustments | | (374 | ) | | (436 | ) | | (118 | ) | | (300 | ) | | 348 |
| | (112 | ) | Change in retirement plans’ funded status | | 500 |
| | (1,745 | ) | | 2,595 |
| | (61 | ) | | 20 |
| | (192 | ) | Other comprehensive (loss) income, pretax | | (270 | ) | | (2,450 | ) | | 2,492 |
| | (325 | ) | | 718 |
| | (122 | ) | Provision (benefit) for income tax, net | | 84 |
| | (703 | ) | | 902 |
| | Benefit (provision) for income tax, net | | | 5 |
| | (151 | ) | | 18 |
| Other comprehensive (loss) income, net of tax | | (354 | ) | | (1,747 | ) | | 1,590 |
| | (320 | ) | | 567 |
| | (104 | ) | Comprehensive income | | $ | 2,611 |
| | $ | 786 |
| | $ | 3,947 |
| | $ | 3,025 |
| | $ | 3,479 |
| | $ | 2,468 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED BALANCE SHEETSSHEET
| | | December 31 | December 31 | (Dollars in millions) | 2015 | | 2014 | 2018 | | 2017 | | | | | | ASSETS | | | | | | | Current assets: | | | | | | | Cash and equivalents | $ | 2,785 |
| | $ | 4,388 |
| $ | 963 |
| | $ | 2,983 |
| Accounts receivable | 3,446 |
| | 4,050 |
| 3,759 |
| | 3,617 |
| Contracts in process | 4,357 |
| | 4,591 |
| | Unbilled receivables | | 6,576 |
| | 5,240 |
| Inventories | 3,366 |
| | 3,221 |
| 5,977 |
| | 5,303 |
| Other current assets | 617 |
| | 1,157 |
| 914 |
| | 1,185 |
| Total current assets | 14,571 |
| | 17,407 |
| 18,189 |
| | 18,328 |
| Noncurrent assets: | | | | | | | Property, plant and equipment, net | 3,466 |
| | 3,329 |
| 4,348 |
| | 3,517 |
| Intangible assets, net | 763 |
| | 912 |
| 2,585 |
| | 702 |
| Goodwill | 11,443 |
| | 11,731 |
| 19,594 |
| | 11,914 |
| Other assets | 1,754 |
| | 1,958 |
| 692 |
| | 585 |
| Total noncurrent assets | 17,426 |
| | 17,930 |
| 27,219 |
| | 16,718 |
| Total assets | $ | 31,997 |
| | $ | 35,337 |
| $ | 45,408 |
| | $ | 35,046 |
| | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | Current liabilities: | | | | | | | Short-term debt and current portion of long-term debt | $ | 501 |
| | $ | 501 |
| $ | 973 |
| | $ | 2 |
| Accounts payable | 1,964 |
| | 2,057 |
| 3,179 |
| | 3,207 |
| Customer advances and deposits | 5,674 |
| | 7,335 |
| 7,270 |
| | 6,992 |
| Other current liabilities | 4,306 |
| | 3,858 |
| 3,317 |
| | 2,898 |
| Total current liabilities | 12,445 |
| | 13,751 |
| 14,739 |
| | 13,099 |
| Noncurrent liabilities: | | | | | | | Long-term debt | 2,898 |
| | 3,392 |
| 11,444 |
| | 3,980 |
| Other liabilities | 5,916 |
| | 6,365 |
| 7,493 |
| | 6,532 |
| Commitments and contingencies (see Note N) |
|
| |
|
| | Commitments and contingencies (see Note O) | |
|
| |
|
| Total noncurrent liabilities | 8,814 |
| | 9,757 |
| 18,937 |
| | 10,512 |
| Shareholders’ equity: | | | | | | | Common stock | 482 |
| | 482 |
| 482 |
| | 482 |
| Surplus | 2,730 |
| | 2,548 |
| 2,946 |
| | 2,872 |
| Retained earnings | 23,204 |
| | 21,127 |
| 29,326 |
| | 26,444 |
| Treasury stock | (12,392 | ) | | (9,396 | ) | (17,244 | ) | | (15,543 | ) | Accumulated other comprehensive loss | (3,286 | ) | | (2,932 | ) | (3,778 | ) | | (2,820 | ) | Total shareholders’ equity | 10,738 |
| | 11,829 |
| 11,732 |
| | 11,435 |
| Total liabilities and shareholders’ equity | $ | 31,997 |
| | $ | 35,337 |
| $ | 45,408 |
| | $ | 35,046 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
| | | Year Ended December 31 | Year Ended December 31 | (Dollars in millions) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Cash flows from operating activities - continuing operations: | | | | | | | | | | | Net earnings | $ | 2,965 |
| | $ | 2,533 |
| | $ | 2,357 |
| $ | 3,345 |
| | $ | 2,912 |
| | $ | 2,572 |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | Depreciation of property, plant and equipment | 366 |
| | 375 |
| | 382 |
| 493 |
| | 362 |
| | 365 |
| Amortization of intangible assets | 116 |
| | 121 |
| | 143 |
| 270 |
| | 79 |
| | 88 |
| Equity-based compensation expense | 110 |
| | 128 |
| | 120 |
| 140 |
| | 123 |
| | 95 |
| Excess tax benefit from equity-based compensation | (77 | ) | | (83 | ) | | (23 | ) | | Deferred income tax provision | 167 |
| | 136 |
| | 115 |
| | Deferred income tax (benefit) provision | | (3 | ) | | 401 |
| | 184 |
| Discontinued operations, net of tax | — |
| | 140 |
| | 129 |
| 13 |
| | — |
| | 107 |
| (Increase) decrease in assets, net of effects of business acquisitions: | | | | | | | | | | | Accounts receivable | 604 |
| | 330 |
| | (223 | ) | 417 |
| | (195 | ) | | (122 | ) | Contracts in process | 231 |
| | 281 |
| | 177 |
| | Unbilled receivables | | (800 | ) | | (987 | ) | | (1,048 | ) | Inventories | (156 | ) | | (303 | ) | | (200 | ) | (591 | ) | | (182 | ) | | (377 | ) | Other current assets | | 310 |
| | 207 |
| | 315 |
| Increase (decrease) in liabilities, net of effects of business acquisitions: | | | | | | | | | | | Accounts payable | (89 | ) | | (161 | ) | | (204 | ) | (197 | ) | | 657 |
| | 567 |
| Customer advances and deposits | (1,756 | ) | | 691 |
| | 330 |
| 36 |
| | 264 |
| | (305 | ) | Other current liabilities | (83 | ) | | (246 | ) | | (118 | ) | | Other, net | 101 |
| | (214 | ) | | 126 |
| (285 | ) | | 235 |
| | (278 | ) | Net cash provided by operating activities | 2,499 |
| | 3,728 |
| | 3,111 |
| 3,148 |
| | 3,876 |
| | 2,163 |
| Cash flows from investing activities: | | | | | | | | | | | Business acquisitions, net of cash acquired
| | (10,099 | ) | | (399 | ) | | (58 | ) | Capital expenditures | (569 | ) | | (521 | ) | | (436 | ) | (690 | ) | | (428 | ) | | (392 | ) | Maturities of held-to-maturity securities | 500 |
| | — |
| | — |
| | Purchases of held-to-maturity securities | — |
| | (500 | ) | | — |
| | Proceeds from sales of assets | 291 |
| | 102 |
| | 104 |
| 562 |
| | 50 |
| | 9 |
| Purchases of available-for-sale securities | (123 | ) | | (136 | ) | | (135 | ) | | Sales of available-for-sale securities | 122 |
| | 135 |
| | 99 |
| | Maturities of available-for-sale securities | 6 |
| | 4 |
| | 14 |
| | Other, net | (27 | ) | | (186 | ) | | (9 | ) | (7 | ) | | (11 | ) | | 50 |
| Net cash provided (used) by investing activities | 200 |
| | (1,102 | ) | | (363 | ) | | Net cash used by investing activities | | (10,234 | ) | | (788 | ) | | (391 | ) | Cash flows from financing activities: | | | | | | | | | | | Proceeds from fixed-rate notes | | 6,461 |
| | 985 |
| | 992 |
| Purchases of common stock | (3,233 | ) | | (3,382 | ) | | (740 | ) | (1,769 | ) | | (1,558 | ) | | (1,996 | ) | Dividends paid | (873 | ) | | (822 | ) | | (591 | ) | (1,075 | ) | | (986 | ) | | (911 | ) | Proceeds from floating-rate notes | | 1,000 |
| | — |
| | — |
| Proceeds from commercial paper, net | | 851 |
| | — |
| | — |
| Repayment of CSRA accounts receivable purchase agreement | | (450 | ) | | — |
| | — |
| Proceeds from stock option exercises | | 136 |
| | 163 |
| | 292 |
| Repayment of fixed-rate notes | (500 | ) | | — |
| | — |
| — |
| | (900 | ) | | (500 | ) | Proceeds from stock option exercises | 268 |
| | 547 |
| | 583 |
| | Other, net | 79 |
| | 82 |
| | 23 |
| (68 | ) | | (103 | ) | | (46 | ) | Net cash used by financing activities | (4,259 | ) | | (3,575 | ) | | (725 | ) | | Net cash (used) provided by discontinued operations | (43 | ) | | 36 |
| | (18 | ) | | Net cash provided (used) by financing activities | | 5,086 |
| | (2,399 | ) | | (2,169 | ) | Net cash used by discontinued operations | | (20 | ) | | (40 | ) | | (54 | ) | Net (decrease) increase in cash and equivalents | (1,603 | ) | | (913 | ) | | 2,005 |
| (2,020 | ) | | 649 |
| | (451 | ) | Cash and equivalents at beginning of year | 4,388 |
| | 5,301 |
| | 3,296 |
| 2,983 |
| | 2,334 |
| | 2,785 |
| Cash and equivalents at end of year | $ | 2,785 |
| | $ | 4,388 |
| | $ | 5,301 |
| $ | 963 |
| | $ | 2,983 |
| | $ | 2,334 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENTSSTATEMENT OF SHAREHOLDERS’ EQUITY
| | | Common Stock | | Retained | | Treasury | | Accumulated Other Comprehensive | | Total Shareholders’ | Common Stock | | Retained | | Treasury | | Accumulated Other Comprehensive | | Total Shareholders’ | (Dollars in millions) | Par | | Surplus | | Earnings | | Stock | | Loss | | Equity | Par | | Surplus | | Earnings | | Stock | | Loss | | Equity | December 31, 2012 | $ | 482 |
| | $ | 1,988 |
| | $ | 17,860 |
| | $ | (6,165 | ) | | $ | (2,775 | ) | | $ | 11,390 |
| | December 31, 2015 | | $ | 482 |
| | $ | 2,730 |
| | $ | 22,903 |
| | $ | (12,392 | ) | | $ | (3,283 | ) | | $ | 10,440 |
| Net earnings | | — |
| | — |
| | 2,572 |
| | — |
| | — |
| | 2,572 |
| Cash dividends declared | | — |
| | — |
| | (932 | ) | | — |
| | — |
| | (932 | ) | Equity-based awards | | — |
| | 89 |
| | — |
| | 267 |
| | — |
| | 356 |
| Shares purchased | | — |
| | — |
| | — |
| | (2,031 | ) | | — |
| | (2,031 | ) | Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (104 | ) | | (104 | ) | December 31, 2016 | | 482 |
|
| 2,819 |
|
| 24,543 |
|
| (14,156 | ) |
| (3,387 | ) |
| 10,301 |
| Cumulative-effect adjustment* | | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) | Net earnings | — |
| | — |
| | 2,357 |
| | — |
| | — |
| | 2,357 |
| — |
| | — |
| | 2,912 |
| | — |
| | — |
| | 2,912 |
| Cash dividends declared | — |
| | — |
| | (789 | ) | | — |
| | — |
| | (789 | ) | — |
| | — |
| | (1,008 | ) | | — |
| | — |
| | (1,008 | ) | Equity-based awards | — |
| | 238 |
| | — |
| | 455 |
| | — |
| | 693 |
| — |
| | 53 |
| | — |
| | 146 |
| | — |
| | 199 |
| Shares purchased | — |
| | — |
| | — |
| | (740 | ) | | — |
| | (740 | ) | — |
| | — |
| | — |
| | (1,533 | ) | | — |
| | (1,533 | ) | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,590 |
| | 1,590 |
| — |
| | — |
| | — |
| | — |
| | 567 |
| | 567 |
| December 31, 2013 | 482 |
| | 2,226 |
| | 19,428 |
| | (6,450 | ) | | (1,185 | ) | | 14,501 |
| | December 31, 2017 | | 482 |
| | 2,872 |
| | 26,444 |
| | (15,543 | ) | | (2,820 | ) | | 11,435 |
| Cumulative-effects adjustments (See Note A) | | — |
| | — |
| | 638 |
| | — |
| | (638 | ) | | — |
| Net earnings | — |
| | — |
| | 2,533 |
| | — |
| | — |
| | 2,533 |
| — |
| | — |
| | 3,345 |
| | — |
| | — |
| | 3,345 |
| Cash dividends declared | — |
| | — |
| | (834 | ) | | — |
| | — |
| | (834 | ) | — |
| | — |
| | (1,101 | ) | | — |
| | — |
| | (1,101 | ) | Equity-based awards | — |
| | 322 |
| | — |
| | 436 |
| | — |
| | 758 |
| — |
| | 74 |
| | — |
| | 105 |
| | — |
| | 179 |
| Shares purchased | — |
| | — |
| | — |
| | (3,382 | ) | | — |
| | (3,382 | ) | — |
| | — |
| | — |
| | (1,806 | ) | | — |
| | (1,806 | ) | Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1,747 | ) | | (1,747 | ) | — |
| | — |
| | — |
| | — |
| | (320 | ) | | (320 | ) | December 31, 2014 | 482 |
| | 2,548 |
| | 21,127 |
| | (9,396 | ) | | (2,932 | ) | | 11,829 |
| | Net earnings | — |
| | — |
| | 2,965 |
| | — |
| | — |
| | 2,965 |
| | Cash dividends declared | — |
| | — |
| | (888 | ) | | — |
| | — |
| | (888 | ) | | Equity-based awards | — |
| | 182 |
| | — |
| | 237 |
| | — |
| | 419 |
| | Shares purchased | — |
| | — |
| | — |
| | (3,233 | ) | | — |
| | (3,233 | ) | | Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (354 | ) | | (354 | ) | | December 31, 2015 | $ | 482 |
| | $ | 2,730 |
| | $ | 23,204 |
| | $ | (12,392 | ) | | $ | (3,286 | ) | | $ | 10,738 |
| | December 31, 2018 | | $ | 482 |
| | $ | 2,946 |
| | $ | 29,326 |
| | $ | (17,244 | ) | | $ | (3,778 | ) | | $ | 11,732 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
* Reflects the cumulative effect of Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which we adopted on January 1, 2017.
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 organized into foura global aerospace and defense company that offers a broad portfolio of products and services in business groups: Aerospace, which produces Gulfstream aircraft, provides aircraft services and performs aircraft completions for other original equipment manufacturers (OEMs); Combat Systems, which designs and manufacturesaviation; combat vehicles, weapons systems and munitions; information technology (IT) services; C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions; and shipbuilding and ship repair. On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA). See Note B for further discussion of the acquisition. Concurrent with the acquisition, for segment reporting purposes, we reorganized our Information Systems and Technology which provides C4ISR (command, control, communication, computing, intelligence, surveillanceoperating segment into two separate segments: Information Technology and reconnaissance) solutions and information technology (IT) services;Mission Systems. Our company now has five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems, which designs, constructs and repairs surface ships and submarines. Our primary customer is the U.S. government. We also do significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business aircraft.Systems. The latter four segments we collectively refer to as our defense segments. Prior-period segment information has been restated for this change. 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 a number of 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. Revenue Recognition. Discontinued Operations, Net of Tax.We account for revenue and earnings using Concurrent with the percentage-of-completion method. Under this method, contract costs and revenue are recognized asacquisition of CSRA, we were required by a government customer to dispose of certain CSRA operations to address an organizational conflict of interest with respect to services provided to the work progresses, either ascustomer. In 2018, we sold these operations. In accordance with GAAP, the products are produced or as services are rendered. 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. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the loss in the quarter it is identified.
We generally measure progress toward completion on contracts in our defense business based on the proportion of costs incurred to date relative to total estimated costs at completion. For our contracts for the manufacture of business-jet aircraft, we record revenue at two contractual milestones: when green aircraft are delivered to and accepted by the customer and when the customer accepts final delivery of the fully outfitted aircraft.
We review and update our contract-related estimates regularly. We recognize changes in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of a revision in estimate is recognized prospectively over the remaining contract term. The net impact of revisions in contract estimates on our operating earnings (and on a diluted per-share basis) totaled favorable changes of $222 ($0.44) in 2015, $184 ($0.35) in 2014 and $351 ($0.65) in 2013. No revisions on any one contract were material to our Consolidated Financial Statements in 2015, 2014 or 2013.
Consistent with defense industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts maysale did not be realized within one year. All contracts are reported
on the Consolidated Balance Sheetsresult in a net asset (contractsgain for financial reporting purposes. However, the sale generated a taxable gain, resulting in process) or liability (customer advances and deposits) position on a contract-by-contract basis at the endtax expense of each reporting period. Our U.S. government customer generally asserts title to, or a security interest in, inventoried costs related to such contracts as a result of advances and progress payments. We reflect these advances and progress payments as an offset to the related inventoried costs as shown in Note G.
In the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 prescribes a single, common revenue standard that replaces most existing revenue recognition guidance in GAAP. The standard outlines a five-step model, whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. Several updates have been proposed since the issuance of ASU 2014-09. These updates are intended to allow for a more consistent interpretation and application of the principles outlined in the standard. Once these updates are issued by the FASB in 2016, the standard will be final.
ASU 2014-09 is effective in the first quarter of 2018 for public companies. However, entities can elect to adopt one year earlier in the first quarter of 2017. The standard permits the use of either the retrospective or cumulative effect transition method.
We are utilizing a bottom-up approach to analyze the standard’s impact on our contract portfolio, taking a fresh look at historical accounting policies and practices and identifying potential differences from applying the requirements of the new standard to our contracts. While this assessment continues, we have not yet selected a transition date or method nor have we yet determined the effect of the standard on our Consolidated Financial Statements. We expect this determination will near completion in the second half of 2016. Because the new standard will impact our business processes, systems and controls, we have developed a comprehensive change management project plan to guide the implementation.
The required adoption of the ASU will preclude our use of the reallocation method of recognizing revisions in estimated profit on contracts discussed above. As changes in estimated profit will be recognized in the period they are identified (cumulative catch-up method), rather than prospectively over the remaining contract term, we expect the impact of revisions of contract estimates may be larger and potentially more variable from period to period. Anticipated losses on contracts will continue to be recognized in the quarter they are identified.
Discontinued Operations. In 2014, we entered into an agreement to sell our axle business in the Combat Systems group and recognized a $146 loss, net of tax (the sale was completed in January 2015). The financial statements have been restated to reflect the results of operations of this business in discontinued operations with the revenue of the business eliminated, and the net loss reported separately below earnings from continuing operations.$13.
