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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 20152018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 1-3671

GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1673581
State or other jurisdiction of incorporation or organization IRS Employer Identification No.
   
2941 Fairview Park Drive, Suite 100
Falls Church, Virginia
 22042-4513
Address of principal executive offices Zip code

Registrant’s telephone number, including area code:
(703) 876-3000

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common stock, par value $1 per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ü No ___
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No ü
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment ofto this Form 10-K. _ü_
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Fileraccelerated filer ü Accelerated Filerfiler __ Non-Accelerated FilerNon-accelerated filer __ Smaller Reporting Company ___reporting company __ Emerging growth company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü
The aggregate market value of the voting common equity held by non-affiliates of the registrant was $41,198,779,978$48,890,306,362 as of July 5, 20151, 2018 (based on the closing price of the shares on the New York Stock Exchange).
311,161,810288,235,928 shares of the registrant’s common stock, $1 par value per share, were outstanding on January 31, 201627, 2019.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference information from certain portions of the registrant’s definitive proxy statement for the 20162019 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.




INDEX
PART I PAGE
Item 1.
Business
3
Item 1A.
Risk Factors
1619
Item 1B.
Unresolved Staff Comments
2023
Item 2.
Properties
2024
Item 3.
Legal Proceedings
2125
Item 4.
Mine Safety Disclosures
2125
Executive Officers of the Company
25
PART II  
Item 5.
Market for the Company'sCompany’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
2326
Item 6.
Selected Financial Data
2528
Item 7.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
2629
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
5056
Item 8.
Financial Statements and Supplementary Data
5157
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
92111
Item 9A.
Controls and Procedures
92111
Item 9B.
Other Information
95114
PART III  
Item 10.
Directors, Executive Officers and Corporate Governance
95114
Item 11.
Executive Compensation
95114
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
96114
Item 13.
Certain Relationships and Related Transactions, and Director Independence
96115
Item 14.
Principal Accountant Fees and Services
96115
PART IV  
Item 15.
Index to Exhibits
96115
Item 16.
Form 10-K Summary
119
 
Signatures
97
Index to Exhibits
99120

2



PART I

(Dollars in millions, except per-share amounts or unless otherwise noted)

ITEM 1. BUSINESS
(Dollars in millions, except per-share amounts or unless otherwise noted)

BUSINESS OVERVIEW
General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; information technology (IT) services; C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutionssolutions; and information technology (IT) services;shipbuilding and shipbuilding.ship repair.
IncorporatedGeneral Dynamics was incorporated in Delaware in 1952, General Dynamics grew organically1952. Long periods of growth, organic and through acquisitions untilinorganic, defined our early history leading up to the early 1990s, when we sold nearly allshed most elements of our businesses. Inportfolio with the exception of military vehicles and submarines. We took subsequent actions beginning in the mid-1990s we began expanding again bythat laid the foundation for modern-day General Dynamics, including acquiring combat vehicle-relatedGulfstream Aerospace Corporation, combat-vehicle businesses, IT productservices and serviceC4ISR solutions companies, and additional shipyards and Gulfstream Aerospace Corporation. In the 2000s,shipyards.
During 2018, we continued to grow organicallyposition our company for future growth and acquired companies throughoutsuperior profitability. On April 3, 2018, we completed the portfolio. Today,acquisition of CSRA Inc. (CSRA), our largest acquisition to date. Combining CSRA with our General Dynamics Information Technology (GDIT) business unit created a premier provider of IT solutions to the defense, intelligence and federal civilian markets.
Concurrent with the acquisition, for segment reporting purposes, we reorganized our Information Systems and Technology operating segment into two separate segments: Information Technology and Mission Systems. Our company now has five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. The latter four segments we collectively refer to as our defense segments. Prior-period segment information has been restated for this change.
Some of our segments consist of multiple business units. Each business unit is responsible for its strategy and operational performance, emphasizing the importance of flexibility and agility for those closest to the customer. Our corporate headquarters sets the overall strategy and governance for the company and is responsible for allocating and deploying capital. Our Ethos—based upon honesty, transparency, trust and alignment—undergirds our culture, our business model and our decision-making.
We are focused on delivering superior productsshareholder returns by exceeding our customers’ expectations and servicescommitting to our customers, improving operations, generatingoperational excellence. Our priorities are executing on backlog; managing costs; implementing continuous improvement; and maximizing earnings, cash and increasing return on invested capital.
We operate through four business groups, and each group has several business units. Each of our businesses has responsibility for strategy and execution, providing the flexibility they need to stay close to their customers, perform on programs and remain agile. Our corporate headquarters is responsible for setting the overall direction of the company, the allocation of capital and promoting a culture of ethics and integrity that defines how we operate. Our management team delivers on our commitments to shareholders through disciplined execution of backlog, efficient cash-flow conversion and prudent capital deployment. We manage costs, undertake continuous improvement initiatives and collaborate across our businesses to achieve our goals of maximizing earnings and cash and creating value for our shareholders.
Following is additional information on each of our business groups: Aerospace, Combat Systems, Information Systems and Technology and Marine Systems. For selected financial information, see Note Q to the Consolidated Financial Statements in Item 8.operating segments.
AEROSPACE
Our Aerospace groupsegment is at the forefront of the business-jet industry. The segment consists of our Gulfstream and Jet Aviation business units. We deliveroffer a family of Gulfstream aircraft and provide aircrafta full range of services and perform completions for business aircraft produced by Gulfstream and other original equipment manufacturers (OEMs). With more than 50 years of experience, the Aerospace group is known for:We have earned our reputation through:


superior aircraft design, quality, performance, safety and reliability;
technologically advanced cockpitflight deck and cabin systems; and
industry-leading product service andcustomer support.
Gulfstream Aerospace Corporation designs, develops, manufactures services and supports the world’s most technologically advanced business-jet aircraft. Our product line includesencompasses aircraft across a spectrumvariety of price and performance options in the large- and mid-cabin business-jet market.for mid- to ultra-large-cabin business jets. The varying ranges, speedsmany combinations of range, speed, size and cabin dimensions are well-suitedcustomization generate aircraft best suited for the needs of a diverseeach customer’s unique requirements.
Our disciplined and global customer base.
In 2015, Gulfstream was awarded the Collier Trophyproven approach to new product development allows us to repeatedly introduce first-to-market capabilities that set industry standards for the designperformance, quality, speed and development of the G650 business-jet family. This is Gulfstream’s third time receiving the National Aeronautic Association’s annual award, which recognizes the greatest achievementcomfort. Our continual investment in U.S. aeronautics or astronautics with respect to

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improving performance, efficiency and safety. The G650 family includes the G650 and the extended-range G650ER. The ultra-long-range G650ER flies farther at faster speeds than any other business jet on the market, and can travel 7,500 nautical miles at Mach 0.85. The G650 entered into service in 2012, and the G650ER was introduced and delivered in 2014. In February 2015, the G650ER set two city-pair records while flying around the world with one stop. Together, the G650 and G650ER hold more than 50 world speed records.
We are committed to research and development (R&D) activitiesleads to ensure we continue to introduce new products and first-to-market enhancementsaircraft that consistently broaden customer choice, improve aircraft performanceofferings while raising the bar on safety and set new standards for customer safety, comfort and in-flight productivity. In 2014, we also introduced two new large-cabin business jets, the G500 and G600. These clean-sheet next-generation business jets optimize the speed, wide-cabin comfort, efficiency and advanced safety technology of the aircraft. At Mach 0.85, the G500 can fly 5,000 nautical miles, and the G600 can fly 6,200 nautical miles. The G500 completed its first flight in May 2015 and has since completed hundreds of test flight hours at speeds up to Mach 0.995 and altitude over 50,000 feet. The G500 and G600 are expected to enter into service in 2018 and 2019, respectively. These new aircraft demonstrate our consistent and disciplined investment in Gulfstream.
Our productperformance. Product enhancement and development efforts include initiatives in advanced avionics, composites, renewable fuels, flight-control systems, acoustics, cabin technologies and vision systems. A recent example
In 2018, our next-generation, clean-sheet aircraft—the G500—received certification from the U.S. Federal Aviation Administration (FAA). The first G500 customer delivery took place in the third quarter of 2018. The G600 is making progress towards its certification, and the Symmetry Flight Deck introduced withfirst G600 is slated for delivery in 2019. These aircraft are the latest examples of our commitment to performance, safety, efficiency and innovation. Both aircraft exceeded original performance projections during their rigorous flight test programs, demonstrating their industry-leading capabilities. At Mach 0.85, the G500 can fly 5,200 nautical miles, and the G600 which includes 10 touchscreenscan fly 6,500 nautical miles.
The ultra-long-range, ultra-large-cabin G650 created a new market when it entered service in 2012. The fastest non-supersonic aircraft to circumnavigate the globe, the G650 has flown around the world in record-setting time. Together, the G650 and G650ER have claimed more than 85 world speed records. The G650 was the distinguished recipient of the National Aeronautic Association’s Robert J. Collier Trophy, an annual award recognizing the greatest achievement in U.S. aeronautics or astronautics for performance, efficiency and safety. In 2018, the G650 demonstrated steep approach capabilities at London City Airport, unlocking even greater customer utility. Today, there are more than 325 G650 and G650ER aircraft operating in more than 40 countries. Interest in the G650 remains strong; its capabilities, reliability and installed base make it the business-jet standard around the globe.
Gulfstream continued its history of innovation in 2018, becoming the first civil aircraft manufacturer to offer electronically linked active control sidesticks. The touchscreens improve howsidesticks that allow pilots interact with onboard systems, and the sidesticks are digitally linked to allow both pilots to see and feel each other’s control inputs, enhancinginput as well as those from the auto pilot, increasing situational awareness and further improving safetyenhancing safety. Gulfstream also followed up on its history-making certification of the flight.
Gulfstream has an ongoing environmental sustainability program, includingenhanced vision system by becoming the first OEM to certify use of renewable fuels. In 2015, we finalized an industry-first, three-year agreement that provides Gulfstream with a consistent supply of renewable fuels for daily flight operations from its headquarters in Savannah, Georgia. Each gallon of renewable fuel burned is expectedthe system to achieve a more than 50-percent reduction in greenhouse gas emissions on a lifecycle basis, relative to petroleum-based jet fuel.touchdown and rollout.
Gulfstream designs, develops and manufactures aircraft in Savannah, Georgia, including manufacturing all large-cabin models. The mid-cabin models are constructedG280 is assembled by a non-U.S. partner. All models are outfitted in the group’sGulfstream’s U.S. facilities. In support of Gulfstream’s growing aircraft portfolio and international customer base, we have investedcontinue to invest in multi-year facilities projects atour facilities. At our Savannah campus, which are scheduled to continue through 2017. This expansion consists of constructing newwe have constructed facilities, including the completed purpose-built G500, and G600 manufacturing facilities, and renovating existing infrastructure. This effort follows earlier projects including a purpose-built G650 manufacturing facility,facilities; increased aircraft-service capacity, an improvedaircraft service capacity; and opened a new customer sales and designsupport distribution center and a state-of-the-art paint facility.dedicated research and development centers.
The group offers extensiveWe offer comprehensive support for the over 2,500our more than 2,700 Gulfstream aircraft in service witharound the world and operate the largest factory-owned service network in the business aviation industry, including professionals located around the globe. The service network for Gulfstream aircraft continues to evolve to address the demands of the group’s growing international customer base.industry. We operate 11 company-owned service centers worldwide and have more than 20 factory-authorized service centers and authorized warranty facilities on six continents. We also operate a 24-hour-per-day/365-day-per-year Customer ContactSupport Center and offer on-call Gulfstream aircraft technicians ready to deploy around the world for urgent customer-service requirementsrequirements. In 2018, we opened a state-of-the-art Sales and Design


Center in midtown Manhattan, elevating the Americas. This commitmentcustomer experience to superior productenhance our position in one of the world’s largest business-aviation markets.
We are always evolving our Customer Support business along with our growing customer base, and 2018 was no exception. We announced the construction of new service centers in Appleton, Wisconsin; West Palm Beach, Florida; Farnborough, United Kingdom; and Savannah. We also announced the creation of a center dedicated to the resolution of customer issues by a co-located team of technical experts and multidisciplinary personnel from across the organization, providing Gulfstream operators with an unprecedented level of integrated support continuesand ensuring faster return to receive industry recognition,service of customer aircraft. Resources include multiple field and airborne support teams (FAST) aircraft to deliver mission-critical parts, tools and technicians; more than 150 field service representatives and FAST-dedicated technicians, including the number-one ranking for the 13th consecutive yearover 12 mobile repair teams with specially-equipped vehicles; approximately $2 billion in the annual Aviation International News Product Support Survey.spares at over 20 locations; and a network of more than 30 company-owned and factory-authorized service centers and authorized warranty facilities.
Jet Aviation expands our Aerospace portfolio ashas been a global leader in business aviationbusiness-aviation services for over 50 years, providing comprehensive services and aan extensive network of facilities tolocations for aircraft owners and operators. With employees across

4


more than 25approximately 50 airport facilities throughout North America, Europe, the Middle East and Asia and North America,Pacific, our service offerings include maintenance, repair,fixed-base operations (FBO), government fleet services, aircraft management, charter fixed-base operations (FBO) and staffing services. We recently
In 2018, we acquired Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East. Hawker Pacific added 19 locations, including 7 FBOs and 14 maintenance, repair and overhaul (MRO) facilities to our global footprint. In separate transactions, we expanded our service networkFBO presence in EuropeSt. Louis, Missouri; and Amsterdam and Rotterdam, the Bahamas, began construction on a major FBO expansion in Bedford, Massachusetts, and are on schedule to have a new maintenance facility in Macau operational in 2016.  Netherlands.
In addition to these capabilities, Jet Aviation has nearly 40 years of experience offeringoffers custom complex completions for business-jetnarrow- and single- and double-aisle aircraft from itswide-body aircraft. In 2018, Jet Aviation opened a new 94,000 square foot wide-body hangar in Basel, Switzerland, and St. Louis, Missouri, operations. To support the increasingconstructed to meet increased demand for corporatewide-body completions and VIP aircraft interiorsrefurbishments. The new state-of-the-art hangar can accommodate several wide- and our growing backlog, we recently expanded our production capacity at the Basel facility.narrow-body projects simultaneously.
As a market leader in the business-aviation industry, the Aerospace groupsegment is focused on developing innovative first-to-market technologies and products; providing exemplary and timely service to customers globally; and driving efficiencies and reducing costs in the aircraft production, outfittingcompletions and service processes.services.
Revenue for the Aerospace groupsegment was 28 percent23% of our consolidated revenue in 20152018 and 201426% in 2017 and 26 percent in 2013.2016. Revenue by major products and services was as follows:
Year Ended December 312015 2014 20132018 2017 2016
Aircraft manufacturing, outfitting and completions$7,156
 $6,983
 $6,378
Aircraft manufacturing and completions$6,226
 $6,320
 $6,074
Aircraft services1,584
 1,599
 1,530
2,096
 1,743
 1,625
Pre-owned aircraft111
 67
 210
133
 66
 116
Total Aerospace$8,851
 $8,649
 $8,118
$8,455
 $8,129
 $7,815