In 2013, we recognized a $129 loss, net of tax, from the settlement of oursettled litigation with the U.S. Navy related to the terminated A-12 aircraft contract in the company’s discontinuedformer tactical military aircraft business. UnderIn connection with the termssettlement, we released some rights to reimbursement of costs on ships under contract at our Bath, Maine, shipyard. As we progressed through the shipbuilding process, we determined that the cost associated with this settlement was greater than anticipated. Therefore, in 2016, we recognized an $84 loss, net of tax, to adjust the previously recognized
settlement value. In addition, we recognized $23 of losses, net of tax, in 2016 related to other former operations of the settlement agreement, the Navy received a $198 credit that will be utilized over several years as we render design and construction services on the DDG-1000 program. Net cash from discontinued operations on the Consolidated Statements of Cash Flows primarily represents related work on the DDG-1000 program.company. Research and Development Expenses. Company-sponsored research and development (R&D) expenses, including product development costs, were $395$502 in 2015, $3582018, $521 in 20142017 and $310$418 in 2013.2016. The R&D expenses in 2018 and 2017 reflected ongoing product-development efforts in the Aerospace segment as we progressed with the certification of our two newest Gulfstream aircraft models, the G500 and G600. R&D expenses are included in operating costs and expenses in the Consolidated StatementsStatement of Earnings in the
period in which they are incurred. Customer-sponsored R&D expenses are charged directly to the related contracts. The Aerospace groupsegment has cost-sharing arrangements with some of its suppliers that enhance the group’ssegment’s internal development capabilities and offset a portion of the financial cost associated with the group’ssegment’s product development efforts. These arrangements explicitly state that supplier contributions are for reimbursements 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: | | Year Ended December 31 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Interest expense | $ | 98 |
| | $ | 103 |
| | $ | 103 |
| $ | 374 |
| | $ | 117 |
| | $ | 99 |
| Interest income | (15 | ) | | (17 | ) | | (17 | ) | (18 | ) | | (14 | ) | | (8 | ) | Interest expense, net | $ | 83 |
| | $ | 86 |
| | $ | 86 |
| $ | 356 |
| | $ | 103 |
| | $ | 91 |
|
The increase in 2018 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 (see Note D) are included in other current and noncurrent assets on the Consolidated Balance Sheets.Sheet (see Note E). We report our held-to-maturityequity securities at amortized cost.fair value with subsequent changes in fair value recognized in net earnings. We report our available-for-sale debt securities at fair value. Changes in the fair value of available-for-sale securities arewith unrealized gains and losses recognized as a component of other comprehensive income (loss) in the Consolidated StatementsStatement of Comprehensive Income. We had no trading or held-to-maturity debt securities on December 31, 20152018 or 2014.2017. Cash flows from operating activities in 2013Other 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 2014 included customer deposits relatedother post-retirement benefits, and environmental expenses. These costs will become allocable to commercial ship orderscontracts 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 Marine Systems groupfuture 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, 2018 and a large contract for a Middle Eastern customer awarded2017, were $135 and $448, respectively, and are included in our Combat Systems group, respectively. In 2015, these deposits were utilized to fund supplier commitmentsother current assets on the program, which negatively affected operating cash flows.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 amountvalue 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. Concurrent with the acquisition of CSRA in April 2018, 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. We review goodwill for impairment annually or when circumstances indicate that the likelihood of an impairment is more likelygreater than not.50%. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired.acquired in a business combination. The test for goodwill impairment is a two-step process to first identify potential goodwill impairment for each reporting unit by comparing the fair value of each of our reporting units to its respective carrying value and then, if necessary, measure the amount of the impairment loss. Our reporting units are consistent with our business groupsoperating segments in Note Q. R. We estimate the fair value of our reporting units based primarily on the discounted projected cash flows of the underlying operations. We completed the required annual goodwill impairment test as of December 31, 2018. The results of the first-step test indicated that, for each of our reporting units, no impairment existed. The estimated fair value of each of our reporting units was substantially in excess of its respective carrying value as of December 31, 2018, with the exception of our Information Technology reporting unit. The estimated fair value of the Information Technology reporting unit exceeded its carrying value as of December 31, 2018, by slightly more than 5%. This is due to the significant size of the CSRA acquisition relative to the newly formed Information Technology reporting unit and its recent acquisition date. Given that the net book value of this business was recorded at its fair value during the current reporting period, the reporting unit’s carrying value, by default, closely approximates its fair value at year end. 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 would put the reporting unit at risk of goodwill impairment. For example, our ability to realize synergies from the acquisition of CSRA and the level of funding in the U.S. government budget for contracts in our portfolio are key assumptions in our projections of revenue, earnings and cash flows. If our actual experience in future years falls significantly below our current projections, the fair value of the reporting unit could 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 they could change, impacting our fair value estimate, or the carrying value could change. For a summary of our goodwill by reporting unit, see Note B. New Accounting Standards.Standards Updates. There are several newOn January 1, 2018, we adopted the following accounting standards that have been issued by the FASB, but are not yet effective.Financial Accounting Standards Board (FASB):
ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs to be presented on the balance sheet as a
deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Previously, debt issuance costs were presented as a deferred asset, separate from the related debt liability. ASU 2015-03 does not affect the recognition and measurement guidance for debt issuance costs. While ASU 2015-03 was not effective until January 1, 2016, we elected to early adopt the standard. See Note J for further discussion of the impact of ASU 2015-03.
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement principle for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value (NRV). The ASU also eliminates the requirement to consider replacement cost or NRV less a normal profit margin when measuring inventory. We intend to adopt the standard prospectively after the effective date of January 1, 2017. We do not expect the adoption of ASU 2015-11 to have a material effect on our results of operations, financial condition or cash flows.
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the Consolidated Balance Sheets. ASU 2015-17 is effective on January 1, 2017, with early adoption permitted, and may be applied either prospectively or retrospectively. We have not yet selected a transition date or method nor have we determined the effect of the ASU on our Consolidated Balance Sheets. See Note E for further discussion of our net deferred tax assets.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Specific to our business, ASU
2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income. The ASU eliminates the available-for-sale classification for equity investments that recognized changes in the fair value as a component of other comprehensive income. We intendadopted the standard on a modified retrospective basis on January 1, 2018, and recognized the cumulative effect as a $24 increase to retained earnings on the date of adoption. ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. We adopted the standard retrospectively on January 1, 2018. The adoption of the ASU did not have a material effect on our cash flows in 2017 and 2016. ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires the service cost component of net retirement benefit cost to be reported separately from the other components of net retirement benefit cost in the Consolidated Statement of Earnings. We adopted the standard retrospectively on January 1, 2018. Our restated operating earnings increased $59 and $10 in 2017 and 2016, respectively, due to the reclassification of the non-service cost components of net benefit cost. Other income decreased by the same amount, with no impact to net earnings. ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act (tax reform) enacted on December 22, 2017. We adopted the standard on January 1, 2018, and recognized a $614 increase to retained earnings on the date of adoption. There are several other accounting standards that have been issued by the FASB but are not effective until after December 31, 2018, including the following: ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. The ASU also requires disclosure of key information about leasing arrangements. ASU 2016-02 is effective on January 1, 2019, using a modified retrospective method of adoption as of January 1, 2017. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an alternative transition method of adoption, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption in lieu of retrospective adoption. We are adopting the standard effective January 1, 2019, using the alternative transition method provided by ASU 2018-11.
In order to adopt the new standard, we developed a comprehensive project plan and established cross-functional project teams to guide the implementation. The project plan included implementing a third-party software solution to facilitate the consolidation of our leases for reporting purposes, reviewing all forms of leases, performing a completeness assessment of our lease population, analyzing the optional practical expedients available in the new standard, and updating our business processes, systems and controls to meet the requirements of the new standard.
The new standard provides several optional practical expedients for use in transition. We have elected to use what the FASB has deemed the “package of practical expedients,” which allows us not to reassess our previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. We have not elected the practical expedients pertaining to the use of hindsight and
land easements. The ASU also provides several optional practical expedients for the ongoing accounting for leases. We have elected the short-term lease recognition exemption for all leases that qualify, meaning that for these leases, we will not recognize right-of-use (ROU) assets or lease liabilities on our Consolidated Balance Sheet. Additionally, we have elected to use the practical expedient to not separate lease and non-lease components for leases of real estate, meaning that for these leases, the non-lease components are included in the associated ROU asset and lease liability balances on our Consolidated Balance Sheet.
The most significant effects of the standard on our Consolidated Financial Statements are (1) the effectiverecognition of new ROU assets and lease liabilities on our Consolidated Balance Sheet for our operating leases, and (2) significant new disclosures about our leasing activities. We expect to recognize operating lease liabilities ranging from $1.2 to $1.6 billion, with corresponding ROU assets of the same amount based on the present value of the remaining lease payments over the lease term. The new standard is not expected to have a material impact on our results of operations or cash flows. ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities through the expansion of the types of financial and nonfinancial hedging strategies that are eligible for hedge accounting. The ASU also simplifies the application of the hedge accounting guidance, including eliminating the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance SheetsSheet as of the beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. We adopted the standard on January 1, 2018. We do not expect the2019. The adoption of the ASU 2016-01 todid not have a material effect on our results of operations, financial condition or cash flows. Other ASUs issued by the FASB but not yet effective are not expected to have a material effect on our Consolidated Financial Statements.
Subsequent Events. We have evaluated material events and transactions that have occurred after December 31, 2015, and concluded that none have occurred that require an adjustment to or disclosure in the Consolidated Financial Statements.
B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS Acquisitions and DivestituresCSRA Acquisition
We did not acquire any businessesOn April 3, 2018, we acquired 100% of the outstanding shares of CSRA for $41.25 per share in 2015. In 2014, ourcash plus the assumption of outstanding net debt. CSRA has been combined with General Dynamics Information Systems and Technology group acquired(GDIT) to create a premier provider of IT supportsolutions to U.S. special operations forces. the defense, intelligence and federal civilian markets. Except where otherwise noted in the Notes to the Consolidated Financial Statements, changes in balances and activity were generally driven by the CSRA acquisition.
Purchase Price and Fair Value of Net Assets Acquired. The operating resultscash purchase price totaled $9.7 billion and consisted of the following: | | | | | CSRA shares outstanding (in millions) | 165.4 |
| Cash consideration per CSRA share | $ | 41.25 |
| Cash paid to purchase outstanding CSRA shares | $ | 6,825 |
| Cash paid to extinguish CSRA debt | 2,846 |
| Cash settlement of outstanding CSRA stock options and restricted stock units | 78 |
| Total purchase price | $ | 9,749 |
|
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the acquisition date, with the excess recorded as goodwill: | | | | | Cash and equivalents | $ | 45 |
| Accounts receivable | 154 |
| Unbilled receivables | 510 |
| Other current assets | 301 |
| Property, plant and equipment, net | 673 |
| Intangible assets, net | 2,066 |
| Goodwill | 7,859 |
| Other noncurrent assets | 20 |
| Total assets | $ | 11,628 |
| Accounts payable | $ | (139 | ) | Customer advances and deposits | (151 | ) | Current capital lease obligation | (51 | ) | Other current liabilities | (404 | ) | Noncurrent capital lease obligation | (207 | ) | Noncurrent deferred tax liability | (376 | ) | Other noncurrent liabilities | (551 | ) | Total liabilities | $ | (1,879 | ) | Net assets acquired | $ | 9,749 |
|
We have continued to obtain information to refine the estimated fair values. The additional information obtained during the quarter did not result in any material adjustments. However, these provisional amounts are subject to change as we continue to evaluate information required to complete the valuations throughout the measurement period, which will extend into the second quarter of 2019. We have valued $2.1 billion of acquired intangible assets, which consist of acquired backlog and probable follow-on work and associated customer relationships (contract and program intangible assets), with a weighted-average life of 17 years. The intangible assets will be amortized using an accelerated method, which approximates the pattern of how the economic benefit is expected to be used. Under this method, approximately 50% of the aggregate value of the intangible assets will be amortized within six years. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of CSRA. Approximately $490 of this acquisitiongoodwill is pre-acquisition goodwill deductible for income tax purposes over its remaining tax life. CSRA’s operating results have been included with our reported results since the acquisition date. As we immediately began integrating CSRA with GDIT following the acquisition, it is becoming increasingly difficult to separate the results of legacy CSRA from those of the combined entity. Approximately $3.7 billion of revenue, $400 of operating earnings and $430 of pretax earnings from legacy CSRA were included in our Consolidated Statement of Earnings in 2018. These amounts exclude amortization of intangible assets and acquisition financing. In addition, we have recognized approximately $75 of one-time, acquisition-related costs, reported in operating costs and expenses and other income (expense) in the Consolidated Statement of Earnings.
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: | | | | | | | | | 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 certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. We completed the sale of these operations in 2018. The removal of CSRA’s historical pre-acquisition intangible asset amortization expense and debt-related interest expense. The impact of intangible asset amortization expense assuming our current estimate of fair value was applied on January 1, 2017. The payment of acquisition-related costs assuming they were incurred on January 1, 2017. The pro forma information is based on the preliminary amounts allocated to the estimated fair value of net assets acquired and may be revised as the provisional amounts change. The pro forma information does not reflect the realization of expected cost savings or synergies from the acquisition, and does not reflect what our combined results of operations would have been had the acquisition occurred on January 1, 2017. Other Acquisitions and Divestitures In addition to the acquisition of CSRA, we acquired five businesses in 2018 for an aggregate of approximately $400: Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, and two fixed-base operation (FBO) businesses in our Aerospace segment; a maintenance and service provider for the German Army and other international customers in our Combat Systems segment; and a provider of specialized transmitters and receivers in our Mission Systems segment. 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. In 2016, we acquired two businesses for an aggregate of approximately $60: an aircraft management and charter services provider in our Aerospace segment; and a manufacturer of unmanned underwater vehicles in our Mission Systems segment.
The operating results of these acquisitions have been included with our reported results since the respective closing date.dates. The purchase priceprices of this acquisition hasthe acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill. We did not acquire any businesses in 2013. In 2015,2018, we completed the sale of our axle business in the Combat Systems group and a commercial cyber security businessthree businesses in our Information SystemsTechnology segment: a commercial health products business; certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer; and Technology group.
59a 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 | | Marine Systems | | Total Goodwill | December 31, 2013 (a) | $ | 2,741 |
| | $ | 2,849 |
| | $ | 6,053 |
| | $ | 289 |
| | $ | 11,932 |
| Acquisitions (b) | — |
| | — |
| | 127 |
| | — |
| | 127 |
| Other (c) | (186 | ) | | (99 | ) | | (43 | ) | | — |
| | (328 | ) | December 31, 2014 | 2,555 |
| | 2,750 |
| | 6,137 |
| | 289 |
| | 11,731 |
| Acquisitions/divestitures (b) | — |
| | — |
| | (76 | ) | | — |
| | (76 | ) | Other (c) | (13 | ) | | (159 | ) | | (40 | ) | | — |
| | (212 | ) | December 31, 2015 | $ | 2,542 |
| | $ | 2,591 |
| | $ | 6,021 |
| | $ | 289 |
| | $ | 11,443 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Aerospace | | Combat Systems | | Information Systems and Technology | | Information Technology | | Mission Systems | | Marine Systems | | Total Goodwill | December 31, 2016 (a) | $ | 2,537 |
| | $ | 2,598 |
| | $ | 6,013 |
| | $ | — |
| | $ | — |
| | $ | 297 |
| | $ | 11,445 |
| Acquisitions/ divestitures (b) | 28 |
| | — |
| | 268 |
| | — |
| | — |
| | — |
| | 296 |
| Other (c) | 73 |
| | 79 |
| | 21 |
| | — |
| | — |
| | — |
| | 173 |
| 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 |
|
(a)Goodwill on December 31, 2013, in the Information Systems and Technology reporting unit is net of a $2$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 commercial cyber securitypublic-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. We completed(d)Concurrent with the required annual goodwill impairment test asacquisition of December 31, 2015. The first stepCSRA, we reorganized our Information Systems and Technology operating segment into the Information Technology and Mission Systems segments. See Note A for further discussion of the goodwill impairment test comparessegment reorganization. This reorganization similarly changed the fair valuescomposition of our reporting unitsunits. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to their carrying values. We estimate the fair values of ourInformation Technology and Mission Systems reporting units based primarily on the discounted projected cash flowsusing a relative fair value allocation approach as of the underlying operations. The estimated fair values for eachdate of ourthe reorganization.
(e)Goodwill in the Information Technology and Mission Systems reporting units were in excessis net of their respective carrying values as$536 and $1.3 billion of accumulated impairment losses, respectively.December 31, 2015.
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 | Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | | December 31, 2015 | | December 31, 2014 | | December 31 | | 2018 | | 2017 | Contract and program intangible assets (b) | $ | 1,626 |
| $ | (1,214 | ) | $ | 412 |
| | $ | 1,652 |
| $ | (1,123 | ) | $ | 529 |
| $ | 3,771 |
| $ | (1,531 | ) | $ | 2,240 |
| | $ | 1,684 |
| $ | (1,320 | ) | $ | 364 |
| Trade names and trademarks | 455 |
| (127 | ) | 328 |
| | 462 |
| (113 | ) | 349 |
| 469 |
| (177 | ) | 292 |
| | 465 |
| (160 | ) | 305 |
| Technology and software | 119 |
| (96 | ) | 23 |
| | 130 |
| (97 | ) | 33 |
| 165 |
| (116 | ) | 49 |
| | 137 |
| (105 | ) | 32 |
| Other intangible assets | 154 |
| (154 | ) | — |
| | 154 |
| (153 | ) | 1 |
| 159 |
| (155 | ) | 4 |
| | 155 |
| (154 | ) | 1 |
| Total intangible assets | $ | 2,354 |
| $ | (1,591 | ) | $ | 763 |
| | $ | 2,398 |
| $ | (1,486 | ) | $ | 912 |
| $ | 4,564 |
| $ | (1,979 | ) | $ | 2,585 |
| | $ | 2,441 |
| $ | (1,739 | ) | $ | 702 |
|
(a)Change in gross carrying amounts consists primarily of adjustments for acquired intangible assets and foreign currency translation. (b)Consists of acquired backlog and probable follow-on work and associated customer relationships. We did not recognize any impairments of our intangible assets in 2015, 20142018, 2017 or 2013. 2016. The amortization lives (in years) of our intangible assets on December 31, 2015,2018, were as follows: | | | | Intangible Asset | | Range of | | | Amortization Life | Contract and program intangible assets | | 7-30 | Trade names and trademarks | | 30 | Technology and software | | 7-155-20 | Other intangible assets | | 2-7 |
Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense was $116$270 in 2015, $1212018, $79 in 20142017 and $143$88 in 2013.2016. We expect to record annual amortization expense over the next five years as follows: | | | | | 2016 | $ | 90 |
| 2017 | 75 |
| 2018 | 65 |
| 2019 | 52 |
| 2020 | 48 |
|
| | | | | Year Ended December 31 | Amortization Expense | 2019 | $ | 280 |
| 2020 | 265 |
| 2021 | 217 |
| 2022 | 192 |
| 2023 | 175 |
|
C. REVENUE The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation within that contract and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple
performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 74% of our revenue in 2018, 71% in 2017 and 72% in 2016. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. Revenue from goods and services transferred to customers at a point in time accounted for 26% of our revenue in 2018, 29% in 2017 and 28% in 2016. 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, 2018, we had $67.9 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 45% of our remaining performance obligations as revenue in 2019, an additional 35% by 2021 and the balance thereafter. On December 31, 2017, we had $63.2 billion of remaining performance obligations, at which time we expected to recognize approximately 40% of these remaining performance obligations as revenue in 2018, an additional 40% by year-end 2020 and the balance thereafter. Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on 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 | 2018 | | 2017 | | 2016 | Revenue | $ | 377 |
| | $ | 292 |
| | $ | 95 |
| Operating earnings | 345 |
| | 323 |
| | 16 |
| Diluted earnings per share | $ | 0.91 |
| | $ | 0.69 |
| | $ | 0.03 |
|
While no adjustment on any one contract was material to our Consolidated Financial Statements in 2018, 2017 or 2016, the amount in 2016 was negatively impacted by a loss on the design and development phase of the AJAX program in our Combat Systems segment and cost growth associated with the restart of the Navy’s DDG-51 program in our Marine Systems segment. 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 | 2018 | | 2017 | | 2016 | Aircraft manufacturing and completions | $ | 6,226 |
| | $ | 6,320 |
| | $ | 6,074 |
| Aircraft services | 2,096 |
| | 1,743 |
| | 1,625 |
| Pre-owned aircraft | 133 |
| | 66 |
| | 116 |
| Total Aerospace | 8,455 |
| | 8,129 |
| | 7,815 |
| Military vehicles | 4,027 |
| | 3,731 |
| | 3,378 |
| Weapons systems, armament and munitions | 1,798 |
| | 1,633 |
| | 1,517 |
| Engineering and other services | 416 |
| | 585 |
| | 635 |
| Total Combat Systems | 6,241 |
| | 5,949 |
| | 5,530 |
| IT services | 8,269 |
| | 4,410 |
| | 4,428 |
| Total Information Technology | 8,269 |
| | 4,410 |
| | 4,428 |
| C4ISR solutions | 4,726 |
| | 4,481 |
| | 4,716 |
| Total Mission Systems | 4,726 |
| | 4,481 |
| | 4,716 |
| Nuclear-powered submarines | 5,712 |
| | 5,175 |
| | 5,264 |
| Surface ships | 1,872 |
| | 1,607 |
| | 1,648 |
| Repair and other services | 918 |
| | 1,222 |
| | 1,160 |
| Total Marine Systems | 8,502 |
| | 8,004 |
| | 8,072 |
| Total revenue | $ | 36,193 |
| | $ | 30,973 |
| | $ | 30,561 |
|
Revenue by contract type was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | Aerospace | | Combat Systems | | Information Technology | | Mission Systems | | Marine Systems | | Total Revenue | 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 |
| Year Ended December 31, 2016 | | | | | | | | | | | | Fixed-price | $ | 7,208 |
| | $ | 4,629 |
| | $ | 1,514 |
| | $ | 2,737 |
| | $ | 4,857 |
| | $ | 20,945 |
| Cost-reimbursement | — |
| | 865 |
| | 2,262 |
| | 1,822 |
| | 3,204 |
| | 8,153 |
| Time-and-materials | 607 |
| | 36 |
| | 652 |
| | 157 |
| | 11 |
| | 1,463 |
| Total revenue | $ | 7,815 |
| | $ | 5,530 |
| | $ | 4,428 |
| | $ | 4,716 |
| | $ | 8,072 |
| | $ | 30,561 |
|
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, 2018 | Aerospace | | Combat Systems | | Information Technology | | Mission Systems | | Marine Systems | | Total Revenue | U.S. government: | | | | | | | | | | | | Department of Defense (DoD) | $ | 236 |
| | $ | 2,903 |
| | $ | 3,291 |
| | $ | 3,224 |
| | $ | 8,098 |
| | $ | 17,752 |
| Non-DoD | — |
| | 8 |
| | 4,712 |
| | 506 |
| | 2 |
| | 5,228 |
| Foreign Military Sales (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 |
| Year Ended December 31, 2016 | | | | | | | | | | |
| U.S. government: | | | | | | | | | | |
|
| DoD | $ | 231 |
| | $ | 2,274 |
| | $ | 1,781 |
| | $ | 3,287 |
| | $ | 7,507 |
| | $ | 15,080 |
| Non-DoD | — |
| | 7 |
| | 2,343 |
| | 525 |
| | 8 |
| | 2,883 |
| FMS | 130 |
| | 333 |
| | 23 |
| | 25 |
| | 202 |
| | 713 |
| Total U.S. government | 361 |
| | 2,614 |
| | 4,147 |
| | 3,837 |
| | 7,717 |
| | 18,676 |
| U.S. commercial | 3,501 |
| | 287 |
| | 259 |
| | 108 |
| | 329 |
| | 4,484 |
| Non-U.S. government | 496 |
| | 2,520 |
| | 8 |
| | 613 |
| | 26 |
| | 3,663 |
| Non-U.S. commercial | 3,457 |
| | 109 |
| | 14 |
| | 158 |
| | — |
| | 3,738 |
| Total revenue | $ | 7,815 |
| | $ | 5,530 |
| | $ | 4,428 |
| | $ | 4,716 |
| | $ | 8,072 |
| | $ | 30,561 |
|
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, 2018, were not materially impacted by any other factors except for the acquisition of CSRA in our Information Technology segment as further discussed in Note B and the delays in payment on an international wheeled armored vehicle contract in our Combat Systems segment as further discussed in Note H. Revenue recognized in 2018, 2017 and 2016 that was included in the contract liability balance at the beginning of each year was $4.3 billion, $4.3 billion and $4.2 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 throughout 2015in 2018 and 20142017 due to share repurchases. See Note LM for additional detailsfurther 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 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | Basic weighted average shares outstanding | 321,313 |
| 335,192 |
| 350,714 |
| 295,262 |
| 299,172 |
| 304,707 |
| Dilutive effect of stock options and restricted stock/RSUs* | 5,339 |
| 6,139 |
| 2,785 |
| 3,898 |
| 5,465 |
| 5,680 |
| Diluted weighted average shares outstanding | 326,652 |
| 341,331 |
| 353,499 |
| 299,160 |
| 304,637 |
| 310,387 |
|
* Excludes outstanding options to purchase shares of common stock because these optionsthat 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 1,7063,143 in 2015, 3,6832018, 1,547 in 20142017 and 8,2464,201 in 2013.2016.
D.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, 20152018 or 2014, except for the assets of our axle business that were classified as held for sale on December 31, 2014, and were measured at fair value using Level 3 inputs. See Note A for further discussion.2017. Our financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable;payable, marketable securities held in trust and other investments, short- and long-term debt;debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable and short-term debt on the Consolidated Balance SheetsSheet approximate their fair value. The following tables present the fair values of
our other financial assets and liabilities on December 31, 20152018 and 2014,2017, 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) (a) | Financial assets (liabilities) (b) | December 31, 2015 | Available-for-sale securities | 186 |
| | $ | 186 |
| | $ | 124 |
| | $ | 62 |
| Derivatives | (673 | ) | | (673 | ) | | — |
| | (673 | ) | Long-term debt, including current portion | (3,425 | ) | | (3,381 | ) | | — |
| | (3,381 | ) | | | | | | | | | | December 31, 2014 | Held-to-maturity marketable securities (c) | $ | 500 |
| | $ | 500 |
| | $ | 10 |
| | $ | 490 |
| Available-for-sale securities | 188 |
| | 188 |
| | 123 |
| | 65 |
| Derivatives | (276 | ) | | (276 | ) | | — |
| | (276 | ) | Long-term debt, including current portion | (3,925 | ) | | (3,911 | ) | | — |
| | (3,911 | ) |
| | | | | | | | | | | | | | | | | | | | | | 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, 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 | ) | | — |
| | | | | | | | | | | | December 31, 2017 | Measured at fair value: | | | | | | | | | | Marketable securities held in trust: | | | | | | | | | | Cash and equivalents | $ | 20 |
| | $ | 20 |
| | $ | 15 |
| | $ | 5 |
| | $ | — |
| Available-for-sale debt securities | 117 |
| | 117 |
| | — |
| | 117 |
| | — |
| Equity securities | 54 |
| | 54 |
| | 54 |
| | — |
| | — |
| Other investments | 4 |
| | 4 |
| | — |
| | — |
| | 4 |
| Cash flow hedges | (105 | ) | | (105 | ) | | — |
| | (105 | ) | | — |
| Measured at amortized cost: | | | | | | | | | | Short- and long-term debt principal | (4,032 | ) | | (3,974 | ) | | — |
| | (3,974 | ) | | — |
|
(a)DeterminedOur 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 and liabilities.
(b)We had noassets. Our Level 3 financial instruments on December 31, 2015 or 2014.
(c)Included in other current assets on the December 31, 2014, Consolidated Balance Sheet.include direct private equity investments that are measured using inputs unobservable to a marketplace participant.
E.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 following is a summary of our net provision for income taxes for continuing operations: | | | | | | | | | | | | | Year Ended December 31 | 2018 | | 2017 | | 2016 | Current: | | | | | | U.S. federal | $ | 587 |
| | $ | 656 |
| | $ | 698 |
| State | 48 |
| | 31 |
| | 24 |
| International | 95 |
| | 77 |
| | 71 |
| Total current | 730 |
| | 764 |
| | 793 |
| Deferred: | | | | | | U.S. federal | (37 | ) | | 215 |
| | 140 |
| State | 8 |
| | 7 |
| | 7 |
| International | 26 |
| | 60 |
| | 37 |
| Adjustment for enacted change in U.S. tax law | — |
| | 119 |
| | — |
| Total deferred | (3 | ) | | 401 |
| | 184 |
| Provision for income taxes, net | $ | 727 |
| | $ | 1,165 |
| | $ | 977 |
| Net income tax payments | $ | 532 |
| | $ | 617 |
| | $ | 959 |
|
The reported tax provision differs from the amounts currently receivable or payablepaid because some income and expense items are recognized in different time periods for financial reporting than for income tax purposes. The following is a summary of our net provision for income taxes for continuing operations: | | | | | | | | | | | | | Year Ended December 31 | 2015 | | 2014 | | 2013 | Current: | | | | | | U.S. federal | $ | 841 |
| | $ | 856 |
| | $ | 850 |
| State | 31 |
| | 31 |
| | 28 |
| International | 98 |
| | 106 |
| | 132 |
| Total current | 970 |
| | 993 |
| | 1,010 |
| Deferred: | | | | | | U.S. federal | 116 |
| | 110 |
| | 119 |
| State | 5 |
| | (3 | ) | | 1 |
| International | 46 |
| | 29 |
| | (5 | ) | Total deferred | 167 |
| | 136 |
| | 115 |
| Provision for income taxes, net | $ | 1,137 |
| | $ | 1,129 |
| | $ | 1,125 |
| Net income tax payments | $ | 871 |
| | $ | 1,019 |
| | $ | 888 |
|
State and local income taxes allocable to U.S. government contracts are included in operating costs and expenses in the Consolidated StatementsStatement 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 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 21.0 | % | | 35.0 | % | | 35.0 | % | State tax on commercial operations, net of federal benefits | 0.6 |
| | 0.5 |
| | 0.7 |
| 1.1 |
| | 0.6 |
| | 0.6 |
| Impact of international operations | (1.4 | ) | | (2.6 | ) | | — |
| 0.6 |
| | (4.5 | ) | | (4.0 | ) | Domestic production deduction | (1.6 | ) | | (1.9 | ) | | (2.2 | ) | — |
| | (1.5 | ) | | (1.5 | ) | Foreign derived intangible income | | (1.2 | ) | | — |
| | — |
| Equity-based compensation | | (1.1 | ) | | (2.6 | ) | | (2.3 | ) | Domestic tax credits | (1.1 | ) | | (0.7 | ) | | (0.8 | ) | (1.1 | ) | | (0.8 | ) | | (0.9 | ) | Contract close-outs | (2.9 | ) | | — |
| | — |
| (0.5 | ) | | — |
| | — |
| Adoption impact of enacted change in U.S. tax law | | — |
| | 2.9 |
| | — |
| Other, net | (0.9 | ) | | (0.6 | ) | | (1.5 | ) | (1.0 | ) | | (0.5 | ) | | (0.2 | ) | Effective income tax rate | 27.7 | % | | 29.7 | % | | 31.2 | % | 17.8 | % | | 28.6 | % | | 26.7 | % |
The decrease in the effective tax rate in 2015 from 2014 was due primarily to the favorable impact of contract close-outs, largely resulting from interest from the completion of a long-term contract triggered by the prior settlement of litigation. The decrease in the effective tax rate in 2014 from 2013 was due primarily to increased income from non-U.S. operations that is taxed at lower rates and utilization of foreign tax credits.
Net Deferred Tax Assets.Liability. The tax effects of temporary differences between reported earnings and taxable income consisted of the following: | | December 31 | 2015 | | 2014 | 2018 | | 2017 | Retirement benefits | $ | 1,347 |
| | $ | 1,403 |
| $ | 1,055 |
| | $ | 935 |
| Tax loss and credit carryforwards | 522 |
| | 701 |
| 393 |
| | 437 |
| Salaries and wages | 275 |
| | 301 |
| 160 |
| | 137 |
| Workers’ compensation | 248 |
| | 257 |
| 138 |
| | 139 |
| Other | 406 |
| | 363 |
| 351 |
| | 335 |
| Deferred assets | 2,798 |
| | 3,025 |
| 2,097 |
| | 1,983 |
| Valuation allowances | (425 | ) | | (494 | ) | (336 | ) | | (402 | ) | Net deferred assets | $ | 2,373 |
| | $ | 2,531 |
| $ | 1,761 |
| | $ | 1,581 |
| | | | | | | | Intangible assets | $ | (1,013 | ) | | $ | (973 | ) | $ | (1,061 | ) | | $ | (688 | ) | Contract accounting methods | (261 | ) | | (227 | ) | (530 | ) | | (500 | ) | Property, plant and equipment | (285 | ) | | (280 | ) | (265 | ) | | (182 | ) | Capital Construction Fund qualified ships | (240 | ) | | (240 | ) | (160 | ) | | (159 | ) | Other | (203 | ) | | (167 | ) | (284 | ) | | (221 | ) | Deferred liabilities | $ | (2,002 | ) | | $ | (1,887 | ) | $ | (2,300 | ) | | $ | (1,750 | ) | Net deferred tax asset | $ | 371 |
| | $ | 644 |
| | Net deferred tax liability | | $ | (539 | ) | | $ | (169 | ) |
Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax asset was included onliability consisted of the Consolidated Balance Sheets in other assets and liabilities as follows:following: | | | | | | | | | December 31 | 2015 | | 2014 | Current deferred tax asset | $ | 3 |
| | $ | 16 |
| Current deferred tax liability | (829 | ) | | (729 | ) | Noncurrent deferred tax asset | 1,272 |
| | 1,439 |
| Noncurrent deferred tax liability | (75 | ) | | (82 | ) | Net deferred tax asset | $ | 371 |
| | $ | 644 |
|
| | | | | | | | | December 31 | 2018 | | 2017 | Deferred tax asset | $ | 38 |
| | $ | 75 |
| Deferred tax liability | (577 | ) | | (244 | ) | Net deferred tax liability | $ | (539 | ) | | $ | (169 | ) |
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 retirement benefits deferred tax amountbalance associated with our retirement benefits includes a deferred tax asset of $1.6$1 billion on December 31, 2015,2018 and $1.8 billion on December 31, 2014,2017, related to the amounts recorded in accumulated other comprehensive loss (AOCL) to recognize the funded status of our retirement plans. See Notes LM and PQ for further discussion.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 $42$483 and $692 on December 31, 2015, 2018 and$100 on December 31, 2014. 2017, respectively. On December 31, 2015,2018, we had net operating loss carryforwards of $972$1 billion that begin to expire in 2018, a capital loss carryforward of $229 that expires in 20202019 and tax credit carryforwards of $151$135 that begin to expire in 2021. Earnings from continuing operations before income taxes included non-U.S. income of $573 in 2015, $507 in 2014 and $361 in 2013. We intend to reinvest indefinitely the undistributed earnings of some of our non-U.S. subsidiaries. On December 31, 2015, we had approximately $2 billion of undistributed earnings from these non-U.S. subsidiaries. In general, should these earnings be distributed, a portion would be treated as dividends under U.S. tax law and thus subject to U.S. federal corporate income tax at the statutory rate of 35 percent, but would generate offsetting foreign tax credits.2019.
Tax Uncertainties. For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than
a 50 percent50% chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense. The total amount of these tax liabilities on December 31, 2018, was not material to our results of operations, financial condition or cash flows. We participate in the Internal Revenue Service (IRS) Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2014.2017. We do not expect the resolution of tax matters for open years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate. Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on December 31, 2015, is2018, was not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly vary over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.
F.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 contractcontractual milestones. Accounts receivable consisted of the following:
| | December 31 | 2015 | | 2014 | 2018 | | 2017 | Non-U.S. government | $ | 2,144 |
| | $ | 2,529 |
| $ | 2,035 |
| | $ | 2,228 |
| U.S. government | 683 |
| | 822 |
| 1,189 |
| | 971 |
| Commercial | 619 |
| | 699 |
| 535 |
| | 418 |
| Total accounts receivable | $ | 3,446 |
| | $ | 4,050 |
| $ | 3,759 |
| | $ | 3,617 |
|
Receivables from non-U.S. government customers includeincluded amounts related to long-term production programs for the Spanish Ministry of Defence of $2$1.9 billion and $2.1 billion on December 31, 2015.2018 and 2017, 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 SheetsSheet 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 amountamounts for these programs on December 31, 2015, is an2018 and 2017, were advance paymentpayments of $109.$338 and $284, respectively. With respect to our other receivables, we expect to collect substantially all of the December 31, 2015,year-end 2018 balance during 2016.2019.
G. CONTRACTS IN PROCESS
Contracts in processH. UNBILLED RECEIVABLES
Unbilled receivables represent recoverablerevenue recognized on long-term contracts (contract costs and where applicable, accrued profit related to long-term contractsestimated profits) less associated advances and progress payments.billings. These amounts have been inventoried until the customer iswill be billed generally in accordance with the agreed-upon billing terms or upon shipment of products or rendering of services. Contracts in processcontractual terms. Unbilled receivables consisted of the following:
| | | | | | | | | December 31 | 2015 | | 2014 | Contract costs and estimated profits | $ | 20,742 |
| | $ | 18,691 |
| Other contract costs | 965 |
| | 1,064 |
| | 21,707 |
| | 19,755 |
| Advances and progress payments | (17,350 | ) | | (15,164 | ) | Total contracts in process | $ | 4,357 |
| | $ | 4,591 |
|
| | | | | | | | | December 31 | 2018 | | 2017 | Unbilled revenue | $ | 27,908 |
| | $ | 21,845 |
| Advances and progress billings | (21,332 | ) | | (16,605 | ) | Net unbilled receivables | $ | 6,576 |
| | $ | 5,240 |
|
Contract costsExcluding the acquisition of CSRA, the increase in net unbilled receivables in 2018 was primarily include labor, material, overheadon an international wheeled armored vehicle contract in our Combat Systems segment. At December 31, 2018, the net unbilled receivable related to this contract was $1.9 billion. Our contract is with the Canadian government, who is selling the vehicles to an international customer. We have experienced delays in payment under the contract. We continue to meet our obligations under the contract and when appropriate, G&A expenses. Theare entitled to payment for work performed. Therefore, we expect to collect the full amount of currently outstanding.
G&A costs remaining in contracts in processunbilled revenue on December 31, 20152018 and 2014,2017, were $211$381 and $176,$282, 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. 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.
Excluding our other contract costs, we expect to bill substantially all but approximately 15 percent of our year-end 2015 contracts-in-process2018 net unbilled receivables balance in the normal course of business during 2016. Of the2019. The amount not expected to be billed in 2016, approximately $150 relates to a single contract,2019 results primarily from the Canadian Maritime Helicopter Project (MHP). This MHP-related balance declined by approximately $70 during 2015.agreed-upon contractual billing terms.
H.I. INVENTORIES
The majority of our inventories are for business-jet aircraft. Our inventories represent primarily business-jet components and 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 of the units 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 | 2015 | | 2014 | 2018 | | 2017 | Work in process | $ | 1,889 |
| | $ | 1,828 |
| $ | 4,357 |
| | $ | 3,872 |
| Raw materials | 1,376 |
| | 1,290 |
| 1,504 |
| | 1,357 |
| Finished goods | 28 |
| | 28 |
| 33 |
| | 51 |
| Pre-owned aircraft | 73 |
| | 75 |
| 83 |
| | 23 |
| Total inventories | $ | 3,366 |
| | $ | 3,221 |
| $ | 5,977 |
| | $ | 5,303 |
|
The increase in total inventories was due primarily to the ramp-up in production of the new G500 and G600 aircraft programs 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 type certification from the U.S. Federal Aviation Administration (FAA) and delivered the first G500 aircraft in the third quarter of 2018. Additionally, we are anticipating FAA type certification and entry into service in 2019 of the new G600 aircraft.
I.
J. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. ThePP&E by major classesasset class consisted of PP&E were as follows:the following: | | December 31 | 2015 | | 2014 | 2018 | | 2017 | Machinery and equipment | $ | 4,394 |
| | $ | 4,182 |
| $ | 5,534 |
| | $ | 4,736 |
| Buildings and improvements | 2,666 |
| | 2,518 |
| 3,011 |
| | 2,837 |
| Land and improvements | 328 |
| | 331 |
| 386 |
| | 357 |
| Construction in process | 288 |
| | 261 |
| 472 |
| | 307 |
| Total PP&E | 7,676 |
| | 7,292 |
| 9,403 |
| | 8,237 |
| Accumulated depreciation | (4,210 | ) | | (3,963 | ) | (5,055 | ) | | (4,720 | ) | PP&E, net | $ | 3,466 |
| | $ | 3,329 |
| $ | 4,348 |
| | $ | 3,517 |
|
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.
J.K. DEBT
Debt consisted of the following: | | December 31 | | 2015 | | 2014 | | 2018 | | 2017 | Fixed-rate notes due: | Interest Rate | | | | Interest rate: | | | | January 2015 | 1.375% | $ | — |
| | $ | 500 |
| | July 2016 | 2.250% | 500 |
| | 500 |
| | November 2017 | 1.000% | 900 |
| | 900 |
| | May 2020 | | 2.875% | $ | 2,000 |
| | $ | — |
| May 2021 | | 3.000% | 2,000 |
| | — |
| July 2021 | 3.875% | 500 |
| | 500 |
| 3.875% | 500 |
| | 500 |
| November 2022 | 2.250% | 1,000 |
| | 1,000 |
| 2.250% | 1,000 |
| | 1,000 |
| May 2023 | | 3.375% | 750 |
| | — |
| August 2023 | | 1.875% | 500 |
| | 500 |
| November 2024 | | 2.375% | 500 |
| | 500 |
| May 2025 | | 3.500% | 750 |
| | — |
| August 2026 | | 2.125% | 500 |
| | 500 |
| November 2027 | | 2.625% | 500 |
| | 500 |
| May 2028 | | 3.750% | 1,000 |
| | — |
| November 2042 | 3.600% | 500 |
| | 500 |
| 3.600% | 500 |
| | 500 |
| Floating-rate notes due: | | | | | | May 2020 | | 3-month LIBOR + 0.29% | 500 |
| | — |
| May 2021 | | 3-month LIBOR + 0.38% | 500 |
| | — |
| Commercial paper | | 2.568% | 850 |
| | — |
| Other | Various | 25 |
| | 25 |
| Various | 168 |
| | 32 |
| Total debt - principal | | 3,425 |
| | 3,925 |
| | Total debt principal | | | 12,518 |
| | 4,032 |
| Less unamortized debt issuance costs and discounts | | 26 |
| | 32 |
| | 101 |
| | 50 |
| Total debt | | 3,399 |
| | 3,893 |
| | 12,417 |
| | 3,982 |
| Less current portion | | 501 |
| | 501 |
| | 973 |
| | 2 |
| Long-term debt | | $ | 2,898 |
| | $ | 3,392 |
| | $ | 11,444 |
| | $ | 3,980 |
|
In April 2018, we borrowed $7.5 billion under a short-term credit facility to finance, in part, the acquisition of CSRA. In May 2018, we issued $7.5 billion of fixed- and floating-rate notes to repay the borrowings under this facility. We entered into interest rate swap contracts that exchange the floating interest rates on the $500 notes due in May 2020 and May 2021 for fixed rates. The result of the interest rate swap contracts is effective interest rates on the floating-rate notes that are the same as the rates on the fixed-rate notes due in May 2020 and May 2021. See Note N for further discussion of our derivative financial instruments. Interest payments associated with our debt were $90$312 in 20152018, $93 in 2017 and $94$83 in 2014 and 2013.2016. Our fixed-ratefixed- and floating-rate notes are fully and unconditionally guaranteed by several of our 100-percent-owned subsidiaries (see100%-owned subsidiaries. See Note RS for condensed consolidating financial statements).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. In January 2015, we repaid $500 of fixed-rate notes on their scheduled maturity date. In 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. See Note A for further discussion of ASU 2015-03. We elected to early adopt ASU 2015-03, and in accordance with the transition requirements, have applied the new guidance retrospectively, resulting in the reclassification of $18 of unamortized debt issuance costs from other assets to long-term debt on December 31, 2014. The reclassified amount was included in the $32 of unamortized debt issuance costs and discounts on December 31, 2014, in the table above.