COMBAT SYSTEMS
Our Combat Systems groupsegment offers a full-spectrum of combat vehicles, weapons systems and munitions for the United StatesU.S. government and its allies around the world.non-U.S. partners. We takeare a disciplined systems engineering approach to deliverplatform solutions provider, offering market-leading design, development, production, modernization and sustainment services. OurWith extensive diverse and proven product lines, give us the agility towe deliver tailored solutions that meet a wide array offor diverse customer mission needs. ComprisedOur Combat Systems segment consists of three business units,units: European Land Systems, Land Systems, and Ordnance and Tactical Systems, the group’sSystems. The segment’s product lines include:
wheeled combat and tactical vehicles;
main battle tanks and tracked combat vehicles;
weapons systems, armament and munitions; and
maintenance, and logistics support and sustainment services.
Wheeled combat and tactical vehicles: The segment provides a full range of vehicles to our global customer base.
The Stryker is an eight-wheeled, medium-weight Stryker combat vehicle that combines mobility and survivability. There are 11 Stryker variants with 85% commonality across the fleet. We continue to innovate and demonstrate ways in which has 10 variants, has proven itself as onethe Stryker can be modified to address the U.S. Army’s urgent operational needs. In 2015, the Army identified a requirement to increase Stryker lethality, and through internal research and development (R&D) and accelerated acquisition, we developed a 30-millimeter, remotely operated cannon option. We delivered the first prototype in 2016, 15 months after the initial contract award. The first production vehicle was sent to the Germany-based 2nd Cavalry Regiment in December 2017; production and delivery is now complete. The Army is expected to make a decision in 2019 to extend this capability to the other Stryker brigades.
In 2018, the Army made the decision to upgrade all nine Stryker brigades to the Stryker A1 configuration. We are currently under contract for two of the brigades, with estimated completion in 2021. The Stryker A1 builds upon the combat-proven double-V-hull (DVH) configuration, providing significantly higher rates of survivability against mines and improvised explosive devices. In addition to the DVH survivability, the Stryker A1 provides a 450-horsepower engine, 60,000-pound suspension, 910-amp alternator and in-vehicle network. It is among the most versatile, vehiclesmobile and safest personnel carriers in the U.S. Army’s fleet, combining survivability and maneuverability intoentire Army inventory.
The Stryker Maneuver Short-Range Air Defense Launcher (M-SHORAD) program integrates an air defense mission package onto a deployable and responsive combat supportreconfigured Stryker A1 vehicle. The ArmyM-SHORAD vehicle is planninganother variation we quickly developed to convert all nine of its Stryker Brigade Combat Teamsaddress the Army’s directed requirement to counter closer-in air and missile defense threats. In 2018, we received an order to integrate five Strykers into the double-V-hulledM-SHORAD configuration which significantly improves protection for soldiers from threats such as improvised explosive devices (IEDs). In responsedelivery in 2019. We continue to customer needs driven by a dynamic threat environment, we are working with the Army to increase the lethality ofwork on high-energy laser and mobile command post options. We expect the Stryker vehicle withplatform to continue to demonstrate its versatility well into the addition of a 30-millimeter gun system.future.
The groupsegment also has a market-leading position in light armored vehicles (LAVs) with more than 10,00013,000 vehicles deliveredin service around the world. We offerOur LAVs combine advanced technologies combined withand combat-proven survivability. We currently haveare upgrading the Canadian Army’s fleet of LAVs to increase mobility, survivability and lethality, as well as enhancing the vehicle’s surveillance suite. We also provide, under a $10 billion contract to providewith the Canadian government, wheeled armored vehicles along withfor export and associated logistics support to a Middle Eastern customer through 2028.2024.

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We have delivered numerousdeliver high-mobility, versatile Pandur and Piranha armored vehicles.vehicles to non-U.S. customers. The Pandur family of vehicles serves as a common platform for various armament and equipment configurations, and theconfigurations. The Piranha is a multi-role vehicle well-suited for a variety of combat operations. We are supplying Pandur 6x6 vehicles to the Austrian Army. In 2015,2018, we received a contract for over $1 billion to deliver up to 227 Piranha vehicles in six variants to the Romanian Armed Forces. We are delivering more than 300 Piranha