The aggregate amounts of scheduled principal maturities of our debt for the next five years are as follows: | | Year Ended December 31 | | Debt Principal | 2016 | $ | 501 |
| | 2017 | 903 |
| | 2018 | 1 |
| | 2019 | 1 |
| $ | 973 |
| 2020 | 1 |
| 2,501 |
| 2021 | | 3,002 |
| 2022 | | 1,002 |
| 2023 | | 1,252 |
| Thereafter | 2,018 |
| 3,788 |
| Total debt - principal | $ | 3,425 |
| | Total debt principal | | $ | 12,518 |
|
$500 of fixed-rate notes mature in July 2016. As we approach the maturity date of this debt, we will determine whether to repay these notes with cash on hand or refinance the obligation.
On December 31, 2015,2018, we had no$850 of commercial paper outstanding but we maintain the ability to access the commercial paper market in the future.with a dollar-weighted average interest rate of 2.568%. We have $2$5 billion in committed bank credit facilities for general corporate purposes and working capital needs.needs and to support our commercial paper issuances. These credit facilities include a $1$2 billion multi-year364-day facility expiring in July 2018 andMarch 2019, a $1 billion multi-year facility expiring in November 2020. These facilities are required by rating agencies to support our commercial paper issuances.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 these credit facilities at or prior to their expiration dates. Our bank credit facilities are guaranteed by several of our 100-percent-owned100%-owned subsidiaries. In addition, we have approximately $115 in committed bank credit facilities to provide backup liquidity to our European businesses. We also have an effective shelf registration on file with the SECSecurities 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 material covenants and restrictions on December 31, 2015.2018.
K.L. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows: | | December 31 | 2015 | | 2014 | 2018 | | 2017 | Deferred income taxes | $ | 829 |
| | $ | 729 |
| | Salaries and wages | | $ | 952 |
| | $ | 786 |
| Retirement benefits | | 272 |
| | 295 |
| Workers’ compensation | | 244 |
| | 320 |
| Fair value of cash flow hedges | 780 |
| | 292 |
| 141 |
| | 180 |
| Salaries and wages | 648 |
| | 718 |
| | Workers’ compensation | 369 |
| | 420 |
| | Retirement benefits | 304 |
| | 309 |
| | Other (a) | 1,376 |
| | 1,390 |
| 1,708 |
| | 1,317 |
| Total other current liabilities | $ | 4,306 |
| | $ | 3,858 |
| $ | 3,317 |
| | $ | 2,898 |
| | | | | | | | Retirement benefits | $ | 4,251 |
| | $ | 4,596 |
| $ | 4,422 |
| | $ | 4,408 |
| Customer deposits on commercial contracts | 506 |
| | 617 |
| 726 |
| | 814 |
| Deferred income taxes | 75 |
| | 82 |
| 577 |
| | 244 |
| Other (b) | 1,084 |
| | 1,070 |
| 1,768 |
| | 1,066 |
| Total other liabilities | $ | 5,916 |
| | $ | 6,365 |
| $ | 7,493 |
| | $ | 6,532 |
|
(a)Consists primarily of dividends payable, taxes payable, capital lease obligations, environmental remediation reserves, warranty reserves, deferred revenue and supplier contributions in the Aerospace group,segment, liabilities of discontinued operations, and insurance-related costs. (b)Consists primarily of liabilities forcapital lease obligations, warranty reserves, and workers’ compensation liabilities and liabilities of discontinued operations. The increase in the fair value of our cash flow hedge liabilities from December 31, 2014, to December 31, 2015, largely corresponds to the unrecognized losses on cash flow hedges deferred in AOCL. These losses will be deferred in AOCL until the underlying transaction is reflected in earnings, at which time we believe the losses will be offset by corresponding gains in the remeasurement of the underlying transactions being hedged.
L.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, 2015,2018, we had 481,880,634 shares of common stock issued and 312,987,277288,698,149 shares of common stock outstanding, including unvested restricted stock of 1,391,275686,921 shares. On December 31, 2014,2017, we had 481,880,634 shares of common stock issued and 332,164,097296,895,608 shares of common stock outstanding. No shares of our preferred stock were outstanding on either date. The only changes in our shares outstanding during 20152018 and 20142017 resulted from shares repurchased in the open market and share activity under our equity compensation plans (seeplans. See Note OP for further discussion).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 from time to time. In 2015,market. On December 5, 2018, the board of directors authorized management to repurchase an aggregateup to 10 million additional shares of 30 million shares. Accordingly,the company’s outstanding stock. In 2018, we repurchased 22.810.1 million of our outstanding shares for $3.2 billion in 2015.$1.8 billion. On December 31, 2015, 9.62018, 7.5 million shares remained authorized by our board of directors for repurchase, approximately 3 percent3% of our total shares outstanding. We repurchased 297.8 million shares for a total of $3.4$1.5 billion in 20142017 and 9.414.2 million shares for a total of $740$2 billion in 2013.2016. Dividends per Share. DividendsOur board of directors declared dividends per share were $2.76of $3.72 in 20152018, $2.483.36 in 20142017 and $2.243.04 in 2013. Cash2016. We paid cash dividends paid were $873of $1.1 billion in 20152018, $822986 in 20142017 and $591911 in 2013. We did not pay any dividends in the first three months of 2013 because we accelerated our first-quarter dividend payment to December 2012.2016. Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of AOCL consisted of the following: | | | Gains (Losses) on Cash Flow Hedges | Unrealized Gains on Securities | Foreign Currency Translation Adjustments | Changes in Retirement Plans’ Funded Status | AOCL | Losses on Cash Flow Hedges | Unrealized Gains on Marketable Securities | Foreign Currency Translation Adjustments | Changes in Retirement Plans’ Funded Status | AOCL | December 31, 2012 | $ | 6 |
| $ | 7 |
| $ | 1,092 |
| $ | (3,880 | ) | $ | (2,775 | ) | | December 31, 2015 | | $ | (487 | ) | $ | 20 |
| $ | 181 |
| $ | (2,997 | ) | $ | (3,283 | ) | Other comprehensive loss, pretax | | 191 |
| (9 | ) | (112 | ) | (192 | ) | (122 | ) | Benefit from income tax, net | | (49 | ) | 3 |
| — |
| 64 |
| 18 |
| Other comprehensive loss, net of tax | | 142 |
| (6 | ) | (112 | ) | (128 | ) | (104 | ) | December 31, 2016 | | (345 | ) | 14 |
| 69 |
| (3,125 | ) | (3,387 | ) | Other comprehensive income, pretax | 3 |
| 12 |
| (118 | ) | 2,595 |
| 2,492 |
| 341 |
| 9 |
| 348 |
| 20 |
| 718 |
| Provision for income tax, net | — |
| 4 |
| — |
| 898 |
| 902 |
| (90 | ) | (4 | ) | (15 | ) | (42 | ) | (151 | ) | Other comprehensive income, net of tax | 3 |
| 8 |
| (118 | ) | 1,697 |
| 1,590 |
| 251 |
| 5 |
| 333 |
| (22 | ) | 567 |
| December 31, 2013 | 9 |
| 15 |
| 974 |
| (2,183 | ) | (1,185 | ) | | December 31, 2017 | | (94 | ) | 19 |
| 402 |
| (3,147 | ) | (2,820 | ) | Cumulative effect adjustments (see Note A) | | (4 | ) | (19 | ) | — |
| (615 | ) | (638 | ) | Other comprehensive loss, pretax | (279 | ) | 10 |
| (436 | ) | (1,745 | ) | (2,450 | ) | 36 |
| — |
| (300 | ) | (61 | ) | (325 | ) | Benefit for income tax, net | (97 | ) | 3 |
| (3 | ) | (606 | ) | (703 | ) | | Benefit from income tax, net | | (9 | ) | — |
| — |
| 14 |
| 5 |
| Other comprehensive loss, net of tax | (182 | ) | 7 |
| (433 | ) | (1,139 | ) | (1,747 | ) | 27 |
| — |
| (300 | ) | (47 | ) | (320 | ) | December 31, 2014 | (173 | ) | 22 |
| 541 |
| (3,322 | ) | (2,932 | ) | | Other comprehensive loss, pretax | (394 | ) | (2 | ) | (374 | ) | 500 |
| (270 | ) | | Provision for income tax, net | (80 | ) | — |
| (11 | ) | 175 |
| 84 |
| | Other comprehensive loss, net of tax | (314 | ) | (2 | ) | (363 | ) | 325 |
| (354 | ) | | December 31, 2015 | $ | (487 | ) | $ | 20 |
| $ | 178 |
| $ | (2,997 | ) | $ | (3,286 | ) | | December 31, 2018 | | $ | (71 | ) | $ | — |
| $ | 102 |
| $ | (3,809 | ) | $ | (3,778 | ) |
AmountsCurrent-period amounts reclassified out of AOCL related primarily to changes in our retirement plans'plans’ funded status and consisted of pretax recognized net actuarial losses of $423$355 in 20152018, $358 in 2017 and $329$340 in 2014.2016. This was offset partially by pretax amortization of prior service credit of $72$50 in 2015 and2018, $69 in 2014.2017 and $74 in 2016. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note PQ for additional details.
M.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 derivativesderivative financial instruments for trading or speculative purposes. Foreign Currency Risk and Hedging Activities.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 three-yeardollar-weighted two-year average maturity of these instruments generally matches the duration of the activities that are at risk. We had $7.2 billion in notional forward exchange contracts outstanding on December 31, 2015, and$9.1 billion on December 31, 2014. We recognize derivative financial instruments on the Consolidated Balance Sheets at fair value (see Note D).
We record changes in the fair value of derivative financial instruments in operating costs and expenses in the Consolidated Statements of Earnings or in other comprehensive loss (OCL) within the Consolidated Statements of Comprehensive Income depending on whether the derivative is designated and qualifies for hedge accounting. Gains and losses related to derivatives that qualify as cash flow hedges are deferred in OCL until the underlying transaction is reflected in earnings. We adjust derivative financial instruments not designated as cash flow hedges to market value each period and record the gain or loss in the Consolidated Statements of Earnings. The gains and losses on these instruments generally offset losses and gains on the assets, liabilities and other transactions being hedged. Gains and losses resulting from hedge ineffectiveness are recognized in the Consolidated Statements of Earnings for all derivative financial instruments, regardless of designation.
Net gains and losses recognized in earnings, including gains and losses related to hedge ineffectiveness, were not material to our results of operations in any of the past three years. Net gains and losses reclassified to earnings from OCL were 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 in 2016 to be material.
We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2015 or 2014.
Interest Rate Risk. Our financial instruments subject to interest rate risk include fixed-ratevariable-rate commercial paper and fixed- and floating-rate long-term debt obligations and variable-rate commercial paper. However, theobligations. As described in Note K, we entered into derivative financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest rate risk. The interest rate risk associated with theseour 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 derivativesderivative 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, 2015,2018, we held $2.8 billion$963 in cash and equivalents, but held no marketable securities.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, 2018, these marketable securities totaled $202 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 $5.8 billion and$4.3 billion on December 31, 2018 and 2017, 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. 70Changes 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. Gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in the Consolidated Statement of Earnings in operating costs and expenses or interest expense. The gains and losses on derivative financial instruments that do not qualify for hedge accounting generally offset losses and gains on the assets and liabilities being hedged. Gains and losses resulting from hedge ineffectiveness are recognized in the Consolidated Statement of Earnings for all derivative financial instruments, regardless of designation.
Net gains and losses on derivative financial instruments recognized in earnings, including gains and losses related to hedge ineffectiveness, were not material to our results of operations in any of the past three years. Net gains and losses reclassified to earnings from AOCL were 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 in 2019 to be material. We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2018 or 2017. 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 OCL.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. Although negative, theThe impact of translating our non-U.S. operations’ revenue and earnings into U.S. dollars was not material to our results of operations in any of the past three years. The impact in 2015 was most pronounced in our Combat Systems group. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in eachany of the past three years.
N.
O. COMMITMENTS AND CONTINGENCIES Litigation VariousIn 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter filed under seal in U.S. district court. Also in 2016, the Suspending and Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and has been engaged in discussions with the U.S. government. Given the current status of these matters, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on our results of operations, financial condition and cash flows.
Additionally, various other claims and other 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. Minimum Lease Payments Total expense under operating leases was $283$380 in 2015, $297 in 2014 and2018, $309 in 20132017 and $307 in 2016. Operating leases are primarily for facilities and equipment. Future minimum lease payments are as follows:
| | Year Ended December 31 | Year Ended December 31 | Future Minimum Lease Payments | 2016 | $ | 220 |
| | 2017 | 179 |
| | 2018 | 136 |
| | 2019 | 90 |
| $ | 297 |
| 2020 | 90 |
| 234 |
| 2021 | | 196 |
| 2022 | | 154 |
| 2023 | | 110 |
| Thereafter | 322 |
| 698 |
| Total minimum lease payments | $ | 1,037 |
| | Total future minimum lease payments | | $ | 1,689 |
|
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 uponon 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 $1.1$1.7 billion on December 31, 2015.2018. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance obligations of our subsidiaries arising under certain contracts. Aircraft Trade-ins. In connection with orders for new aircraft in funded contract backlog, our Aerospace groupsegment 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. AnyAdditionally, certain trade-in commitments are structured to guarantee a pre-determined trade-in value. In either case, any excess of the pre-established trade-in price above the fair market value at the time the new outfitted aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction. Labor Agreements. ApproximatelyOn December 31, 2018, approximately one-fifth of the employees of our subsidiaries workwere working under collectively-bargainedcollectively bargained terms and conditions, including 5394 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 2016,2019, we expect to negotiate the terms of 1821 agreements covering approximately 6,4005,500 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 based 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 Sheets.Sheet. The changes in the carrying amount of warranty liabilities for each of the past three years were as follows: | | Year Ended December 31 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Beginning balance | $ | 428 |
| | $ | 354 |
| | $ | 316 |
| $ | 467 |
| | $ | 474 |
| | $ | 434 |
| Warranty expense | 158 |
| | 146 |
| | 125 |
| 129 |
| | 146 |
| | 155 |
| Payments | (120 | ) | | (78 | ) | | (82 | ) | (102 | ) | | (123 | ) | | (100 | ) | Adjustments | (1 | ) | | 6 |
| | (5 | ) | (14 | ) | | (30 | ) | | (15 | ) | Ending balance | $ | 465 |
| | $ | 428 |
| | $ | 354 |
| $ | 480 |
| | $ | 467 |
| | $ | 474 |
|
Capital Leases. Capital lease liabilities represent obligations due under capital leases for the use of buildings and improvements, and machinery and equipment. The gross amount of assets recorded under capital leases was $485 and $19 with accumulated amortization of $61 and $3 as of December 31, 2018 and 2017, respectively. Amortization of capital lease assets is included within depreciation expense. The increase in capital lease liabilities in 2018 was due primarily to the acquisition of CSRA. The future minimum lease payments are as follows: | | | | | Year Ended December 31 | Future Minimum Lease Payments | 2019 | $ | 92 |
| 2020 | 84 |
| 2021 | 78 |
| 2022 | 79 |
| 2023 | 30 |
| Thereafter | 70 |
| Total future minimum lease payments | 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 liability | 64 |
| Non-current capital lease liability | $ | 255 |
|
O.P. 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 retaining and motivatingretaining 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. We
Annually, we grant annualawards of stock option awardsoptions, restricted stock and RSUs to participants in theour equity compensation plans on the first Wednesday of March based on the average of the high and low stock prices on that day as listed on the New York Stock Exchange. Wein early March. Additionally, we may make limited ad hoc grants at other times during the yearon a quarterly basis for new hires or promotions. We issue common stock under our equity compensation plans from treasury stock. On December 31, 2018, in addition to the shares reserved for issuance upon the exercise of outstanding stock options, approximately 28 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 | 2018 | | 2017 | | 2016 | Stock options | $ | 45 |
| | $ | 34 |
| | $ | 25 |
| Restricted stock/RSUs | 65 |
| | 46 |
| | 36 |
| Total equity-based compensation expense, net of tax | $ | 110 |
| | $ | 80 |
| | $ | 61 |
|
Stock Options. Stock options granted under theour equity compensation plans are issued with an exercise price at the fair market value of theour common stock determined by the average of the high and low stock prices as listed on the New York Stock Exchange on the date of grant. In 2015, we made several changes to the equity compensation program, including an increase in the term The majority of theour outstanding stock options from seven to ten years and a change to a three-year vesting period versus a two-year vesting period for prior option grants. Stock options now vest over three years, with 50 percent50% of the options vesting after two years and the remaining 50 percent vesting the following year.
Outstanding stock options granted prior to 2015 vest over two years, with 50 percent of the options vesting in one year and the remaining 50 percent50% vesting the following year, and expire seven10 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 | 2018 | | 2017 | | 2016 | Expected volatility | 17.6-18.2% | | 17.3-19.4% | | 19.1-20.0% | Weighted average expected volatility | 17.6% | | 19.4% | | 20.0% | Expected term (in months) | 68 | | 68 | | 70 | Risk-free interest rate | 2.6-2.9% | | 2.0-2.2% | | 1.5-1.6% | Expected dividend yield | 1.8% | | 1.8% | | 2.0% |
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 $37.42 in 2018, $33.09 in 2017 and $22.11 in 2016. Stock option expense reduced pretax operating earnings (and on a diluted per-share basis) by $57 ($0.15) in 2018, $53 ($0.11) in 2017and$39 ($0.08) in 2016. Compensation expense for stock options is reported as a Corporate expense for segment reporting purposes (see Note R). On December 31, 2018, we had $73 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.9 years.
A summary of stock option activity during 2018 follows: | | | | | | | | In Shares and Dollars | Shares Under Option | | Weighted Average Exercise Price Per Share | Outstanding on December 31, 2017 | 10,620,389 |
| | $ | 126.08 |
| Granted | 1,730,430 |
| | 223.06 |
| Exercised | (1,388,110 | ) | | 104.48 |
| Forfeited/canceled | (197,514 | ) | | 182.08 |
| Outstanding on December 31, 2018 | 10,765,195 |
| | $ | 143.43 |
| Vested and expected to vest on December 31, 2018 | 10,595,953 |
| | $ | 142.32 |
| Exercisable on December 31, 2018 | 6,119,560 |
| | $ | 109.19 |
|
Summary information with respect to our stock options’ intrinsic value and remaining contractual term on December 31, 2018, follows: | | | | | | | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | Outstanding | 5.5 | | $ | 320 |
| Vested and expected to vest | 5.4 | | 319 |
| Exercisable | 3.4 | | 294 |
|
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 $147 in 2018, $215 in 2017 and $263 in 2016. 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 New York Stock Exchange on the date of grant. Grants of restricted stock are awards of shares of common stock that vest approximately four years after the grant date. During the restriction period, recipients may not sell, transfer, pledge, assign or otherwise convey their restricted shares to another party. During this period, the recipient is entitled to vote the restricted shares and receive cash dividends on those shares. 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. In 2012, we started granting 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 a performance measure derived from a non-GAAP-based management metric, return on invested capital (ROIC). Depending on the company’s performance with respect to this metric, 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. The performance period for the ROIC metric was extended from one to three years in 2015. For a definition of ROIC, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7.