vehicles, also in six variants, to the Danish Ministry of Defence for its armored personnel carrier program. The Spanish Army selected the Piranha as its new8x8 armored personnel carrier,fighting vehicle, and we signed an agreement with the Spanish Ministry of Defense forare now performing extensive technological trials in anticipation of thea production contract. We are also producing Piranha 5 vehiclevehicles for the Spanish Army’s future 8x8 armored infantry fighting vehicle.Ireland and Switzerland. There are over 11,000 Piranhas in service worldwide.
TacticalThe segment also offers a range of light tactical vehicles offered by the group include theto global customers. The Flyer is a lightweight, Flyer family of vehicles, a modular vehicle built for speed and mobility that allowsgrants access to previously deniedunreachable terrain in demanding environments. We are delivering this family of vehicles to the Flyer 60 and Flyer 72 to U.S. Special Operations Command forand the Internally Transportable Vehicle (ITV) and GroundArmy. In 2018, we delivered the first Army-Ground Mobility Vehicle (GMV) programs.(A-GMV) 1.1. Outside the United States, the Duro and Eagle tactical vehicle familiesvehicles offer a range of options and weight classes. We are upgrading Duro tactical vehicles for the Swiss Army through 2022 and began delivering Eagle armored patrol vehicles to the Danish Army in 2018.
In 2018, we acquired FWW Fahrzeugwerk GmbH, a maintenance and service provider for the German army and other non-U.S. customers, and formed General Dynamics European Land Systems – Deutschland, enhancing our presence in the 6- to 15-ton weight class.
The group’s family of route clearance vehicles, including the Buffalo, Cougar and RG-31 vehicles, is at the forefront of blast- and ballistic-protected technologies. These vehicles are designed specifically to protect occupants from land mines, hostile fire and IEDs.country.
TanksMain battle tanks and tracked combat vehicles: Combat Systems’The segment’s powerful tracked vehicles provide key combat capabilities to customers around the world. The Abrams main battle tank offers a proven, decisive edge in combat forcombat. We are maximizing the effectiveness and lethality of the U.S. Army, National Guard and Marine Corps. We are upgrading the Army’s M1A2 Abrams tankstank fleet with the System Enhancement Package (SEP)Version 3 (SEPv3), which provides a digital platform that includes an enhanced command-and-control system, newtechnological advancements in communications, power generation, fuel efficiency and distribution systems, second-generation thermal sights and improved armor. Internationally, the group providesIn 2018, we received orders to upgrade 274 Abrams tanks to several U.S. allies. In 2015, the group received an award to refurbish and upgradeSEPv3 configuration. Additionally, the segment is upgrading Abrams tanks for the Kingdom of Morocco and announced resumed production of M1A1 tank kitsseveral non-U.S. partners. We are currently under contract to develop further upgrades for the Egyptian Land Forces.SEPv4 configuration.
In 2018, we were selected to deliver 12 medium-weight, large caliber prototype vehicles for the U.S. Army’s Mobile Protected Firepower program, providing a new opportunity to field vehicles in Infantry Brigade Combat Team (IBCT) formations. The ASCOD is avehicles are required to be highly versatile tracked combat vehicle with multiple versions, including the Spanish Pizarrolethal, survivable and the Austrian Ulan. Currently the group ismobile.
We are producing the British Army’s next-generation AJAX armoured fighting vehicle, a version ofnext-generation medium-weight tracked combat vehicle. The segment will also provide in-service support for the ASCOD formerly known as the Scout Specialist Vehicle.AJAX vehicle fleet. With six variants, the AJAX family of vehicles offers advanced electronic architecture and proven technology for an unparalleled balance of protection, survivability, lethality and mobility, along with high reliability for a vehicle in its weight class. In addition to production, the group will provide in-service support for2017 and 2018, the AJAX vehicles underwent extensive testing trials in preparation for delivery to the British Army, including successful manned live firing trials. The vehicle fleet through 2024.is scheduled to enter service in 2020.
With our large installed base of wheeled and tracked vehicles around the world and the expertise gained from ourinnovative research, engineering and production programs, we are well-positioned for vehicle modernization programs, support and sustainment services, and future development programs.
Weapons systems, armament and munitions: Complementing these military-vehicle offerings, the groupsegment designs, develops and produces a comprehensive array of sophisticated weapons systems. For ground forces, we manufacture M2/M2-A1 heavy machine guns and MK19/MK47 grenade launchers. The groupsegment also produces legacy and next-generation weapons systems for shipboard applications, including the Navy’s Phalanx Close-In Weapon System (CIWS), multiple subsystems for the Littoral Combat Ship (LCS) and Zumwalt-class (DDG-1000) guided-missile destroyer firepower mission modules.applications. For airborne platforms, we produce weapons for U.S. and non-U.S. fighter aircraft, including high-speed Gatling guns for all U.S. fixed-wing military aircraft. The group is also a significant supplier of composite structures and aircraft components.
Our munitions portfolio covers the full breadth of naval, air and ground forces applications across all calibers and weapons platforms for the U.S. government and its allies. In North America, the group segment


maintains a market-leading position in the supply of Hydra-70 rockets, large-caliber tank ammunition, medium-caliber

6


ammunition, mortar and artillery projectiles, tactical missile aerostructures, and high-performance warheads,warheads; military propellantspropellants; and conventional bombs and bomb cases.
The Combat Systems groupsegment emphasizes operational executionexcellence and continuous process improvements to enhance our productivity. In animprovement in a dynamic threat environment with ever-evolving customer needs. One of uncertain threatsthe 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 evolving customer needs, the group isStryker wheeled combat-vehicle programs. We are focused on innovation, affordability and speed-to-market to deliver increased performance, survivability and survivable, mission-effective products.
Revenue for the Combat Systems groupsegment was 18 percent17% of our consolidated revenue in 20152018, 19% in 2017 and 2014 and 19 percent18% in 2013.2016. Revenue by major products and services was as follows:
Year Ended December 312015 2014 20132018 2017 2016
Wheeled combat vehicles$2,599
 $2,852
 $2,709
Weapons systems and munitions1,496
 1,635
 1,761
Tanks and tracked vehicles816
 526
 595
Military vehicles$4,027
 $3,731
 $3,378
Weapons systems, armament and munitions1,798
 1,633
 1,517
Engineering and other services729
 719
 767
416
 585
 635
Total Combat Systems$5,640
 $5,732
 $5,832
$6,241
 $5,949
 $5,530
INFORMATION SYSTEMS AND TECHNOLOGY
Our Information Technology segment was formed in 2018 concurrent with our acquisition of CSRA and the reorganization of our legacy Information Systems and Technology group provides technologies, productssegment into two separate segments: Information Technology and Mission Systems. The combination of GDIT and CSRA created a premier provider of technology solutions and mission services to help customers across defense, intelligence and federal civilian markets advance mission performance and transform operations. Integrating these two businesses has enhanced our ability to develop cost-effective, next-generation technology solutions, leverage our expanded and deep experience across multiple agencies and pursue large-scale enterprise solutions for our customers.
We partner with our customers to provide critical services and solutions that draw upon multiple technological capabilities, deliver value and solve our customers’ complex challenges, including cloud, cyber, software development, systems engineering, IT modernization and data analytics. Additionally, we advance our customers’ missions through innovative delivery models, including outcome-based contracts and a relentless focus on execution. Our portfolio includes thousands of individual contracts that predominantly align to three broad capability categories:
IT services;
IT infrastructure modernization; and
professional services.
IT services: IT services include technology consulting, solution design, system integration, operations and maintenance, cloud services, applications development, and cyber defense of enterprise systems.
The Information Technology segment manages global IT enterprise operations for its customers, including in the classified domain, providing IT support, operations and maintenance, applications development, and cloud and cyber services. For the Centers for Medicare & Medicaid Services, we provide IT hosting and operations and maintenance services in support of hundredsclaims processing for more than 49 million Medicare beneficiaries. At the Pentagon, we provide cybersecurity services that include end-point security, network security and incident handling.


In 2018, we were awarded a multi-year, large-scale contract with the FAA to develop a Data Visualization, Analysis, and Reporting System. This system enables the FAA to modernize and provide updated flight reporting, visualization, modeling and analysis capabilities for FAA air traffic management analysts and engineers. Our IT services work in the intelligence and national security domain also expanded in 2018 following a large multi-year contract award from a classified customer. Under the new program, we will provide IT service operations, maintenance support and critical mission services for the customer.
IT infrastructure modernization: IT infrastructure modernization includes system development and engineering; data center consolidation; and cloud strategy, migration and operations.
The Information Technology segment provides managed data center services to the Department of programsHomeland Security, migrating and consolidating data center operations while introducing new technologies to improve security and mission performance. We also provide IT modernization services for our defense and national security customers, including designing, building and operating global enterprise IT infrastructures.
In 2018, we were awarded a multi-year contract by the U.S. Environmental Protection Agency (EPA) to develop, implement and operate an enterprise approach to the agency’s local area networks at the EPA’s headquarters and more than 100 offices nationwide.
Professional services: Our professional services portfolio includes logistics and supply chain management; training and simulation; and life sciences, medical research and specialized mission support services.
The Information Technology segment provides comprehensive supply chain management for the Department of State’s Bureau of Diplomatic Security. We procure, warehouse, package, transport and deliver a variety of security-related products, including more than six million items to support the customer’s worldwide missions. In our defense portfolio, we provide turnkey training and simulation services for the U.S. Army’s Aviation Center of Excellence in Fort Rucker, Alabama, the largest helicopter flight training program in the world.
In 2018, we were also awarded a large-scale, multi-year contract to provide communication specialists and personnel for mission support, planning, logistics and security services for a wide rangeclassified customer.
We continue to assess and refine our key capabilities in the Information Technology segment’s portfolio. Subsequent to the CSRA acquisition, we completed additional portfolio shaping, divesting non-core work operating public-facing contact centers.
As a segment that focuses exclusively on providing services, our highly skilled workforce is central to our success. Their technical expertise, deep knowledge of military, federal/civilian, state, localour customers’ missions and commercialneeds, and constant drive to improve performance differentiate our services.
Revenue for the Information Technology segment was $8.3 billion in 2018 and $4.4 billion in 2017 and 2016, which represented 23%, 14% and 15% of our consolidated revenue in each of the respective years.
MISSION SYSTEMS
Our Mission Systems segment was formed in 2018 upon the reorganization of our legacy Information Systems and Technology segment into two separate segments: Information Technology and Mission Systems.
Our Mission Systems segment is a global provider of mission-critical C4ISR products and systems. We offer solutions across all domains, and we embrace agility to improve the speed of capability to mission. In