Participation units vest approximately three years after the grant date with recipients prohibited from certain activities during the restriction period. During this period, the recipient receives dividend-equivalent units rather than cash dividends, and is not entitled to vote the participation units or the dividend-equivalent units. Participation units granted prior to 2015 vest over four years with the same conditions and limitations described above.
We issue common stock under our equity compensation plans from treasury stock. On December 31, 2015, in addition to the shares reserved for issuance upon the exercise of outstanding stock options, approximately 11 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 | 2015 | | 2014 | | 2013 | Stock options | $ | 32 |
| | $ | 38 |
| | $ | 48 |
| Restricted stock | 40 |
| | 45 |
| | 30 |
| Total equity-based compensation expense, net of tax | $ | 72 |
| | $ | 83 |
| | $ | 78 |
|
Stock Options. We recognize compensation expense related to stock options on a straight-line basis over the vesting period of the awards. 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 | 2015 | | 2014 | | 2013 | Expected volatility | 20.1-24.1% |
| | 19.4-20.8% |
| | 21.6-27.3% |
| Weighted average expected volatility | 24.0 | % | | 20.2 | % | | 23.5 | % | Expected term (in months) | 74 |
| | 43/53 |
| | 43/53 |
| Risk-free interest rate | 1.7-1.9% |
| | 1.1-1.4% |
| | 0.5-1.0% |
| Expected dividend yield | 2.0 | % | | 2.5 | % | | 3.0 | % |
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.
In 2015, expected term is based on assumptions used by a set of comparable peer companies as sufficient entity-specific information is not available. In 2014 and 2013, using historical option exercise data, we estimated different expected terms and determined a separate fair value for options granted for two employee populations.
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 was $27.54 in 2015, $13.99 in 2014 and $8.90 in 2013. Stock option expense reduced pretax operating earnings (and on a diluted per-share basis) by $49 ($0.10) in 2015, $59 ($0.11) in 2014and$74 ($0.14) in 2013. Compensation expense for stock options is reported as a Corporate expense for segment reporting purposes (see Note Q). On December 31, 2015, we had $46 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of two years.
A summary of stock option activity during 2015 follows:
| | | | | | | | | Shares Under Option | | Weighted Average Exercise Price Per Share | Outstanding on December 31, 2014 | 14,026,526 |
| | $ | 83.40 |
| Granted | 2,125,970 |
| | 136.90 |
| Exercised | (3,620,295 | ) | | 75.42 |
| Forfeited/canceled | (356,540 | ) | | 115.56 |
| Outstanding on December 31, 2015 | 12,175,661 |
| | $ | 94.17 |
| Vested and expected to vest on December 31, 2015 | 12,058,610 |
| | $ | 93.78 |
| Exercisable on December 31, 2015 | 8,153,380 |
| | $ | 79.09 |
|
Summary information with respect to our stock options’ intrinsic value and remaining contractual term on December 31, 2015, follows:
| | | | | | | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | Outstanding | 4.8 | | $ | 526 |
| Vested and expected to vest | 4.8 | | 526 |
| Exercisable | 3.7 | | 475 |
|
In the table above, intrinsic value is calculated as the excess, if any, between the market price of our stock on the last trading day of the year and 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 $238 in 2015, $340 in 2014 and $154 in 2013.
Restricted Stock/Restricted Stock Units. We determine the fair value of restricted stock and RSUs as the average of the high and low market prices of our stock on the date of grant. We generally recognize compensation expense related to restricted stock and RSUs on a straight-line basis over the vesting period during whichof the restriction lapses.
awards. Compensation expense related to restricted stock and RSUs reduced pretax operating earnings (and on a diluted per-share basis) by $61$83 ($0.22) in 2018, $70 ($0.15) in 2017 and $56 ($0.12) in 2015, $69 ($0.13) in 20142016. Compensation expense for restricted stock and $46 ($0.09) in 2013.RSUs is reported as an operating expense for segment reporting purposes (see Note R). On December 31, 2015,2018, we had $45$53 of
unrecognized compensation cost related to restricted stock and RSUs, which is expected to be recognized over a weighted average period of 1.91.6 years. A summary of restricted stock and RSU activity during 20152018 follows: | | | Shares/ Share-Equivalent Units | | Weighted Average Grant-Date Fair Value Per Share | | Nonvested at December 31, 2014 | 2,740,177 |
| | $ | 78.83 |
| | In Shares and Dollars | | Shares/ Share-Equivalent Units | | Weighted Average Grant-Date Fair Value Per Share | Nonvested at December 31, 2017 | | 1,983,173 |
| | $ | 135.38 |
| Granted | 708,700 |
| | 136.89 |
| 482,700 |
| | 204.97 |
| Vested | (547,736 | ) | | 74.69 |
| (1,163,702 | ) | | 122.59 |
| Forfeited | (41,970 | ) | | 107.03 |
| (39,895 | ) | | 195.99 |
| Nonvested at December 31, 2015 | 2,859,171 |
| | $ | 91.03 |
| | Nonvested at December 31, 2018 | | 1,262,276 |
| | $ | 171.62 |
|
The total fair value of vesting shares was $76$242 in 2015, $472018, $200 in 20142017 and $63$68 in 2013.2016.
P.Q. 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. The following discussion reflects the inclusion of legacy CSRA plans assumed in connection with the acquisition as of the acquisition date. 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. Generally, salaried employees and certain hourly employees are eligible to participate in the plans. Under most plans, the employeeEmployees may contribute to various investment alternatives, including investment in our common stock.alternatives. In somemost of these plans, we match a portion of the employees’ contributions. Our contributions to these plans totaled $240$302 in 2015,2018, $238274 in 20142017 and $204261 in 20132016. The defined-contribution plans held approximately 24 million and 2521 million shares of our common stock, representing approximately 8 percentand 7 percent7% of our outstanding shares on December 31, 2015,2018 and 2014, respectively.2017. Pension Benefits. We have sixten noncontributory and sixfive 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 plan,plans, which comprisescomprise the majority of our unfunded obligation, waswere closed to new salaried participants on January 1, 2007. Additionally, we made changes to this planthese 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 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 $187In 2018, in addition to our required contributions of approximately $315, we made a discretionary contribution of $255, resulting in total pension plansplan contributions of approximately $570 in 20152018. The additional contribution was considered to be a significant event in accordance with ASC Topic 715 and, expect to contributetherefore, triggered a remeasurement of the 2018 net periodic defined-benefit pension cost. In 2019, our required contributions are approximately $200 in 2016.$190. 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 20152018 and are not expected to be material in 2016.2019.
We expect the following benefits to be paid from our retirement plans over the next 10 years: | | | | | | | | | | Pension Benefits | | Other Post-retirement Benefits | 2016 | $ | 566 |
| | $ | 65 |
| 2017 | 589 |
| | 64 |
| 2018 | 616 |
| | 64 |
| 2019 | 643 |
| | 64 |
| 2020 | 675 |
| | 63 |
| 2021-2025 | 3,797 |
| | 310 |
|
| | | | | | | | | | Pension Benefits | | Other Post-retirement Benefits | 2019 | $ | 816 |
| | $ | 68 |
| 2020 | 846 |
| | 67 |
| 2021 | 873 |
| | 66 |
| 2022 | 899 |
| | 65 |
| 2023 | 927 |
| | 64 |
| 2024-2028 | 4,947 |
| | 296 |
|
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 business groups.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 is consideredto be probable based on our backlog and probable follow-on contracts, we defer the excess in contractsother contract costs in processother current assets on the Consolidated Balance SheetsSheet until the cost is allocable to contracts. See Note GA for a discussion of our deferredother 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 to provide a better matching of revenue and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheets.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 raterates 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 three primary elements: the cost of benefits earned by employees for services rendered during the year, an interest charge on our plan liabilities and an assumed return on our plan assets for the year. The annual cost also includes gains and losses resulting from changes in actuarial assumptions, differences between the actual and assumed long-term rate of return on assets, and gains and losses resulting from changes we make to plan benefit terms. We recognize an asset or liability on the Consolidated Balance SheetsSheet 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. Changes in plan assets and liabilities due to differences between actuarial assumptions and the actual results of the plan are deferred in OCLAOCL rather than charged to earnings. These differences are 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 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.
OurNet annual defined-benefit pension and other post-retirement benefit costscost (credit) consisted of the following:
| | | Pension Benefits | Pension Benefits | Year Ended December 31 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Service cost | $ | 210 |
| | $ | 186 |
| | $ | 298 |
| $ | 180 |
| | $ | 168 |
| | $ | 173 |
| Interest cost | 529 |
| | 532 |
| | 492 |
| 532 |
| | 453 |
| | 456 |
| Expected return on plan assets | (693 | ) | | (655 | ) | | (590 | ) | (856 | ) | | (679 | ) | | (713 | ) | Recognized net actuarial loss | 417 |
| | 320 |
| | 409 |
| 359 |
| | 362 |
| | 343 |
| Amortization of prior service credit | (67 | ) | | (67 | ) | | (67 | ) | (46 | ) | | (66 | ) | | (68 | ) | Annual benefit cost | $ | 396 |
| | $ | 316 |
| | $ | 542 |
| | Net annual benefit cost | | $ | 169 |
| | $ | 238 |
| | $ | 191 |
|
| | | Other Post-retirement Benefits | Other Post-retirement Benefits | Year Ended December 31 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Service cost | $ | 11 |
| | $ | 12 |
| | $ | 15 |
| $ | 10 |
| | $ | 9 |
| | $ | 10 |
| Interest cost | 44 |
| | 52 |
| | 53 |
| 33 |
| | 30 |
| | 34 |
| Expected return on plan assets | (32 | ) | | (31 | ) | | (29 | ) | (40 | ) | | (34 | ) | | (33 | ) | Recognized net actuarial loss | 6 |
| | 9 |
| | 26 |
| | Amortization of prior service (credit) cost | (5 | ) | | (2 | ) | | 7 |
| | Annual benefit cost | $ | 24 |
| | $ | 40 |
| | $ | 72 |
| | Recognized net actuarial gain | | (4 | ) | | (4 | ) | | (3 | ) | Amortization of prior service credit | | (4 | ) | | (3 | ) | | (6 | ) | Net annual benefit (credit) cost | | $ | (5 | ) | | $ | (2 | ) | | $ | 2 |
|
As discussed in Note A, 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.
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 | Pension Benefits | | Other Post-retirement Benefits | Year Ended December 31 | 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2018 | | 2017 | Change in Benefit Obligation | | | | | | | | | | | | | | | Benefit obligation at beginning of year | $ | (13,236 | ) | | $ | (11,013 | ) | | $ | (1,130 | ) | | $ | (1,183 | ) | $ | (14,212 | ) | | $ | (13,022 | ) | | $ | (996 | ) | | $ | (1,005 | ) | Service cost | (210 | ) | | (186 | ) | | (11 | ) | | (12 | ) | (180 | ) | | (168 | ) | | (10 | ) | | (9 | ) | Interest cost | (529 | ) | | (532 | ) | | (44 | ) | | (52 | ) | (532 | ) | | (453 | ) | | (33 | ) | | (30 | ) | Acquisitions | | (2,758 | ) | | — |
| | (62 | ) | | — |
| Amendments | 6 |
| | (1 | ) | | (10 | ) | | 55 |
| 15 |
| | 1 |
| | — |
| | — |
| Actuarial gain (loss) | 685 |
| | (2,083 | ) | | 104 |
| | (30 | ) | 1,183 |
| | (1,098 | ) | | 78 |
| | (42 | ) | Settlement/curtailment/other | 195 |
| | 64 |
| | 35 |
| | 15 |
| 23 |
| | (58 | ) | | 21 |
| | 27 |
| Benefits paid | 535 |
| | 515 |
| | 65 |
| | 77 |
| 741 |
| | 586 |
| | 67 |
| | 63 |
| Benefit obligation at end of year | $ | (12,554 | ) | | $ | (13,236 | ) | | $ | (991 | ) | | $ | (1,130 | ) | $ | (15,720 | ) | | $ | (14,212 | ) | | $ | (935 | ) | | $ | (996 | ) | Change in Plan/Trust Assets | | | | | | | | | | | | | | | Fair value of assets at beginning of year | $ | 9,084 |
| | $ | 8,476 |
| | $ | 553 |
| | $ | 519 |
| $ | 10,130 |
| | $ | 8,980 |
| | $ | 541 |
| | $ | 499 |
| Actual return on plan assets | (85 | ) | | 664 |
| | 13 |
| | 68 |
| (749 | ) | | 1,469 |
| | (4 | ) | | 82 |
| Acquisitions | | 2,328 |
| | — |
| | 77 |
| | — |
| Employer contributions | 187 |
| | 513 |
| | — |
| | 6 |
| 571 |
| | 199 |
| | 1 |
| | 3 |
| Settlement/curtailment/other | (54 | ) | | (65 | ) | | — |
| | (1 | ) | (26 | ) | | 56 |
| | — |
| | — |
| Benefits paid | (524 | ) | | (504 | ) | | (39 | ) | | (39 | ) | (722 | ) | | (574 | ) | | (45 | ) | | (43 | ) | Fair value of assets at end of year | $ | 8,608 |
| | $ | 9,084 |
| | $ | 527 |
| | $ | 553 |
| $ | 11,532 |
| | $ | 10,130 |
| | $ | 570 |
| | $ | 541 |
| Funded status at end of year | $ | (3,946 | ) | | $ | (4,152 | ) | | $ | (464 | ) | | $ | (577 | ) | $ | (4,188 | ) | | $ | (4,082 | ) | | $ | (365 | ) | | $ | (455 | ) |
Amounts recognized on ourthe Consolidated Balance SheetsSheet consisted of the following: | | | Pension Benefits | | Other Post-retirement Benefits | Pension Benefits | | Other Post-retirement Benefits | December 31 | 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2018 | | 2017 | Noncurrent assets | $ | 145 |
| | $ | 176 |
| | $ | — |
| | $ | — |
| $ | 67 |
| | $ | 133 |
| | $ | 74 |
| | $ | 33 |
| Current liabilities | (125 | ) | | (128 | ) | | (179 | ) | | (181 | ) | (131 | ) | | (145 | ) | | (141 | ) | | (150 | ) | Noncurrent liabilities | (3,966 | ) | | (4,200 | ) | | (285 | ) | | (396 | ) | (4,124 | ) | | (4,070 | ) | | (298 | ) | | (338 | ) | Net liability recognized | $ | (3,946 | ) | | $ | (4,152 | ) | | $ | (464 | ) | | $ | (577 | ) | $ | (4,188 | ) | | $ | (4,082 | ) | | $ | (365 | ) | | $ | (455 | ) |
Amounts deferred in AOCL consisted of the following: | | | Pension Benefits | | Other Post-retirement Benefits | Pension Benefits | | Other Post-retirement Benefits | December 31 | 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2018 | | 2017 | Net actuarial loss (gain) | $ | 4,887 |
| | $ | 5,364 |
| | $ | (9 | ) | | $ | 89 |
| $ | 4,959 |
| | $ | 4,899 |
| | $ | (37 | ) | | $ | (5 | ) | Prior service credit | (258 | ) | | (320 | ) | | (25 | ) | | (38 | ) | | Prior service (credit) cost | | (95 | ) | | (124 | ) | | 1 |
| | (3 | ) | Total amount recognized in AOCL, pretax | $ | 4,629 |
| | $ | 5,044 |
| | $ | (34 | ) | | $ | 51 |
| $ | 4,864 |
| | $ | 4,775 |
| | $ | (36 | ) | | $ | (8 | ) |
The following is a reconciliation of the change in AOCL for our defined-benefit retirement plans: | | | Pension Benefits | | Other Post-retirement Benefits | Pension Benefits | | Other Post-retirement Benefits | Year Ended December 31 | 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2018 | | 2017 | Net actuarial loss (gain) | $ | 93 |
| | $ | 2,074 |
| | $ | (85 | ) | | $ | (7 | ) | $ | 422 |
| | $ | 308 |
| | $ | (34 | ) | | $ | (6 | ) | Prior service (credit) cost | (6 | ) | | 1 |
| | 10 |
| | (55 | ) | | Prior service cost | | (15 | ) | | (1 | ) | | — |
| | — |
| Amortization of: | | | | | | | | | | | | | | | Net actuarial loss from prior years | (417 | ) | | (320 | ) | | (6 | ) | | (9 | ) | | Net actuarial (loss) gain from prior years | | (359 | ) | | (362 | ) | | 4 |
| | 4 |
| Prior service credit | 67 |
| | 67 |
| | 5 |
| | 2 |
| 46 |
| | 66 |
| | 4 |
| | 3 |
| Other* | (152 | ) | | (9 | ) | | (9 | ) | | 1 |
| (5 | ) | | 7 |
| | (2 | ) | | (39 | ) | Change in AOCL, pretax | $ | (415 | ) | | $ | 1,813 |
| | $ | (85 | ) | | $ | (68 | ) | $ | 89 |
| | $ | 18 |
| | $ | (28 | ) | | $ | (38 | ) |
* Includes foreign exchange translation, curtailment and curtailmentother adjustments. The following table represents amounts deferred in AOCL on the Consolidated Balance SheetsSheet on December 31, 2015,2018, that we expect to recognize in our retirement benefit cost in 2016:2019: | | | Pension Benefits | | Other Post-retirement Benefits | | �� | | Pension Benefits | | Other Post-retirement Benefits | Net actuarial loss (gain) | $ | 336 |
| | $ | (3 | ) | $ | 280 |
| | $ | (8 | ) | Prior service credit | (68 | ) | | (6 | ) | (18 | ) | | (4 | ) |
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. A pension 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. The ABO for all defined-benefit pension plans was $12.2$15.5 billion and $12.8$13.9 billion on December 31, 20152018 and 2014,2017, respectively. On December 31, 20152018 and 2014,2017, some of our pension plans had an ABO that exceeded the plans’ assets. Summary information for those plans follows:
| | December 31 | 2015 | | 2014 | 2018 | | 2017 | PBO | $ | (12,368 | ) | | $ | (12,797 | ) | $ | (15,067 | ) | | $ | (13,660 | ) | ABO | (12,082 | ) | | (12,363 | ) | (14,856 | ) | | (13,398 | ) | Fair value of plan assets | 8,360 |
| | 8,578 |
| 10,832 |
| | 9,526 |
|
Retirement Plan Assumptions We calculate the plan assets and liabilities for a given year and the net periodicannual 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 | 2015 | | 2014 | 2018 | | 2017 | Pension Benefits | | | | | | | Discount rate | 4.46 | % | | 4.10 | % | | Benefit obligation discount rate | | 4.28 | % | | 3.62 | % | Rate of increase in compensation levels | 3.40 | % | | 3.43 | % | 2.79 | % | | 2.82 | % | Other Post-retirement Benefits | | | | | | | Discount rate | 4.35 | % | | 4.03 | % | | Benefit obligation discount rate | | 4.24 | % | | 3.64 | % | Healthcare cost trend rate: | | | | | | | Trend rate for next year | 7.00 | % | | 7.00 | % | 6.50 | % | | 6.50 | % | Ultimate trend rate | 5.00 | % | | 5.00 | % | 5.00 | % | | 5.00 | % | Year rate reaches ultimate trend rate | 2024 |
| | 2024 |
| 2024 |
| | 2024 |
|
The following table summarizes the weighted average assumptions used to determine our net periodicannual benefit costs:cost: | | Assumptions for Year Ended December 31 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | Pension Benefits | | | | | | | | | | | Discount rate | 4.10 | % | | 4.95 | % | | 4.22 | % | | Discount rates: | | | | | | | Benefit obligation | | 3.69 | % | | 4.19 | % | | 4.46 | % | Service cost | | 3.51 | % | | 4.13 | % | | 4.42 | % | Interest cost | | 3.34 | % | | 3.56 | % | | 3.71 | % | Expected long-term rate of return on assets | 8.15 | % | | 8.16 | % | | 8.14 | % | 7.45 | % | | 7.43 | % | | 8.14 | % | Rate of increase in compensation levels | 3.43 | % | | 3.78 | % | | 3.79 | % | 2.79 | % | | 2.90 | % | | 3.39 | % | Other Post-retirement Benefits | | | | | | | | | | | Discount rate | 4.03 | % | | 4.74 | % | | 3.97 | % | | Discount rates: | | | | | | | Benefit obligation | | 3.64 | % | | 4.11 | % | | 4.35 | % | Service cost | | 3.79 | % | | 4.34 | % | | 4.52 | % | Interest cost | | 3.27 | % | | 3.43 | % | | 3.53 | % | Expected long-term rate of return on assets | 8.03 | % | | 8.03 | % | | 8.03 | % | 7.75 | % | | 7.76 | % | | 7.81 | % |
We base the discount raterates 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 raterates of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy. In 2017, 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 following an assessment of the historical and expected long-term returns of our various asset classes. Beginning in 2016,2019, we refined the method used to determine the service and interest cost components of our net periodic benefit cost. Previously, the cost was determined using a single weighted-average discount rate derived from the yield curve. Under the refined method, known as the spot rate approach, we will use individual spot rates along the yield curve that correspond with the timing of each benefit payment. We believe this change provides a more precise measurement of service and interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. Compared to the previous method, the spot rate approach will decrease the serviceexpected long-term rates of return on assets in our primary U.S. other post-retirement benefit plans by 100 basis points, following an assessment of the historical and interest componentsexpected long-term returns of our benefit costs slightly in 2016. Therevarious asset classes. This decrease is nonot expected to have a material impact on the totalour 2019 benefit obligation. We will account for this change prospectively as a change in accounting estimate.costs.