2018, we introduced increasingly sophisticated offerings in areas including high-end encryption, and we acquired a provider of specialized transmitters and receivers.
The Mission Systems segment has more than 100 locations worldwide and employs more than 13,000 engineering and technical professionals dedicated to solving the toughest security and technology challenges facing the United States and its partners. The segment’s portfolio includes prime contract programs in which we deliver high-end defense-electronics hardware and integrated systems, as well as subcontract efforts in support of large-scale land, air, sea and space platforms. The segment is organized into three core capabilities:
Space, intelligence and cyber systems;
Ground systems and products; and
Naval, air and electronic systems.
Space, intelligence and cyber systems: Our Mission Systems segment engineers space payloads for advanced missions, builds and manages spaceborne and ground-based communications systems, and provides mission-data tracking equipment and processing capabilities for our customers. The group’s market leadership resultsAdditionally, we design and develop high-performance sensors to gather intelligence data from decades of domain expertise, incumbency on high-priority programsacross the land, air, sea, space and continuous innovationcyber domains, and provide geospatial intelligence products and services to meet the ever-changing information-systems and mission support needs of our customers. The group’s diverse portfolio includes:customers in the global defense, civilian and commercial markets.
IT solutionsWe also offer a variety of cyber products and mission support services,software, including our family of encryption products, to protect and defend our customers’ critical information. We continually evolve our TACLANE family of network encryptors, the most widely deployed NSA-certified Type 1 in-line network encryptors, and our NSA-certified ProtecD@R family of data-at-rest encryptors. In 2018, we introduced the TACLANE-Nano compact Type 1 encryptor for mobile users, designed to protect information classified up to top secret/sensitive compartmented information (TS/SCI), pending NSA certification.
mobile communication, command-and-control missionGround systems and intelligence, surveillanceproducts: Our Mission Systems segment is a leading manufacturer and reconnaissance (ISR) solutions.
IT solutionsintegrator of tactical, secure communications systems for a diverse customer base, both U.S. and mission support services:non-U.S. We design, build, deploy and operate large-scale, securesupport satellite communications (SATCOM) equipment; mission command applications; assured position, navigation and timing components; and other communications equipment and networking solutions for the U.S. defense community and U.S. partners. We also provide communications equipment, sensors and software for public safety applications and to the federal government. Additionally, we provide data collection and processing products, command and control applications, and computing and communications equipment.
In 2018, we were awarded the contract for the U.S. Army’s Common Hardware Systems-5 (CHS-5) program. CHS is a “one-stop shop” for tactical IT networks and systems and provide professional and technical services. The group has been a trusted systems integrator forhardware solutions supporting more than 50 years.120 Army and other Department of Defense programs for the rapid acquisition and delivery of commercial off-the-shelf IT hardware and services.
We support the full enterprise IT lifecycle from designingArmy’s readiness priorities through our contract for the Army Life Cycle Product Line Management (LCPM) program, awarded jointly in 2018 to our Mission Systems and integratingInformation Technology segments. The LCPM program provides soldiers a realistic live training experience and adds hardware product line management to operatingour existing software product line management for the Army. We focus primarily on the extensive Live Training Transformation (LT2) family of training systems, including force-on-force and maintaining complex data, voiceforce-on-target systems, and multimedia networks. Working closely with our customers, we ensure their network infrastructures are secure, efficient, scalabletraining and cost-effective. We have extensive experience consolidating, building and operating data centers. The group’s expertise in building IT and communications networks extends beyond government customers. We engineer, design and install networks for several major commercial fiber-to-the-home providers and wireless carriers.instrumentation.
We are also at the forefront of cloud and virtualization technologies and services. For example, the group is implementing the Department of Defense’s (DoD) largest enterprise-wide email infrastructure and a virtual desktop environment for the intelligence community.
As a leading provider in the U.S. healthcare IT market, we support government civilian and military health systems, providing critical services in support of healthcare reform and medical benefits programs. Our offerings include cyber security services, big data analytics, fraud prevention and detection software, process automation and program management solutions for public and commercial health systems. Our Information Technology business unit operates several customer contact centers for the Centers for Medicare

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& Medicaid Services, responding to consumer inquiries about key Medicare and Affordable Care Act programs.
The group’s technical support personnel and domain specialists help customers meet critical planning, staffing, technology and operational needs. We also offer advanced training in military operations, range support, technology-based simulation and professional development.
Mobile communication, command-and-control mission systems and ISR solutions: We design, build, integrate, deploy and support communications, command-and-control and computer mission systems; imagery, signals- and multi-intelligence systems; and cyber security systems for customers in the U.S. defense, intelligence and homeland security communities, and U.S. allies.
The group is a leading integrator and manufacturer of secure communications systems that improve our customers’ ability to communicate, collaborate and access vital information, including fixed and mobile ground, radio and satellite communications systems and antenna technologies. For example, we are the prime contractor for Warfighter Information Network-Tactical (WIN-T), the Army’s mobile communications backbone, which provides a secure and resilient network, delivering voice, videoon-the-move capabilities, and data communicationsthe ability to soldiers anywhere onrapidly insert new technologies into the battlefield. In 2015, we received approvalsystem. We continue to move forwardwork closely with full-rate productionour Army customer to evolve its next-generation combat network to meet the threats of the WIN-T Increment 2 system.future.