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 costs.
cost. As discussed above, we defer recognition of the cumulative benefit cost for our government plans in excess of costs allocableallocated to contracts to provide a better matching of revenue and expenses.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. For our domesticU.S. pension plans that represent the majority of our total obligation, the following hypothetical changes in the discount raterates and expected long-term raterates of return on plan assets would have had the following impact in 2015:2018: | | | | | | | | | | Increase 25 basis points | | Decrease 25 basis points | Increase (decrease) to net pension cost from: | | | | Change in discount rate | $ | (34 | ) | | $ | 35 |
| Change in long-term rate of return on plan assets | (19 | ) | | 19 |
|
| | | | | | | | | | Increase 25 Basis Points | | Decrease 25 Basis Points | Increase (decrease) to net pension cost from: | | | | Change in discount rates | $ | (24 | ) | | $ | 25 |
| Change in long-term rates of return on plan assets | (27 | ) | | 27 |
|
A 25-basis-point change in these assumed rates would not have had a measurable impact on the benefit cost for our other post-retirement benefit plans in 2015.2018. For our healthcare plans, the effect of a 1 percentage point1% increase or decrease in the assumed healthcare cost trend rate on the 20152018 net periodicannual benefit cost is $6$4 and ($5)3), respectively, and the effect on the December 31, 2015,2018, accumulated other post-retirement benefit obligation is $82$65 and ($65)52), respectively.
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 strategies, provides oversight of a third-party investment manager andwho reports to the committee on a regular basis. AnThe 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 raterates of return used to determine our benefit obligations and net periodicannual benefit costs.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 2015,2018, our asset allocation policy ranges were: | | | Equities | 48 - 68%48-68% | Fixed income | 20 - 48%20-48% | Cash | 0 - 5%0-5% | Other asset classes | 0 - 16%0-16% |
More than 90 percentApproximately 75% of our pension plan assets are held in a single trust for our primary U.S. government and commercial pension plans. On December 31, 20152018, the trust was invested largely in publicly traded equities, and fixed-income securities but may investand commingled funds comprised of equity securities. The trust also invests in other asset classes in the future consistent with our investment policy. Our investments in equity assets include U.S. and international securities and equity funds as well as futures contracts on U.S. equity indices.funds. Our investments in fixed-income assets include U.S. Treasury and U.S. agency securities, corporate bonds, mortgage-backed securities futures contracts and internationalother asset-backed securities. 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.
Assets for our non-U.S. pension plans are held in trusts in the countries in which the related operations reside. Our non-U.S. operations maintain investment policies for their individual plans based on country-specificcountry-
specific regulations. The non-U.S. plan assets are invested primarily invested in commingled funds comprised of equity and fixed-income securities. 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 equities, corporate bondsfixed-income securities and equity-based mutual funds.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 liability,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 DE for a discussion of the hierarchy for determining fair value. Our Level 1 assets include investments in publicly traded equity securities and commingled funds.securities. These securities (and the underlying investments of the funds) 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 that are not actively traded or 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 useincorporate observable inputs such as interest rates, bond yields low-volume market quotes 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 and hedge funds, insurance deposit 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, 2018, and we had no unfunded commitments related to these investments on December 31, 2017.
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) |
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, 2015 | December 31, 2018 | Cash and equivalents | $ | 116 |
| | $ | 12 |
| | $ | 104 |
| | $ | — |
| $ | 73 |
| | $ | — |
| | $ | 73 |
| | $ | — |
| Equity securities: | | | | | | | | | Equity securities (a): | | | | | | | | | U.S. companies (a) | 675 |
| | 675 |
| | — |
| | — |
| 732 |
| | 732 |
| | — |
| | — |
| Non-U.S. companies | 64 |
| | 64 |
| | — |
| | — |
| 117 |
| | 117 |
| | — |
| | — |
| Private equity investments | 12 |
| | — |
| | — |
| | 12 |
| 20 |
| | — |
| | — |
| | 20 |
| Fixed-income securities: | | | | | | | | | | | | | | | Corporate bonds (b) | | 1,600 |
| | — |
| | 1,600 |
| | — |
| Treasury securities | 261 |
| | — |
| | 261 |
| | — |
| 1,410 |
| | — |
| | 1,410 |
| | — |
| Corporate bonds (b) | 1,986 |
| | — |
| | 1,986 |
| | — |
| | Commingled funds: | | | | | | | | | | | | | | | Equity funds | 4,006 |
| | — |
| | 4,006 |
| | — |
| 5,243 |
| | — |
| | 5,243 |
| | — |
| Fixed-income funds | 560 |
| | — |
| | 560 |
| | — |
| 624 |
| | — |
| | 624 |
| | — |
| Real estate funds | 380 |
| | — |
| | — |
| | 380 |
| 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 | 445 |
| | — |
| | — |
| | 445 |
| 910 |
| | | | | | | Other investments: | | | | | | | | | Insurance deposit agreements | 103 |
| | — |
| | — |
| | 103 |
| | Real estate funds | | 420 |
| | | | | | | Fixed-income funds | | 101 |
| | | | | | | Equity funds | | 86 |
| | | | | | | Total pension plan assets | $ | 8,608 |
| | $ | 751 |
| | $ | 6,917 |
| | $ | 940 |
| $ | 11,532 |
| |
| |
| |
|
| | (a) | No single equity holding amounted to more than 1 percent of the total fair value. |
| | (b) | Our corporate bond investments had an average rating of BBB+. |
(a)No single equity holding amounted to more than 1% of the total fair value. 82(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) |
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, 2014 | December 31, 2017 | Cash and equivalents | $ | 94 |
| | $ | 15 |
| | $ | 79 |
| | $ | — |
| $ | 48 |
| | $ | — |
| | $ | 48 |
| | $ | — |
| Equity securities: | | | | | | | | | Equity securities (a): | | | | | | | | | U.S. companies (a) | 775 |
| | 775 |
| | — |
| | — |
| 770 |
| | 770 |
| | — |
| | — |
| Non-U.S. companies | 90 |
| | 90 |
| | — |
| | — |
| 97 |
| | 97 |
| | — |
| | — |
| Private equity investments | 9 |
| | — |
| | — |
| | 9 |
| 18 |
| | — |
| | — |
| | 18 |
| Fixed-income securities: | | | | | | | | | | | | | | | Corporate bonds (b) | | 1,604 |
| | — |
| | 1,604 |
| | — |
| Treasury securities | 292 |
| | — |
| | 292 |
| | — |
| 1,361 |
| | — |
| | 1,361 |
| | — |
| Corporate bonds (b) | 2,188 |
| | — |
| | 2,188 |
| | — |
| | Commingled funds: | | | | | | | | | | | | | | | Equity funds | 4,272 |
| | — |
| | 4,272 |
| | — |
| 5,018 |
| | — |
| | 5,018 |
| | — |
| Fixed-income funds | 606 |
| | — |
| | 606 |
| | — |
| 325 |
| | — |
| | 325 |
| | — |
| Real estate funds | 139 |
| | — |
| | — |
| | 139 |
| 51 |
| | — |
| | — |
| | 51 |
| Commodity funds | 6 |
| | — |
| | 6 |
| | — |
| | Other investments: | | | | | | | | | Insurance deposit contracts | | 120 |
| | — |
| | — |
| | 120 |
| Total plan assets in fair value hierarchy | | $ | 9,412 |
| | $ | 867 |
| | $ | 8,356 |
| | $ | 189 |
| Plan assets measured using NAV as a practical expedient (c): | | | | | | | | | Real estate funds | | 390 |
| | | | | | | Hedge funds | 510 |
| | — |
| | — |
| | 510 |
| 328 |
| | | | | | | Other investments: | | | | | | | | | Insurance deposit agreements | 103 |
| | — |
| | — |
| | 103 |
| | Total pension plan assets | $ | 9,084 |
| | $ | 880 |
| | $ | 7,443 |
| | $ | 761 |
| $ | 10,130 |
| |
|
| |
|
| |
|
|
| | (a) | No single equity holding amounted to more than 1 percentNo 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.
|
| | (b) | Our corporate bond investments had an average rating of A-. |
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, 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. | | | | | | | | | | | | | | | | | |
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, 2015 | Cash and equivalents | $ | 79 |
| | $ | — |
| | $ | 79 |
| | $ | — |
| Equity securities | 77 |
| | 77 |
| | — |
| | — |
| Fixed-income securities | 21 |
| | — |
| | 21 |
| | — |
| Commingled funds: | | | | | | | | Equity funds | 246 |
| | — |
| | 246 |
| | — |
| Fixed-income funds | 99 |
| | — |
| | 99 |
| | — |
| Real estate funds | 3 |
| | 2 |
| | — |
| | 1 |
| Hedge funds | 2 |
| | — |
| | — |
| | 2 |
| Total other post-retirement plan assets | $ | 527 |
| | $ | 79 |
| | $ | 445 |
| | $ | 3 |
|
(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) | |
Significant Unobservable Inputs (Level 3) |
Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | Asset Category(a) | December 31, 2014 | December 31, 2017 | Cash and equivalents | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
| $ | 18 |
| | $ | — |
| | $ | 18 |
| Equity securities | 164 |
| | 164 |
| | — |
| | — |
| 70 |
| | 70 |
| | — |
| Fixed-income securities | 10 |
| | — |
| | 10 |
| | — |
| 89 |
| | — |
| | 89 |
| Commingled funds: | | | | | | | | | | | | | Equity funds | 314 |
| | 5 |
| | 309 |
| | — |
| 260 |
| | — |
| | 260 |
| Fixed-income funds | 57 |
| | 6 |
| | 51 |
| | — |
| 99 |
| | — |
| | 99 |
| Real estate funds | 3 |
| | 3 |
| | — |
| | — |
| 2 |
| | 2 |
| | — |
| Total plan assets in fair value hierarchy | | $ | 538 |
| | $ | 72 |
| | $ | 466 |
| Plan assets measured using NAV as a practical expedient (b): | | | | | | | Real estate funds | | 2 |
| | | | | Hedge funds | 2 |
| | — |
| | — |
| | 2 |
| 1 |
| | | | | Total other post-retirement plan assets | $ | 553 |
| | $ | 178 |
| | $ | 373 |
| | $ | 2 |
| | Total other post-retirement benefit plan assets | | $ | 541 |
| |
|
| |
|
|
(a) We had no Level 3 investments on December 31, 2017. (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 20152018 and 20142017 were as follows: | | | Private Equity Investments | | Real Estate Funds | | Hedge Funds | | Insurance Deposits Agreements | | Total Level 3 Assets | Private Equity Investments | | Real Estate Funds | | Insurance Deposits Contracts | | Total Level 3 Assets | December 31, 2013 | $ | 10 |
| | $ | 34 |
| | $ | 473 |
| | $ | 115 |
| | $ | 632 |
| | Actual return on plan assets: | | | | | | | | |
| | Unrealized gains, net | (2 | ) | | 9 |
| | 39 |
| | (12 | ) | | 34 |
| | Purchases, sales, and settlements, net | 1 |
| | 96 |
| | — |
| | — |
| | 97 |
| | December 31, 2014 | 9 |
| | 139 |
| | 512 |
| | 103 |
| | 763 |
| | December 31, 2016 | | $ | 13 |
| | $ | 42 |
| | $ | 109 |
| | $ | 164 |
| Actual return on plan assets: |
| |
| |
| |
| |
| | | | | | |
| Unrealized gains, net | 1 |
| | 15 |
| | 14 |
| | 2 |
| | 32 |
| 1 |
| | 4 |
| | 4 |
| | 9 |
| Realized gains, net | — |
| | — |
| | 6 |
| | — |
| | 6 |
| — |
| | — |
| | 2 |
| | 2 |
| Purchases, sales, and settlements, net | 2 |
| | 227 |
| | (85 | ) | | (2 | ) | | 142 |
| | December 31, 2015 | $ | 12 |
| | $ | 381 |
| | $ | 447 |
| | $ | 103 |
| | $ | 943 |
| | Purchases, sales and settlements, net | | 4 |
| | 5 |
| | 5 |
| | 14 |
| 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 |
|
Q. BUSINESS GROUPR. SEGMENT INFORMATION
We operate in four business groups:have five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems, and Technology and Marine Systems. We organize our business groupssegments in accordance with the nature of products and services offered. We measure each group’ssegment’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 business groups.segments.
Summary financial information for each of our business groupssegments follows: | | | Revenue | Operating Earnings | Revenue from U.S. Government | Revenue | | Operating Earnings | | Revenue from U.S. Government | Year Ended December 31 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | | 2018 | 2017 | 2016 | | 2018 | 2017 | 2016 | Aerospace | $ | 8,851 |
| $ | 8,649 |
| $ | 8,118 |
| $ | 1,706 |
| $ | 1,611 |
| $ | 1,416 |
| $ | 104 |
| $ | 99 |
| $ | 98 |
| $ | 8,455 |
| $ | 8,129 |
| $ | 7,815 |
| | $ | 1,490 |
| $ | 1,577 |
| $ | 1,394 |
| | $ | 334 |
| $ | 231 |
| $ | 361 |
| Combat Systems | 5,640 |
| 5,732 |
| 5,832 |
| 882 |
| 862 |
| 908 |
| 2,583 |
| 2,970 |
| 4,057 |
| 6,241 |
| 5,949 |
| 5,530 |
| | 962 |
| 937 |
| 831 |
| | 3,228 |
| 3,084 |
| 2,614 |
| Information Systems and Technology | 8,965 |
| 9,159 |
| 10,268 |
| 903 |
| 785 |
| 795 |
| 7,856 |
| 7,985 |
| 8,572 |
| | Information Technology | | 8,269 |
| 4,410 |
| 4,428 |
| | 608 |
| 373 |
| 340 |
| | 8,025 |
| 4,164 |
| 4,147 |
| Mission Systems | | 4,726 |
| 4,481 |
| 4,716 |
| | 659 |
| 638 |
| 601 |
| | 3,774 |
| 3,629 |
| 3,837 |
| Marine Systems | 8,013 |
| 7,312 |
| 6,712 |
| 728 |
| 703 |
| 666 |
| 7,438 |
| 6,901 |
| 6,536 |
| 8,502 |
| 8,004 |
| 8,072 |
| | 761 |
| 685 |
| 595 |
| | 8,245 |
| 7,913 |
| 7,717 |
| Corporate* | — |
| — |
| — |
| (41 | ) | (72 | ) | (96 | ) | — |
| — |
| — |
| | Corporate | | — |
| — |
| — |
| | (23 | ) | 26 |
| (17 | ) | | — |
| — |
| — |
| Total | $ | 31,469 |
| $ | 30,852 |
| $ | 30,930 |
| $ | 4,178 |
| $ | 3,889 |
| $ | 3,689 |
| $ | 17,981 |
| $ | 17,955 |
| $ | 19,263 |
| $ | 36,193 |
| $ | 30,973 |
| $ | 30,561 |
| | $ | 4,457 |
| $ | 4,236 |
| $ | 3,744 |
| | $ | 23,606 |
| $ | 19,021 |
| $ | 18,676 |
|
Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. ASU 2017-07 requires the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) to be reported in other income (expense) in the Consolidated Statement of Earnings. In our defense segments, as described in Note Q, pension and other post-retirement benefit costs are allocable contract costs. For these segments, we report the offset for the non-service cost components in Corporate operating results. 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 | Identifiable Assets | | Capital Expenditures | | Depreciation and Amortization | Year Ended December 31 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | | 2018 | 2017 | 2016 | | 2018 | 2017 | 2016 | Aerospace | $ | 8,358 |
| $ | 8,245 |
| $ | 8,005 |
| $ | 210 |
| $ | 227 |
| $ | 250 |
| $ | 147 |
| $ | 137 |
| $ | 123 |
| $ | 11,220 |
| $ | 10,126 |
| $ | 9,792 |
| | $ | 194 |
| $ | 132 |
| $ | 125 |
| | $ | 154 |
| $ | 147 |
| $ | 153 |
| Combat Systems | 8,800 |
| 9,487 |
| 9,002 |
| 79 |
| 46 |
| 50 |
| 91 |
| 100 |
| 113 |
| 9,853 |
| 9,846 |
| 8,885 |
| | 91 |
| 84 |
| 71 |
| | 87 |
| 86 |
| 86 |
| Information Systems and Technology | 8,577 |
| 9,064 |
| 9,432 |
| 73 |
| 54 |
| 52 |
| 131 |
| 146 |
| 178 |
| | Information Technology | | 14,159 |
| 3,021 |
| 2,778 |
| | 62 |
| 16 |
| 10 |
| | 333 |
| 32 |
| 42 |
| Mission Systems | | 5,984 |
| 5,856 |
| 5,667 |
| | 49 |
| 47 |
| 87 |
| | 65 |
| 60 |
| 61 |
| Marine Systems | 2,970 |
| 3,110 |
| 3,088 |
| 166 |
| 124 |
| 83 |
| 106 |
| 106 |
| 103 |
| 3,130 |
| 2,906 |
| 3,063 |
| | 243 |
| 123 |
| 92 |
| | 116 |
| 109 |
| 105 |
| Corporate* | 3,292 |
| 5,431 |
| 5,946 |
| 41 |
| 70 |
| 1 |
| 7 |
| 7 |
| 8 |
| 1,062 |
| 3,291 |
| 2,987 |
| | 51 |
| 26 |
| 7 |
| | 8 |
| 7 |
| 6 |
| Total | $ | 31,997 |
| $ | 35,337 |
| $ | 35,473 |
| $ | 569 |
| $ | 521 |
| $ | 436 |
| $ | 482 |
| $ | 496 |
| $ | 525 |
| $ | 45,408 |
| $ | 35,046 |
| $ | 33,172 |
| | $ | 690 |
| $ | 428 |
| $ | 392 |
| | $ | 763 |
| $ | 441 |
| $ | 453 |
|
* Corporate operating results consist primarily of stock option expense. 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 | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | North America: | | | | | | | | | | | United States | $ | 23,257 |
| | $ | 23,222 |
| | $ | 24,646 |
| $ | 28,578 |
| | $ | 23,519 |
| | $ | 23,160 |
| Other | 1,080 |
| | 1,174 |
| | 959 |
| 755 |
| | 915 |
| | 709 |
| Total North America | 24,337 |
| | 24,396 |
| | 25,605 |
| 29,333 |
| | 24,434 |
| | 23,869 |
| Europe | 2,485 |
| | 2,410 |
| | 2,795 |
| 2,772 |
| | 2,558 |
| | 2,152 |
| Asia/Pacific | 1,678 |
| | 1,608 |
| | 1,466 |
| 2,252 |
| | 2,011 |
| | 1,650 |
| Africa/Middle East | 2,508 |
| | 2,163 |
| | 736 |
| 1,565 |
| | 1,655 |
| | 2,617 |
| South America | 461 |
| | 275 |
| | 328 |
| 271 |
| | 315 |
| | 273 |
| Total revenue | $ | 31,469 |
| | $ | 30,852 |
| | $ | 30,930 |
| $ | 36,193 |
| | $ | 30,973 |
| | $ | 30,561 |
|
Our revenue from non-U.S. operations was $3.7$4.2 billion in 2015, $3.62018 and $3.7 billion in 20142017 and$3.3 billion 2016, and earnings from continuing operations before income taxes from non-U.S. operations were $578 in 2013.2018, $550 in 2017 and $530 in 2016. The long-lived assets associated with these operations were 5 percent3% of our total long-lived assets on December 31, 2015,2018, and 6 percent on5% for December 31, 2014.2017 and 2016.
R.S. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed-ratefixed- and floating-rate notes described in Note JK are fully and unconditionally guaranteed on an unsecured, joint and several basis by certainseveral of our 100-percent-owned%-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.