With a 50-year legacy in radio frequency communications and networks, the Mission Systems segment offers a range of radio products and systems for military, government and commercial customers, as well as long-term evolution broadband communications networks for first responders. We provide CM-300/350 V2 digital radios to the FAA, used by air traffic control centers, commercial airports, military air stations and range installations for reliable ground-to-air communications.
We are also developing and deploying the Mobile User Objective System (MUOS) communication waveform and integrated ground segments, which will help provide the satellite link to soldiers on the ground so they can access cell phone-like communications in the most remote locations. We are leading the deployment of the MUOS ground system, which includes four ground stations positioned around the world. Our Manpack radio is the first military radio to successfully connect with the MUOS network.
The Information Systems and Technology group provides many of these capabilities to non-U.S. agencies and commercial customers. For the Canadian Department of National Defence, weWe have developed, deployed, and continue to modernize and support the Canadian Army’s fully-integrated,fully integrated, secure combat voice and data network. We leveraged this experience to delivernetworks for Canada and the U.K. Ministry of Defence’sThese efforts, which we have supported for over 27 years, are ongoing on the Morpheus program, which aims to modernize the U.K.’s communications and command-and-control systems across three armed services by evolving the Bowman tacticalnetwork into a more open, agile architecture.
In Canada, our public-safety-focused communication system, the SHIELD Ecosystem, allows first responders to gather and exchange information quickly using digital applications on secure systems, providing the availability and location of in-field personnel at all times.
Naval, air and electronic systems: We provide platform integration services for which we currently provide ongoing supportmaritime and capability upgrades.aviation platforms, as well as strategic weapons systems and advanced electronic systems, including computing systems, displays and data management, for both U.S. and non-U.S. customers.
In command-and-control systems, weWe have a 50-year legacy of providing advanced fire-control systems for U.S. Navyall of the Navy’s submarine programs, both attack and weballistic missile. We are developing and integrating commercial off-the-shelf software and hardware upgrades to improve the tactical control capabilities for several submarine classes. The group’ssegment’s combat and seaframe control systems serve as the technology backbone for some of the Navy’s next-generationIndependence-variant Littoral Combat Ship (LCS) and the Expeditionary Fast Transport (EPF) ships.
We also manufacture unmanned undersea vehicles for the U.S. military and commercial customers. We offer a range of systems and configurations, including more than 70 different sensors on 80 vehicles that can operate in the open ocean and constrained waterways.
Our Digital Modular Radio (DMR) is the first software-defined radio to become a communications system standard for the U.S. Navy. The DMR is a four-channel radio that serves as the Navy’s communications hub for surface ships, includingsubmarines and shore-site communications. As a multi-channel radio, it simultaneously communicates with a wide spectrum of tactical radios and can communicate information at different security levels. In 2018, we released an updated Mobile User Objective System (MUOS) WFv3.1.5 waveform for the Independence-variant LCSNavy’s DMR, improving secure voice, video and data communications across the Joint High Speed Vessel (JHSV).MUOS SATCOM network. The network was approved by the U.S. Strategic Command in 2018 for expanded operational use.
For airborne platforms, we offer high-assurance mission and display systems, signal and sensor processing, and command-and-control solutions. Our aircraft mission computers are on the Navy’s F/A-18 Super Hornet strike fighter and the Marine Corps’ AV-8B Harrier II aircraft, givingprovide pilots with advanced situational awareness and combat systems control. Our avionics, radomes, or encrypted communication systems are present on nearly every U.S. military aircraft in service today, including the F-35, F-16, F/A-18, F-22, P-3, P-8 and AV-8B.
The Information Systems and Technology group provides ISR solutions for classified programs. Our expertise includes multi-intelligence ground systems and large-scale, high-performance data and signal processing. We deliver high-reliability, long-life sensors and payloads designed to perform in the most extreme environments, including space payloads and undersea sensor and power systems.
Cyber security solutions are embedded throughout the group’s IT and systems engineering programs. We deliver comprehensive, agile cyber security-related products and services to help customers defend and protect their networks from the persistent and growing cyber threat. For example, we continue to evolve our TACLANE family of network encryptors, the most widely-deployed NSA-certified Type 1 encryption device. We deliver technologies that provide access to information at various security levels, accommodating the increased demand for cloud computing and mobility. We offer extensive cyber services to help defend mission-critical national and large-enterprise tactical networks.

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Information Systems and Technology’s market is competitive, diverse and dynamic. We are focused on maintaining our market-leading position by optimizing the performance and size of the business and developing innovative solutions to meet customer requirements. In 2015, we consolidated two businesses in the group to form General Dynamics Mission Systems to be more efficient and responsive to our customers. The group is well-positioned to continue meeting the needs of our broad customer base.
Revenue for the InformationMission Systems segment was $4.7 billion in 2018, $4.5 billion in 2017 and Technology group was 29 percent$4.7 billion in 2016, which represented 13% of our consolidated revenue in 2015, 30 percent2018 and 15% in 20142017 and 33 percentin 2013. Revenue by major products and services was as follows:2016.

Year Ended December 312015 2014 2013
C4ISR solutions$4,571
 $4,610
 $5,534
IT services4,394
 4,549
 4,734
Total Information Systems and Technology$8,965
 $9,159
 $10,268

MARINE SYSTEMS
Our Marine Systems groupsegment is a market-leading designer and builder of nuclear-powered submarines, surface combatants, and auxiliary and combat-logistics ships for the U.S. Navy, and Jones Act ships for commercial customers. We provide high-value-added engineering, constructionrepair services for nearly all classes of Navy ships. With shipyards on both U.S. coasts, our Marine Systems segment consists of three business units: Bath Iron Works, Electric Boat and assembly work, as well as lifecycle support.NASSCO. The group’s portfolio ofsegment’s platforms and diverse capabilities includes:include:
nuclear-powered submarines;
surface combatants;
auxiliary and combat-logistics ships;
commercial product carriers and containerships;
design and engineering support services; and
overhaul, repairmaintenance, modernization and lifecycle support services.
We have a long history as one of the Navy’s primary shipbuilders, forconstructing the U.S. Navy. We constructships of today’s fleet and deliver new shipsdesigning and design and develop thedeveloping next-generation of platforms for the Navy.platforms. More than 90 percent90% of the group’sour segment’s revenue is for major Navy ship-construction, engineering, construction and lifecycle support programs awarded under large, multi-ship contracts that span several years. These programs include Virginia-class nuclear-powered submarines built bymulti-year contracts. We maintain the most sophisticated marine engineering center in the world, designing and testing concepts to support future capabilities. Our ability to design, build, and maintain our nation’s most technologically sophisticated warships are a critical element of the U.S. defense industrial base.
The largest business unit in our Marine Systems segment is Electric Boat, Arleigh Burke-class (DDG-51)the lead shipyard on all Navy nuclear-powered submarine programs, including both the Virginia-class attack submarine and DDG-1000 guided-missile destroyers manufactured by Bath Iron Works and Expeditionary Mobile Base (ESB) auxiliary support ships produced by NASSCO.the future Columbia-class ballistic missile submarine.
We are the primelead contractor foron the Virginia-class submarine program. Designed for the full range ofto meet diverse global mission requirements, including intelligence gathering, special-operations missionsthese submarines operate with highly advanced capabilities and sea-based missile launch, these stealthy boats excelstealth in both littoral and open-ocean environments. Since delivering the lead Virginia-class submarine, we have reduced the cost and time to deliver follow-on ships from 84 months to 66 months, while also improving mission capability and ship quality. The Navy procures Virginia-class submarines in multi-boat blocks at a two submarines-per-year construction rate. We have delivered 1217 Virginia-class submarines from the first three blocks in conjunction with an industry partner that shares in the construction. In 2015, we completedconstruction, and the ramp-up in constructionremaining 11 submarines from one to two Virginia-class submarines per year. The remaining 16 submarinesthe third and fourth blocks are under contract areand scheduled for delivery through 2023.
We are also developing the Virginia Payload Module (VPM) for the nextfifth block of Virginia-class submarines, thatwhich is expectedscheduled to startbegin construction in 2019.2019 in support of the Navy’s fleet plans. This block of submarines will provide significant upgrades in size and performance. The VPM is an 80-foot84-foot hull section that will addadds four additional payload tubes, boostingmore than tripling the strike capacity by 230 percentof these submarines and preservingproviding unique capabilities to support special missions.
We are the United States’ critical undersea capabilities.
The group is currently performing development worklead contractor for the replacementdesign and construction of the Navy’s Ohio-classColumbia-class ballistic missile submarine, fleet, which will reacha 12-boat program the end ofNavy considers its service life starting in 2027.top priority. These Ohio-class replacement submarines will provide strategic deterrent capabilities for decades and are scheduled to come. The lead ship iscome online when the current Ohio-class fleet reaches its end of service life beginning in 2027. We are slated to startbegin construction on the lead boat in 2021 with deliveryand deliver it to the Navy in 2027. We are preparing our workforce

9


and facilities for the startsupport of construction for the Ohio-class replacement program. This includesretirements. In 2018, the Navy awarded us a new 113,000-square-foot automated framecontract modification for advance procurement, advance construction and cylinder facilitylong-lead materials. We have developed a comprehensive resource master plan to ensure that we recently builtwill have a fully trained workforce in Quonset Point, Rhode Island,place to support the Common Missile Compartment work under joint developmentincreased demand for skilled trades for the U.S.Columbia program. We continue to invest in our facilities, optimizing the timing between investments and returns, while coordinating closely with the Navy on a $1.7 billion investment in our submarine yard to support construction.


Bath Iron Works builds the Arleigh Burke-class (DDG-51) guided-missile destroyers and the U.K. Royal Navy.
We are the lead designer and builder of DDG-51 destroyers, managing the design,manages modernization and lifecycle support of these ships.support. These highly capable,high-utility, multi-mission ships provide offensive and defensive capabilities and are capable of simultaneously fighting simultaneous air, surface and subsurface battles. They can operate independently or as part of carrier strike groups, surface action groups, amphibious ready groups and underway replenishment groups. We currently have constructionThe Navy restarted the program in 2010 after a four-year break in construction. Bath Iron Works delivered the first ship in the restart program to the Navy in 2017. In 2018, we were awarded contracts for seventhe construction of five additional DDG-51s, for a total of 11 ships in backlog, scheduled for delivery through 2022.2027.
Bath Iron Works is one of the Navy’s contractors involved in the development and construction of the DDG-1000Zumwalt-class (DDG-1000) platform, the Navy’s next-generation guided-missile destroyer. These ships are equipped with numerous technological enhancements, including a low radar profile, an integrated power system and a software environment that tiestying together nearly every system on the ship. DDG-1000s will provideThe DDG-1000 provides independent forward presence and deterrence, supportsupports special operations forces, and operateoperates as an integral part of joint and combined expeditionary forces. Deliveries of the three ships in the program are scheduled through 2019. In December 2015,We delivered the first ship successfully completed its first set of at-sea builders testsin 2016 and trials.the second ship in 2018. We continue to build the final ship, scheduled for delivery in 2020.
We are delivering ESBNASSCO is building Expeditionary Sea Base (ESB) auxiliary support ships, a second variant of the original Expeditionary Support Dock (ESD) ships, whichships. ESBs serve as floating transfer stations that improveforward staging bases, improving the Navy’sNavy and Marine Corps’ ability to deliver large-scale equipment and expeditionary forces to areas without adequate port access. The ESBs, equippedEquipped with a 52,000-square-foot flight deck and accommodations for up to 250 personnel, they are capable of supporting a variety ofdiverse missions, including airborne mine countermeasure, maritime security operations and disaster relief missions. The group hasIn 2018, we delivered the first three shipsfourth ESB and secured long-lead materials funding for a sixth ship. We expect to deliver the fifth ESB in 2019.
NASSCO was competitively awarded an exclusive design and construction contract in 2016 for the lead ship in the program,Navy’s new class of fleet replenishment oilers, the John Lewis class (T-AO-205), along with options for five additional ships. Designed to transfer fuel to Navy surface ships operating at sea, the oilers can carry 157,000 barrels of fuel and also offer significant dry cargo capacity and aviation capabilities. In 2018, we began construction is underway on the fourthfirst ship, scheduled for delivery in 2018.the future USNS John Lewis.
Our Marine Systems groupsegment provides comprehensive ship and submarine overhaul, repairmaintenance, modernization and lifecycle support services to extend the service life and maximize the value of these ships. We conductNASSCO conducts full-service maintenance and surface-ship repair operations in four locations with full-serviceNavy fleet concentration areas in San Diego, Norfolk, Mayport, and Puget Sound. Electric Boat provides submarine maintenance and repair shipyards on both U.S. coasts. We also provide extensive submarine repairmodernization services in a variety of U.S. locations, and are converting two decommissioned submarines to moored trainingBath Iron Works provides lifecycle support services for Navy surface ships. In support of allied navies, we offer program management, planning, engineering and design support for submarine and surface-ship construction programs.
Beyond itsIn addition to our work for the Navy, the Marine Systems groupsegment has extensive experience in all phases of commercial ship constructionconstruction. We have designed and built oil and product tankers and container and cargo ships for commercial customers designing and building oil tankers and dry cargo carriers for commercial markets since the 1970s. OurThese ships helpsatisfy our commercial customers satisfy thecustomers’ Jones Act requirement that ships carrying cargo between U.S. ports be built in U.S. shipyards. The group has
We offer advanced commercial shipbuilding technology withas demonstrated by NASSCO’s design and delivery of the world’s first liquefied natural gas (LNG)-powered containership, usingcontainerships. Using green ship technology, towe have decreased emissions dramatically decrease emissions while increasing fuel efficiency. We are also designingFrom 2014 to 2017, NASSCO constructed and producingdelivered eight LNG-conversion-ready shipsproduct tankers for commercial customers. Currently,In 2018, we havebegan construction contracts for eight shipson the second ship in a two-ship series of Kanaloa-class containerships. The two new LNG-capable containerships with roll-on, roll-off capability are scheduled for delivery through 2017. With the age of the Jones Act fleetin 2019 and environmental regulations that impose more stringent emission control limits, we anticipate additional commercial shipbuilding opportunities.2020.


To further the group’s goals ofpromote operating efficiency, innovation and affordability for the customer,our customers, we make strategic investments in our business, often in cooperation with the Navy. In addition, the Marine Systems group leverages itsWe leverage our design and engineering expertise across its shipyards to improve program

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execution and generate cost savings. This knowledge sharing enables the groupus to use resources more efficiently and drive process improvements. WeThrough robust and disciplined planning, we are well-positionedpositioned to continue to fulfillsupport our customers well into the ship-construction and support requirements of our customers.future.
Revenue for the Marine Systems groupsegment was 25 percent24% of our consolidated revenue in 2015, 24 percent2018 and 26% in 20142017 and 22 percent in 2013.2016. Revenue by major products and services was as follows:
Year Ended December 312015 2014 20132018 2017 2016
Nuclear-powered submarines$5,003
 $4,310
 $3,697
$5,712
 $5,175
 $5,264
Surface combatants1,049
 1,084
 1,139
Auxiliary and commercial ships692
 640
 499
Surface ships1,872
 1,607
 1,648
Repair and other services1,269
 1,278
 1,377
918
 1,222
 1,160
Total Marine Systems$8,013
 $7,312
 $6,712
$8,502
 $8,004
 $8,072