R. CONDENSED CONSOLIDATING STATEMENTSSTATEMENT OF EARNINGS
| | Year Ended December 31, 2015 | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | | Revenue | $ | — |
| $ | 27,398 |
| $ | 4,071 |
| $ | — |
| $ | 31,469 |
| | Cost of sales | (6 | ) | 22,191 |
| 3,154 |
| — |
| 25,339 |
| | G&A | 46 |
| 1,609 |
| 297 |
| — |
| 1,952 |
| | Operating earnings | (40 | ) | 3,598 |
| 620 |
| — |
| 4,178 |
| | Interest, net | (89 | ) | (1 | ) | 7 |
| — |
| (83 | ) | | Other, net | 4 |
| 2 |
| 1 |
| — |
| 7 |
| | Earnings before income tax | (125 | ) | 3,599 |
| 628 |
| — |
| 4,102 |
| | Provision for income tax, net | (151 | ) | 1,154 |
| 134 |
| — |
| 1,137 |
| | Equity in net earnings of subsidiaries | 2,939 |
| — |
| — |
| (2,939 | ) | — |
| | Net earnings | $ | 2,965 |
| $ | 2,445 |
| $ | 494 |
| $ | (2,939 | ) | $ | 2,965 |
| | Comprehensive income | $ | 2,611 |
| $ | 2,653 |
| $ | (178 | ) | $ | (2,475 | ) | $ | 2,611 |
| | | | | Year Ended December 31, 2014 | | | Year Ended December 31, 2018 | | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | Revenue | $ | — |
| $ | 26,819 |
| $ | 4,033 |
| $ | — |
| $ | 30,852 |
| $ | — |
| $ | 28,132 |
| $ | 8,061 |
| $ | — |
| $ | 36,193 |
| Cost of sales | 9 |
| 21,792 |
| 3,178 |
| — |
| 24,979 |
| 67 |
| (22,841 | ) | (6,704 | ) | — |
| (29,478 | ) | G&A | 62 |
| 1,633 |
| 289 |
| — |
| 1,984 |
| (90 | ) | (1,638 | ) | (530 | ) | — |
| (2,258 | ) | Operating earnings | (71 | ) | 3,394 |
| 566 |
| — |
| 3,889 |
| (23 | ) | 3,653 |
| 827 |
| — |
| 4,457 |
| Interest, net | (93 | ) | — |
| 7 |
| — |
| (86 | ) | (326 | ) | — |
| (30 | ) | — |
| (356 | ) | Other, net | — |
| (2 | ) | 1 |
| — |
| (1 | ) | (81 | ) | 12 |
| 53 |
| — |
| (16 | ) | Earnings before income tax | (164 | ) | 3,392 |
| 574 |
| — |
| 3,802 |
| (430 | ) | 3,665 |
| 850 |
| — |
| 4,085 |
| Provision for income tax, net | (54 | ) | 1,099 |
| 84 |
| — |
| 1,129 |
| 116 |
| (677 | ) | (166 | ) | — |
| (727 | ) | Discontinued operations, net of tax | (140 | ) | — |
| — |
| — |
| (140 | ) | (13 | ) | — |
| — |
| — |
| (13 | ) | Equity in net earnings of subsidiaries | 2,783 |
| — |
| — |
| (2,783 | ) | — |
| 3,672 |
| — |
| — |
| (3,672 | ) | — |
| Net earnings | $ | 2,533 |
| $ | 2,293 |
| $ | 490 |
| $ | (2,783 | ) | $ | 2,533 |
| $ | 3,345 |
| $ | 2,988 |
| $ | 684 |
| $ | (3,672 | ) | $ | 3,345 |
| Comprehensive income | $ | 786 |
| $ | 2,147 |
| $ | (125 | ) | $ | (2,022 | ) | $ | 786 |
| $ | 3,025 |
| $ | 2,992 |
| $ | 305 |
| $ | (3,297 | ) | $ | 3,025 |
| | | | Year Ended December 31, 2013 | | | 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 |
| | | | Year Ended December 31, 2016 | | | Revenue | $ | — |
| $ | 27,272 |
| $ | 3,658 |
| $ | — |
| $ | 30,930 |
| $ | — |
| $ | 26,573 |
| $ | 3,988 |
| $ | — |
| $ | 30,561 |
| Cost of sales | 20 |
| 22,175 |
| 3,007 |
| — |
| 25,202 |
| 21 |
| (21,811 | ) | (3,106 | ) | — |
| (24,896 | ) | G&A | 74 |
| 1,664 |
| 301 |
| — |
| 2,039 |
| (37 | ) | (1,568 | ) | (316 | ) | — |
| (1,921 | ) | Operating earnings | (94 | ) | 3,433 |
| 350 |
| — |
| 3,689 |
| (16 | ) | 3,194 |
| 566 |
| — |
| 3,744 |
| Interest, net | (93 | ) | 1 |
| 6 |
| — |
| (86 | ) | (91 | ) | (2 | ) | 2 |
| — |
| (91 | ) | Other, net | 1 |
| 6 |
| 1 |
| — |
| 8 |
| (11 | ) | 5 |
| 9 |
| — |
| 3 |
| Earnings before income tax | (186 | ) | 3,440 |
| 357 |
| — |
| 3,611 |
| (118 | ) | 3,197 |
| 577 |
| — |
| 3,656 |
| Provision for income tax, net | (51 | ) | 1,058 |
| 118 |
| — |
| 1,125 |
| 121 |
| (1,055 | ) | (43 | ) | — |
| (977 | ) | Discontinued operations, net of tax | (129 | ) | — |
| — |
| — |
| (129 | ) | (107 | ) | — |
| — |
| — |
| (107 | ) | Equity in net earnings of subsidiaries | 2,621 |
| — |
| — |
| (2,621 | ) | — |
| 2,676 |
| — |
| — |
| (2,676 | ) | — |
| Net earnings | $ | 2,357 |
| $ | 2,382 |
| $ | 239 |
| $ | (2,621 | ) | $ | 2,357 |
| $ | 2,572 |
| $ | 2,142 |
| $ | 534 |
| $ | (2,676 | ) | $ | 2,572 |
| Comprehensive income | $ | 3,947 |
| $ | 2,820 |
| $ | 196 |
| $ | (3,016 | ) | $ | 3,947 |
| $ | 2,468 |
| $ | 2,112 |
| $ | 543 |
| $ | (2,655 | ) | $ | 2,468 |
|
R. CONDENSED CONSOLIDATING BALANCE SHEET
| | December 31, 2015 | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | | 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 | $ | 1,732 |
| $ | — |
| $ | 1,053 |
| $ | — |
| $ | 2,785 |
| $ | 460 |
| $ | — |
| $ | 503 |
| $ | — |
| $ | 963 |
| Accounts receivable | — |
| 1,181 |
| 2,265 |
| — |
| 3,446 |
| — |
| 1,171 |
| 2,588 |
| — |
| 3,759 |
| Contracts in process | 514 |
| 2,795 |
| 1,048 |
| — |
| 4,357 |
| | Unbilled receivables | | — |
| 2,758 |
| 3,818 |
| — |
| 6,576 |
| Inventories | | — |
| 5,855 |
| 122 |
| — |
| 5,977 |
| Work in process | — |
| 1,882 |
| 7 |
| — |
| 1,889 |
| | Raw materials | — |
| 1,344 |
| 32 |
| — |
| 1,376 |
| | Finished goods | — |
| 23 |
| 5 |
| — |
| 28 |
| | Pre-owned aircraft | — |
| 73 |
| — |
| — |
| 73 |
| | Other current assets | 140 |
| 213 |
| 264 |
| — |
| 617 |
| (45 | ) | 441 |
| 518 |
| — |
| 914 |
| Total current assets | 2,386 |
| 7,511 |
| 4,674 |
| — |
| 14,571 |
| 415 |
| 10,225 |
| 7,549 |
| — |
| 18,189 |
| Noncurrent assets: | | | Property, plant and equipment | 189 |
| 6,386 |
| 1,101 |
| — |
| 7,676 |
| | PP&E | | 273 |
| 7,197 |
| 1,933 |
| — |
| 9,403 |
| Accumulated depreciation of PP&E | (59 | ) | (3,462 | ) | (689 | ) | — |
| (4,210 | ) | (83 | ) | (4,075 | ) | (897 | ) | — |
| (5,055 | ) | Intangible assets | — |
| 1,445 |
| 909 |
| — |
| 2,354 |
| | Accumulated amortization of intangible assets | — |
| (1,122 | ) | (469 | ) | — |
| (1,591 | ) | | Intangible assets, net | | — |
| 251 |
| 2,334 |
| — |
| 2,585 |
| Goodwill | — |
| 8,040 |
| 3,403 |
| — |
| 11,443 |
| — |
| 8,031 |
| 11,563 |
| — |
| 19,594 |
| Other assets | 1,379 |
| 207 |
| 168 |
| — |
| 1,754 |
| 195 |
| 258 |
| 239 |
| — |
| 692 |
| Investment in subsidiaries | 40,062 |
| — |
| — |
| (40,062 | ) | — |
| | Net investment in subsidiaries | | 25,313 |
| — |
| — |
| (25,313 | ) | — |
| Total noncurrent assets | 41,571 |
| 11,494 |
| 4,423 |
| (40,062 | ) | 17,426 |
| 25,698 |
| 11,662 |
| 15,172 |
| (25,313 | ) | 27,219 |
| Total assets | $ | 43,957 |
| $ | 19,005 |
| $ | 9,097 |
| $ | (40,062 | ) | $ | 31,997 |
| $ | 26,113 |
| $ | 21,887 |
| $ | 22,721 |
| $ | (25,313 | ) | $ | 45,408 |
| | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | Current liabilities: | | | Short-term debt | $ | 500 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 501 |
| | Short-term debt and current portion of long-term debt | | $ | 850 |
| $ | — |
| $ | 123 |
| $ | — |
| $ | 973 |
| Customer advances and deposits | — |
| 3,038 |
| 2,636 |
| — |
| 5,674 |
| — |
| 4,541 |
| 2,729 |
| — |
| 7,270 |
| Other current liabilities | 1,331 |
| 3,309 |
| 1,630 |
| — |
| 6,270 |
| 552 |
| 3,944 |
| 2,000 |
| — |
| 6,496 |
| Total current liabilities | 1,831 |
| 6,348 |
| 4,266 |
| — |
| 12,445 |
| 1,402 |
| 8,485 |
| 4,852 |
| — |
| 14,739 |
| Noncurrent liabilities: | | | Long-term debt | 2,874 |
| 24 |
| — |
| — |
| 2,898 |
| 11,398 |
| 39 |
| 7 |
| — |
| 11,444 |
| Other liabilities | 3,417 |
| 2,021 |
| 478 |
| — |
| 5,916 |
| 1,581 |
| 4,073 |
| 1,839 |
| — |
| 7,493 |
| Total noncurrent liabilities | 6,291 |
| 2,045 |
| 478 |
| — |
| 8,814 |
| 12,979 |
| 4,112 |
| 1,846 |
| — |
| 18,937 |
| Intercompany | 25,097 |
| (23,816 | ) | (1,281 | ) | — |
| — |
| | Shareholders’ equity: | | | Common stock | 482 |
| 6 |
| 2,354 |
| (2,360 | ) | 482 |
| | Other shareholders’ equity | 10,256 |
| 34,422 |
| 3,280 |
| (37,702 | ) | 10,256 |
| | Total shareholders’ equity | 10,738 |
| 34,428 |
| 5,634 |
| (40,062 | ) | 10,738 |
| 11,732 |
| 9,290 |
| 16,023 |
| (25,313 | ) | 11,732 |
| Total liabilities and shareholders’ equity | $ | 43,957 |
| $ | 19,005 |
| $ | 9,097 |
| $ | (40,062 | ) | $ | 31,997 |
| $ | 26,113 |
| $ | 21,887 |
| $ | 22,721 |
| $ | (25,313 | ) | $ | 45,408 |
|
R. CONDENSED CONSOLIDATING BALANCE SHEET
| | December 31, 2014 | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | | December 31, 2017 | | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | | | | ASSETS | | | Current assets: | | | Cash and equivalents | $ | 2,536 |
| $ | — |
| $ | 1,852 |
| $ | — |
| $ | 4,388 |
| $ | 1,930 |
| $ | — |
| $ | 1,053 |
| $ | — |
| $ | 2,983 |
| Accounts receivable | — |
| 1,379 |
| 2,671 |
| — |
| 4,050 |
| — |
| 1,259 |
| 2,358 |
| — |
| 3,617 |
| Contracts in process | 542 |
| 2,966 |
| 1,083 |
| — |
| 4,591 |
| | Unbilled receivables | | — |
| 2,547 |
| 2,693 |
| — |
| 5,240 |
| Inventories | | — |
| 5,216 |
| 87 |
| — |
| 5,303 |
| Work in process | — |
| 1,818 |
| 10 |
| — |
| 1,828 |
| | Raw materials | — |
| 1,260 |
| 30 |
| — |
| 1,290 |
| | Finished goods | — |
| 20 |
| 8 |
| — |
| 28 |
| | Pre-owned aircraft | — |
| 75 |
| — |
| — |
| 75 |
| | Other current assets | 781 |
| 215 |
| 161 |
| — |
| 1,157 |
| 351 |
| 461 |
| 373 |
| — |
| 1,185 |
| Total current assets | 3,859 |
| 7,733 |
| 5,815 |
| — |
| 17,407 |
| 2,281 |
| 9,483 |
| 6,564 |
| — |
| 18,328 |
| Noncurrent assets: | | | Property, plant and equipment | 148 |
| 6,035 |
| 1,109 |
| — |
| 7,292 |
| | PP&E | | 221 |
| 6,779 |
| 1,237 |
| — |
| 8,237 |
| Accumulated depreciation of PP&E | (52 | ) | (3,246 | ) | (665 | ) | — |
| (3,963 | ) | (75 | ) | (3,869 | ) | (776 | ) | — |
| (4,720 | ) | Intangible assets | — |
| 1,484 |
| 914 |
| — |
| 2,398 |
| | Accumulated amortization of intangible assets | — |
| (1,042 | ) | (444 | ) | — |
| (1,486 | ) | | Intangible assets, net | | — |
| 287 |
| 415 |
| — |
| 702 |
| Goodwill | — |
| 8,095 |
| 3,636 |
| — |
| 11,731 |
| — |
| 8,320 |
| 3,594 |
| — |
| 11,914 |
| Other assets | 1,461 |
| 213 |
| 284 |
| — |
| 1,958 |
| 199 |
| 232 |
| 154 |
| — |
| 585 |
| Investment in subsidiaries | 37,449 |
| — |
| — |
| (37,449 | ) | — |
| | Net investment in subsidiaries | | 15,771 |
| — |
| — |
| (15,771 | ) | — |
| Total noncurrent assets | 39,006 |
| 11,539 |
| 4,834 |
| (37,449 | ) | 17,930 |
| 16,116 |
| 11,749 |
| 4,624 |
| (15,771 | ) | 16,718 |
| Total assets | $ | 42,865 |
| $ | 19,272 |
| $ | 10,649 |
| $ | (37,449 | ) | $ | 35,337 |
| $ | 18,397 |
| $ | 21,232 |
| $ | 11,188 |
| $ | (15,771 | ) | $ | 35,046 |
| | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | Current liabilities: | | | Short-term debt | $ | 500 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 501 |
| | Short-term debt and current portion of long-term debt | | $ | — |
| $ | 1 |
| $ | 1 |
| $ | — |
| $ | 2 |
| Customer advances and deposits | — |
| 3,529 |
| 3,806 |
| — |
| 7,335 |
| — |
| 4,180 |
| 2,812 |
| — |
| 6,992 |
| Other current liabilities | 1,298 |
| 3,511 |
| 1,106 |
| — |
| 5,915 |
| 561 |
| 3,758 |
| 1,786 |
| — |
| 6,105 |
| Total current liabilities | 1,798 |
| 7,041 |
| 4,912 |
| — |
| 13,751 |
| 561 |
| 7,939 |
| 4,599 |
| — |
| 13,099 |
| Noncurrent liabilities: | | | Long-term debt | 3,368 |
| 24 |
| — |
| — |
| 3,392 |
| 3,950 |
| 21 |
| 9 |
| — |
| 3,980 |
| Other liabilities | 3,514 |
| 2,369 |
| 482 |
| — |
| 6,365 |
| 2,451 |
| 3,473 |
| 608 |
| — |
| 6,532 |
| Total noncurrent liabilities | 6,882 |
| 2,393 |
| 482 |
| — |
| 9,757 |
| 6,401 |
| 3,494 |
| 617 |
| — |
| 10,512 |
| Intercompany | 22,356 |
| (22,557 | ) | 201 |
| — |
| — |
| | Shareholders’ equity: | | | Common stock | 482 |
| 6 |
| 2,043 |
| (2,049 | ) | 482 |
| | Other shareholders’ equity | 11,347 |
| 32,389 |
| 3,011 |
| (35,400 | ) | 11,347 |
| | Total shareholders’ equity | 11,829 |
| 32,395 |
| 5,054 |
| (37,449 | ) | 11,829 |
| 11,435 |
| 9,799 |
| 5,972 |
| (15,771 | ) | 11,435 |
| Total liabilities and shareholders’ equity | $ | 42,865 |
| $ | 19,272 |
| $ | 10,649 |
| $ | (37,449 | ) | $ | 35,337 |
| $ | 18,397 |
| $ | 21,232 |
| $ | 11,188 |
| $ | (15,771 | ) | $ | 35,046 |
|
R. CONDENSED CONSOLIDATING STATEMENTSSTATEMENT OF CASH FLOWS
| | Year Ended December 31, 2015 | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | | Year Ended December 31, 2018 | | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | Net cash provided by operating activities* | $ | (58 | ) | $ | 2,202 |
| $ | 355 |
| $ | — |
| $ | 2,499 |
| $ | (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 | (42 | ) | (475 | ) | (52 | ) | — |
| (569 | ) | (51 | ) | (513 | ) | (126 | ) | — |
| (690 | ) | Maturities of held-to-maturity securities | 500 |
| — |
| — |
| — |
| 500 |
| | Proceeds from sales of assets | 162 |
| 129 |
| — |
| — |
| 291 |
| 90 |
| 472 |
| — |
| — |
| 562 |
| Other, net | 4 |
| (26 | ) | — |
| — |
| (22 | ) | 4 |
| (12 | ) | 1 |
| — |
| (7 | ) | Net cash provided by investing activities | 624 |
| (372 | ) | (52 | ) | — |
| 200 |
| | 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 | (3,233 | ) | — |
| — |
| — |
| (3,233 | ) | (1,769 | ) | — |
| — |
| — |
| (1,769 | ) | Dividends paid | (873 | ) | — |
| — |
| — |
| (873 | ) | (1,075 | ) | — |
| — |
| — |
| (1,075 | ) | Repayment of fixed-rate notes | (500 | ) | — |
| — |
| — |
| (500 | ) | | Proceeds from stock option exercises | 268 |
| — |
| — |
| — |
| 268 |
| | Proceeds from floating-rate notes | | 1,000 |
| — |
| — |
| — |
| 1,000 |
| Proceeds from commercial paper, net | | 851 |
| — |
| — |
| — |
| 851 |
| Repayment of CSRA accounts receivable purchase agreement | | — |
| — |
| (450 | ) | — |
| (450 | ) | Other, net | 77 |
| 2 |
| — |
| — |
| 79 |
| 2 |
| 35 |
| 31 |
| — |
| 68 |
| Net cash used by financing activities | (4,261 | ) | 2 |
| — |
| — |
| (4,259 | ) | | Net cash provided by financing activities | | 5,470 |
| 35 |
| (419 | ) | — |
| 5,086 |
| Net cash used by discontinued operations | (43 | ) | — |
| — |
| — |
| (43 | ) | (20 | ) | — |
| — |
| — |
| (20 | ) | Cash sweep/funding by parent | 2,934 |
| (1,832 | ) | (1,102 | ) | — |
| — |
| 3,365 |
| (2,862 | ) | (503 | ) | — |
| — |
| Net decrease in cash and equivalents | (804 | ) | — |
| (799 | ) | — |
| (1,603 | ) | (1,470 | ) | — |
| (550 | ) | — |
| (2,020 | ) | Cash and equivalents at beginning of year | 2,536 |
| — |
| 1,852 |
| — |
| 4,388 |
| 1,930 |
| — |
| 1,053 |
| — |
| 2,983 |
| Cash and equivalents at end of year | $ | 1,732 |
| $ | — |
| $ | 1,053 |
| $ | — |
| $ | 2,785 |
| $ | 460 |
| $ | — |
| $ | 503 |
| $ | — |
| $ | 963 |
| | | | Year Ended December 31, 2014 | | | Year Ended December 31, 2017 | | | Net cash provided by operating activities* | $ | (296 | ) | $ | 2,798 |
| $ | 1,226 |
| $ | — |
| $ | 3,728 |
| $ | 312 |
| $ | 2,371 |
| $ | 1,193 |
| $ | — |
| $ | 3,876 |
| Cash flows from investing activities: | | | Capital expenditures | (71 | ) | (409 | ) | (41 | ) | — |
| (521 | ) | (26 | ) | (330 | ) | (72 | ) | — |
| (428 | ) | Purchases of held-to-maturity securities | (500 | ) | — |
| — |
| — |
| (500 | ) | | Business acquisitions, net of cash acquired | | — |
| (350 | ) | (49 | ) | — |
| (399 | ) | Other, net | 3 |
| (74 | ) | (10 | ) | — |
| (81 | ) | 10 |
| 31 |
| (2 | ) | — |
| 39 |
| Net cash used by investing activities | (568 | ) | (483 | ) | (51 | ) | — |
| (1,102 | ) | (16 | ) | (649 | ) | (123 | ) | — |
| (788 | ) | Cash flows from financing activities: | | | Purchases of common stock | (3,382 | ) | — |
| — |
| — |
| (3,382 | ) | (1,558 | ) | — |
| — |
| — |
| (1,558 | ) | Dividends paid | (822 | ) | — |
| — |
| — |
| (822 | ) | (986 | ) | — |
| — |
| — |
| (986 | ) | Proceeds from stock option exercises | 547 |
| — |
| — |
| — |
| 547 |
| | Proceeds from fixed-rate notes | | 985 |
| — |
| — |
| — |
| 985 |
| Repayment of fixed-rate notes | | (900 | ) | — |
| — |
| — |
| (900 | ) | Other, net | 83 |
| (1 | ) | — |
| — |
| 82 |
| 63 |
| (3 | ) | — |
| — |
| 60 |
| Net cash used by financing activities | (3,574 | ) | (1 | ) | — |
| — |
| (3,575 | ) | (2,396 | ) | (3 | ) | — |
| — |
| (2,399 | ) | Net cash provided by discontinued operations | 36 |
| — |
| — |
| — |
| 36 |
| | Net cash used by discontinued operations | | (40 | ) | — |
| — |
| — |
| (40 | ) | Cash sweep/funding by parent | 2,759 |
| (2,314 | ) | (445 | ) | — |
| — |
| 2,816 |
| (1,719 | ) | (1,097 | ) | — |
| — |
| Net decrease in cash and equivalents | (1,643 | ) | — |
| 730 |
| — |
| (913 | ) | | Net increase in cash and equivalents | | 676 |
| — |
| (27 | ) | — |
| 649 |
| Cash and equivalents at beginning of year | 4,179 |
| — |
| 1,122 |
| — |
| 5,301 |
| 1,254 |
| — |
| 1,080 |
| — |
| 2,334 |
| Cash and equivalents at end of year | $ | 2,536 |
| $ | — |
| $ | 1,852 |
| $ | — |
| $ | 4,388 |
| $ | 1,930 |
| $ | — |
| $ | 1,053 |
| $ | — |
| $ | 2,983 |
|
* Continuing operations only.
R. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| | Year Ended December 31, 2013 | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | | Year Ended December 31, 2016 | | Parent | Guarantors on a Combined Basis | Other Subsidiaries on a Combined Basis | Consolidating Adjustments | Total Consolidated | Net cash provided by operating activities* | $ | (454 | ) | $ | 2,810 |
| $ | 755 |
| $ | — |
| $ | 3,111 |
| $ | 217 |
| $ | 1,881 |
| $ | 65 |
| $ | — |
| $ | 2,163 |
| Cash flows from investing activities: | | | Capital expenditures | (1 | ) | (381 | ) | (54 | ) | — |
| (436 | ) | (8 | ) | (336 | ) | (48 | ) | — |
| (392 | ) | Other, net | 3 |
| 59 |
| 11 |
| — |
| 73 |
| 7 |
| 32 |
| (38 | ) | — |
| 1 |
| Net cash used by investing activities | 2 |
| (322 | ) | (43 | ) | — |
| (363 | ) | (1 | ) | (304 | ) | (86 | ) | — |
| (391 | ) | Cash flows from financing activities: | | | Purchases of common stock | (740 | ) | — |
| — |
| — |
| (740 | ) | (1,996 | ) | — |
| — |
| — |
| (1,996 | ) | Proceeds from fixed-rate notes | | 992 |
| — |
| — |
| — |
| 992 |
| Dividends paid | (591 | ) | — |
| — |
| — |
| (591 | ) | (911 | ) | — |
| — |
| — |
| (911 | ) | Repayment of fixed-rate notes | | (500 | ) | — |
| — |
| — |
| (500 | ) | Proceeds from stock option exercises | 583 |
| — |
| — |
| — |
| 583 |
| 292 |
| — |
| — |
| — |
| 292 |
| Other, net | 23 |
| — |
| — |
| — |
| 23 |
| (45 | ) | (1 | ) | — |
| — |
| (46 | ) | Net cash used by financing activities | (725 | ) | — |
| — |
| — |
| (725 | ) | (2,168 | ) | (1 | ) | — |
| — |
| (2,169 | ) | Net cash used by discontinued operations | (18 | ) | — |
| — |
| — |
| (18 | ) | (54 | ) | — |
| — |
| — |
| (54 | ) | Cash sweep/funding by parent | 3,074 |
| (2,488 | ) | (586 | ) | — |
| — |
| 1,528 |
| (1,576 | ) | 48 |
| — |
| — |
| Net increase in cash and equivalents | 1,879 |
| — |
| 126 |
| — |
| 2,005 |
| | Net decrease in cash and equivalents | | (478 | ) | — |
| 27 |
| — |
| (451 | ) | Cash and equivalents at beginning of year | 2,300 |
| — |
| 996 |
| — |
| 3,296 |
| 1,732 |
| — |
| 1,053 |
| — |
| 2,785 |
| Cash and equivalents at end of year | $ | 4,179 |
| $ | — |
| $ | 1,122 |
| $ | — |
| $ | 5,301 |
| $ | 1,254 |
| $ | — |
| $ | 1,080 |
| $ | — |
| $ | 2,334 |
|
* Continuing operations only.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TheTo the Board of Directors and Shareholders of General Dynamics Corporation:
Opinion on the Consolidated Financial Statements We have audited the accompanying Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries (the Company) as of December 31, 20152018 and 2014, and2017, the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows, and Shareholders’ Equity for each of the years in the three-year period ended December 31, 20152018. These, and the related notes (collectively, the Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)Statements). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and subsidiariesthe Company as of December 31, 20152018 and 2014,2017, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015,2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), General Dynamics Corporation’sthe Company’s internal control over financial reporting as of December 31, 2015,2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated February 8, 2016,13, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2002. McLean, Virginia February 8, 201613, 2019
SUPPLEMENTARY DATA (UNAUDITED) | | (Dollars in millions, except per-share amounts) | 2014 | | 2015 | 2017 | | 2018 | | 1Q | | 2Q (a) | | 3Q | | 4Q (b) | | 1Q | | 2Q | | 3Q | | 4Q | 1Q | | 2Q | | 3Q | | 4Q (a) | | 1Q | | 2Q | | 3Q | | 4Q | Revenue | $ | 7,265 |
| | $ | 7,474 |
| | $ | 7,751 |
| | $ | 8,362 |
| | $ | 7,784 |
| | $ | 7,882 |
| | $ | 7,994 |
| | $ | 7,809 |
| $ | 7,441 |
| | $ | 7,675 |
| | $ | 7,580 |
| | $ | 8,277 |
| | $ | 7,535 |
| | $ | 9,186 |
| | $ | 9,094 |
| | $ | 10,378 |
| Operating earnings | 874 |
| | 949 |
| | 999 |
| | 1,067 |
| | 1,027 |
| | 1,081 |
| | 1,034 |
| | 1,036 |
| 1,046 |
| | 1,067 |
| | 1,063 |
| | 1,060 |
| | 1,008 |
| | 1,088 |
| | 1,135 |
| | 1,226 |
| Earnings from continuing operations | 596 |
| | 646 |
| | 694 |
| | 737 |
| | 716 |
| | 752 |
| | 733 |
| | 764 |
| 763 |
| | 749 |
| | 764 |
| | 636 |
| | 799 |
| | 786 |
| | 864 |
| | 909 |
| Discontinued operations | (1 | ) | | (105 | ) | | 2 |
| | (36 | ) | | — |
| | — |
| | — |
| | — |
| | Discontinued operations, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | — |
| Net earnings | $ | 595 |
| | $ | 541 |
| | $ | 696 |
| | $ | 701 |
| | $ | 716 |
| | $ | 752 |
| | $ | 733 |
| | $ | 764 |
| $ | 763 |
| | $ | 749 |
| | $ | 764 |
| | $ | 636 |
| | $ | 799 |
| | $ | 786 |
| | $ | 851 |
| | $ | 909 |
| Earnings per share - basic (c): | | | | | | | | | | | | | | | | | Earnings per share - basic (b): | | | | | | | | | | | | | | | | | Continuing operations | $ | 1.74 |
| | $ | 1.92 |
| | $ | 2.09 |
| | $ | 2.23 |
| | $ | 2.18 |
| | $ | 2.31 |
| | $ | 2.31 |
| | $ | 2.44 |
| $ | 2.53 |
| | $ | 2.50 |
| | $ | 2.56 |
| | $ | 2.14 |
| | $ | 2.70 |
| | $ | 2.65 |
| | $ | 2.92 |
| | $ | 3.10 |
| Discontinued operations | — |
| | (0.31 | ) | | 0.01 |
| | (0.11 | ) | | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.04 | ) | | — |
| Net earnings | $ | 1.74 |
| | $ | 1.61 |
| | $ | 2.10 |
| | $ | 2.12 |
| | $ | 2.18 |
| | $ | 2.31 |
| | $ | 2.31 |
| | $ | 2.44 |
| $ | 2.53 |
| | $ | 2.50 |
| | $ | 2.56 |
| | $ | 2.14 |
| | $ | 2.70 |
| | $ | 2.65 |
| | $ | 2.88 |
| | $ | 3.10 |
| Earnings per share - diluted (c): | | | | | | | | | | | | | | | | | Earnings per share - diluted (b): | | | | | | | | | | | | | | | | | Continuing operations | $ | 1.71 |
| | $ | 1.88 |
| | $ | 2.05 |
| | $ | 2.19 |
| | $ | 2.14 |
| | $ | 2.27 |
| | $ | 2.28 |
| | $ | 2.40 |
| $ | 2.48 |
| | $ | 2.45 |
| | $ | 2.52 |
| | $ | 2.10 |
| | $ | 2.65 |
| | $ | 2.62 |
| | $ | 2.89 |
| | $ | 3.07 |
| Discontinued operations | — |
| | (0.30 | ) | | 0.01 |
| | (0.10 | ) | | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.04 | ) | | — |
| Net earnings | $ | 1.71 |
| | $ | 1.58 |
| | $ | 2.06 |
| | $ | 2.09 |
| | $ | 2.14 |
| | $ | 2.27 |
| | $ | 2.28 |
| | $ | 2.40 |
| $ | 2.48 |
| | $ | 2.45 |
| | $ | 2.52 |
| | $ | 2.10 |
| | $ | 2.65 |
| | $ | 2.62 |
| | $ | 2.85 |
| | $ | 3.07 |
| Market price range: | | | | | | | | | | | | | | | | | High | $ | 113.57 |
| | $ | 121.68 |
| | $ | 130.17 |
| | $ | 146.13 |
| | $ | 142.55 |
| | $ | 147.03 |
| | $ | 153.76 |
| | $ | 152.51 |
| | Low | 93.85 |
| | 104.22 |
| | 114.04 |
| | 114.73 |
| | 131.33 |
| | 130.91 |
| | 132.02 |
| | 136.08 |
| | Dividends declared | $ | 0.62 |
| | $ | 0.62 |
| | $ | 0.62 |
| | $ | 0.62 |
| | $ | 0.69 |
| | $ | 0.69 |
| | $ | 0.69 |
| | $ | 0.69 |
| |
Quarterly data are based on a 13-week period. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. (a)Second-quarter 2014Fourth-quarter 2017 includes $105 loss, net ofa $119 unfavorable one-time, non-cash impact resulting from the December 2017 change in tax law further discussed in discontinued operations primarilyNote F to write down the net assets of our held-for-sale axle business to their estimated fair value.Consolidated Financial Statements in Item 8. (b)Fourth-quarter 2014 includes $36 loss, net of tax, in discontinued operations primarily to record an additional loss on the sale of the axle business completed in January 2015. (c)The sum of the basic and diluted earnings per share for the four quarters of the year may differ from the annual basic and diluted earnings per share due to the required method of computing the weighted average number of shares in interim periods.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 20152018, (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act))amended). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on December 31, 2015,2018, our disclosure controls and procedures were effective. The certifications of the company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Shareholders of General Dynamics Corporation: The management of General Dynamics Corporation is responsible for establishing and maintaining adequate internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 20152018. In making this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our evaluation we believe that, as of December 31, 20152018, our internal control over financial reporting is effective based on those criteria. KPMG LLP has issued an audit report on the effectiveness of our internal control over financial reporting. The KPMG report immediately follows this report. | | | | | | | | | |
| Phebe N. Novakovic | | | | Jason W. Aiken | Chairman and Chief Executive Officer | | | | Senior Vice President and Chief Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TheTo the Board of Directors and Shareholders of General Dynamics Corporation:
Opinion on Internal Control Over Financial Reporting We have audited General Dynamics Corporation’sCorporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 20152018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). General Dynamics Corporation’sCommission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheets of the Company as of December 31, 2018 and 2017, the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows, and Shareholders’ Equity for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the Consolidated Financial Statements), and our report dated February 13, 2019, expressed an unqualified opinion on those Consolidated Financial Statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, General Dynamics Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2015 and 2014, and the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows and Shareholders’ Equity for each of the years in the three-year period ended December 31, 2015, and our report dated February 8, 2016, expressed an unqualified opinion on those Consolidated Financial Statements.
| | | | | | | McLean, Virginia | | | February 8, 201613, 2019 | | |
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no significant changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required to be set forth herein, except for the information included under Executive Officers of the Company in Part I, is included in the sections entitled “Election of the Board of Directors of the Company,” “Governance of the Company – Our Culture of Ethics,” “Audit Committee Report” and “Other Information – Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 20162019 annual shareholders meeting (the Proxy Statement), which sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION The information required to be set forth herein is included in the sections entitled “Governance of the Company – Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation Committee Report” in our Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required to be set forth herein is included in the sections entitled “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in our Proxy Statement, which sections are incorporated herein by reference.
The information required to be set forth herein with respect to securities authorized for issuance under our equity compensation plans is included in the section entitled “Equity Compensation Plan Information” in our Proxy Statement, which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required to be set forth herein is included in the sections entitled “Governance of the Company – Related Person Transactions Policy” and “Governance of the Company – Director Independence” in our Proxy Statement, which sections are incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required to be set forth herein is included in the section entitled “Selection of Independent Auditors – Audit and Non-Audit Fees” in our Proxy Statement, which section is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS 1. Consolidated Financial Statements
| | 1. | Consolidated Financial Statements |
| | | Consolidated StatementsStatement of Earnings | Consolidated StatementsStatement of Comprehensive Income | Consolidated Balance SheetsSheet | Consolidated StatementsStatement of Cash Flows | Consolidated StatementsStatement of Shareholders’ Equity | Notes to Consolidated Financial Statements (A to R)S) |
| | | | | | | 2. Exhibits | | | | | | See Index on pages 100 through 102 of this Annual Report on Form 10-K for the year ended December 31, 2015. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | GENERAL DYNAMICS CORPORATION
| | by | | | | Kimberly A. Kuryea | | | Vice President and Controller | | | | Dated: February 8, 2016 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on February 8, 2016, by the following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors.
| | | 2. | Chairman, Chief Executive Officer and Director | Phebe N. Novakovic | (Principal Executive Officer) | | |
| Senior Vice President and Chief Financial Officer | Jason W. Aiken | (Principal Financial Officer) | | | | Vice President and Controller | Kimberly A. Kuryea | (Principal Accounting Officer) | | | * | | Mary T. Barra | Director | | | * | | Nicholas D. Chabraja | Director | | | * | | James S. Crown | Director | | | * | | Rudy F. deLeon | Director | | | * | | William P. Fricks | Director | | | * | | John M. Keane | Director | | | * | | Lester L. Lyles | Director | | | * | | Mark M. Malcolm | Director | | | * | | James N. Mattis | Director | | | * | | William A. Osborn | Director | | | * | | Laura J. Schumacher | DirectorIndex to Exhibits - General Dynamics Corporation |
* By Gregory S. Gallopoulos pursuant to a Power of Attorney executed by the directors listed above, which Power of Attorney has been filed as an exhibit hereto and incorporated herein by reference thereto.
| | | | | | | | | | Gregory S. Gallopoulos | | Senior Vice President, General Counsel and Secretary |
INDEX TO EXHIBITS – GENERAL DYNAMICS CORPORATION
COMMISSION FILE NO.Commission File No. 1-3671
Exhibits listed below, which have been filed with the Commission pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and which were filed as noted below, are hereby incorporated by reference and made a part of this report with the same effect as if filed herewith. | | | Exhibit Number | Description | | | 3.1 | | | |
| | | 3.2 | | | | 4.1 | | | | 4.2 | | | | 4.3 | | | | 4.4 | | | | 4.5 | | | | 4.6 |
| | | 4.7 |
| | | 4.8 |
| | | 10.1* | | | | 10.2* | Form of Incentive Stock Option Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 5, 2009, filed with the Commission August 4, 2009) | | | 10.3* | | | | 10.4*10.3* | | | |
10.6* | | | 10.5* | | | | 10.6* | | | | 10.7* | | | | 10.8* | | | | 10.8* | Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed with the Commission August 1, 2012) | | | 10.9* | | | | 10.10* | | | | 10.11* | Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for grants beginning March 2, 2016, and including, as indicated therein, provisions for certain executive officers who are subject to the company’s Compensation Recoupment Policy) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended April 5, 2015,3, 2016, filed with the Commission April 29, 2015)27, 2016) | | | 10.11*10.12* | | | | 10.12* | Form of Restricted Stock Unit Award Agreement pursuant to the General DynamicsAmended and Restated 2012 Equity Compensation Plan (for grants beginning March 4, 2015) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended April 5, 2015, filed with the Commission April 29, 2015) | | | 10.13* | Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed with the Commission August 1, 2012) | | | 10.14* | Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for certain executive officers who are subject to the company’s Compensation Recoupment Policy) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended March 30, 2014, filed with the Commission April 23, 2014) | | |
| | | 10.15* | Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics 2012 Equity Compensation Plan (for grants beginning March 4, 2015,May 3, 2017, and including, as indicated therein, provisions for certain executive officers who are subject to the company’s Compensation Recoupment Policy) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended April 5, 2015,July 2, 2017, filed with the Commission April 29, 2015)July 26, 2017)
| | |
| | | 10.13* |
| | | 10.14* |
| | | 10.15* |
| | | 10.16* | | | | 10.17* | | | | 10.18* | Amendment to General Dynamics Corporation Supplemental Savings Plan, effective January 5, 2015 | | | 10.19* | Form of Severance Protection Agreement entered into by substantially all executive officers elected prior to April 23, 2009 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2008, filed with the Commission February 20, 2009) | | | 10.20* | Form of Severance Protection Agreement entered into by substantially all executive officers elected on or after April 23, 2009 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2009, filed with the Commission February 19, 2010) | | | 10.21* | | | | 10.22*10.20* | | | | 10.21* | | | | 10.22* | | | | 21 | Subsidiaries* | | | 23 | | | | 24 | | | | 31.1 | | | |
| | | 31.2 | | | | 32.1 | | | | 32.2 | | | | 101 | Interactive Data File** |
* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K. ** Filed or furnished herewith. In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term debt of the company are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.
ITEM 16. FORM 10-K SUMMARY None.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | GENERAL DYNAMICS CORPORATION
| | by | | | | William A. Moss | | | Vice President and Controller | | | | Dated: February 13, 2019 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 13, 2019, by the following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors.
| | | | Chairman, Chief Executive Officer and Director | Phebe N. Novakovic | (Principal Executive Officer) | | |
| Senior Vice President and Chief Financial Officer | Jason W. Aiken | (Principal Financial Officer) | | | | Vice President and Controller | William A. Moss | (Principal Accounting Officer) | | | * | | James S. Crown | Director | | | * | | Rudy F. deLeon | Director | | | * | | Lester L. Lyles | Director | | | * | | Mark M. Malcolm | Director | | | * | | C. Howard Nye | Director | | | * | | William A. Osborn | Director | | | * | | Catherine B. Reynolds | Director | | | * | | Laura J. Schumacher | Director | | | * | | Peter A. Wall | Director |
* By Gregory S. Gallopoulos pursuant to a Power of Attorney executed by the directors listed above, which Power of Attorney has been filed as an exhibit hereto and incorporated herein by reference thereto. | | | | | | | | | | Gregory S. Gallopoulos | | Senior Vice President, General Counsel and Secretary |
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