CUSTOMERS
In 2015, 57 percent2018, 65% of our consolidated revenue was from the U.S. government, 17 percent14% was from U.S. commercial customers, 13 percent10% was from non-U.S. commercial customers and the remaining 13 percent11% was from non-U.S. government customers.
U.S. GOVERNMENT
Our primary customer is the DoD.U.S. Department of Defense (DoD). We also contract with other U.S. government customers, including the intelligence community, the Departments of Homeland Security and Health and Human Services, and first-responder agencies. Our revenue from the U.S. government was as follows:
Year Ended December 312015 2014 20132018 2017 2016
DoD$14,699
 $14,516
 $15,441
$17,752
 $15,441
 $15,080
Non-DoD2,830
 2,750
 2,790
5,228
 2,904
 2,883
Foreign Military Sales (FMS)*452
 689
 1,032
626
 676
 713
Total U.S. government$17,981
 $17,955
 $19,263
$23,606
 $19,021
 $18,676
Percent of total revenue57% 58% 62%
% of total revenue65% 61% 61%
* In addition to our direct non-U.S. sales, we sell to non-U.S. governments through the FMS program. Under the FMS program, we contract with and are paid by the U.S. government, and the U.S. government assumes the risk of collection from the non-U.S. government customer.
Our U.S. government businesses operate underrevenue is derived from 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.
InOf our U.S. government business,revenue, fixed-price contracts accounted for 54 percent56% in 20152018, 53 percent54% in 20142017 and 54 percent53% in 2013;2016; cost-reimbursement contracts accounted for 42 percent38% in 20152018, 43 percent42% in 20142017 and 42 percent43% in 2013;2016; and time-and-materials contracts accounted for 4 percent6% in 2015, 20142018 and 2013.4% in 2017 and 2016.
EachFor information on the advantages and disadvantages of 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 completesee Note C to the Consolidated Financial Statements in Item 8.

11


work for less than the contract amount. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated fees are usually lower than fees earned on fixed-price contracts. Additionally, some costs are unallowable under these types of contracts, and the government reviews the costs we charge. Under time-and-materials contracts, our profit may vary if actual labor-hour costs 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 margin rates.
U.S. COMMERCIAL
Our U.S. commercial revenue was $5.3$5 billion in 20152018 and 2014 and $5.4$4.5 billion in 2013.2017 and 2016. This represented approximately 17 percent14% of our consolidated revenue in 20152018 and 201415% in 2017 and 18 percent in 2013.2016. The majority of this revenue is for business-jet aircraft and related services where our customer base consists of individuals and public and privately held companies across a wide range of industries.
NON-U.S.
Our revenue from non-U.S. government and commercial customers was $8.2 billion in 2015, $7.6 billion in 2014 and $6.32018, $7.5 billion in 2013.2017 and $7.4 billion in 2016. This represented approximately 26 percent21% of our consolidated revenue in 2015, 25 percent2018 and 24% in 20142017 and 20 percent in 2013.2016.
We conduct business with customers around the world, providing a broad portfolio of products and services.world. Our non-U.S. defense subsidiaries are committed to maintainingmaintain long-term relationships with their respective governmentscustomers and have established themselves as principal regional suppliers and employers.employers, providing a broad portfolio of products and services.
Our non-U.S. commercial businessrevenue consists primarily of business-jet aircraft exports and worldwide aircraft services. The market for business-jet aircraft and related services outside North America has expanded significantly in recent years. While the installed base of aircraft is concentrated in North America, orders from non-U.S. customers outside North America represent a significant segmentportion of our aircraft business with approximately 55 percent45% of the Aerospace group’ssegment’s total backlog on December 31, 2015.2018.

COMPETITION
Several factors determine our ability to compete successfully in the defense and business-aviation markets. While customers’ evaluation criteria vary, the principal competitive elements include:
the technical excellence, reliability, safety and cost competitiveness of our products and services;
our ability to innovate and develop new products and technologies that improve mission performance and adapt to dynamic threats;
successful program execution and on-time delivery of complex, integrated systems;
our global footprint and accessibility to customers;
the reputation and customer confidence derived from past performance; and
the successful management of customer relationships.
DEFENSE MARKET COMPETITION
The U.S. government contracts with numerous domestic and non-U.S. companies for products and services. We compete against other large platform-platform and system-integration contractors as well as smaller companies that specialize in a particular technology or capability. Outside the United States, we compete with global defense contractors’ exports and the offerings of private and state-owned defense manufacturers. Our Combat Systems groupsegment competes with a large number of domesticU.S. and non-U.S. businesses. Our Information Technology and Mission Systems and Technology group competessegments compete with many companies, from large defense companies to small niche competitors with specialized technologies or expertise. Our Marine Systems groupsegment has one primary

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competitor with which it also partners on the Virginia-class submarine program. The operating cycle of many of our major platform programs can result in sustained periods of program continuity when we perform successfully.
We are involved in teaming and subcontracting relationships with some of our competitors. Competitions for major defense programs often require companies to form teams to bring together a spectrum of capabilities to meet the customer’s requirements. Opportunities associated with these programs include roles as the


program’s integrator, overseeing and coordinating the efforts of all participants on a team, or as a provider of a specific component or subsystem.
BUSINESS-JET AIRCRAFT MARKET COMPETITION
The Aerospace groupsegment has several competitors for each of its Gulfstream products. Key competitive factors include aircraft safety, reliability and performance; comfort and in-flight productivity; service quality, global footprint and responsiveness; technological and new-product innovation; and price. We believe that Gulfstream competes effectively in all of these areas.
The Aerospace groupsegment competes worldwide in the business-jet aircraft services market primarily on the basis of price, quality and timeliness. In our maintenance, repair and FBO businesses, the groupsegment competes with several other large companies as well as a number of smaller companies, particularly in the maintenance business. In our completions business, the groupsegment competes with other OEMs, as well as several third-partyservice providers.

BACKLOG
Our total backlog represents the estimated remaining value of work to be performed under firm contracts and includes funded and unfunded portions. For additional discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
Summary backlog information for each of our business groupssegments follows:
    
2015 Total
Backlog Not
Expected to Be
Completed in 2016
    
2018 Total
Backlog Not
Expected to Be
Completed in 2019
December 312015 2014 2018 2017 
Funded     Unfunded     Total     Funded     Unfunded   Total     Funded Unfunded Total Funded Unfunded Total 
Aerospace$13,292
 $106
 $13,398
 $13,115
 $117
 $13,232
 $7,851
$11,208
 $167
 $11,375
 $12,319
 $147
 $12,466
 $5,079
Combat Systems18,398
 597
 18,995
 19,292
 506
 19,798
 14,221
16,174
 424
 16,598
 17,158
 458
 17,616
 10,822
Information Systems and Technology6,827
 1,755
 8,582
 7,070
 1,539
 8,609
 2,071
Information
Technology
4,717
 3,248
 7,965
 2,140
 1,471
 3,611
 1,770
Mission Systems4,890
 445
 5,335
 4,542
 721
 5,263
 2,126
Marine Systems13,266
 11,879
 25,145
 13,452
 17,319
 30,771
 17,855
18,837
 7,761
 26,598
 15,872
 8,347
 24,219
 18,844
Total backlog$51,783
 $14,337
 $66,120
 $52,929
 $19,481
 $72,410
 $41,998
$55,826
 $12,045
 $67,871
 $52,031
 $11,144
 $63,175
 $38,641

RESEARCH AND DEVELOPMENT
To foster innovative product development and evolution, we conduct sustained R&D activities as part of our normal business operations. In the commercial sector, mostMost of our Aerospace group’ssegment’s R&D activities support Gulfstream’s product enhancement and development programs. In our U.S. defense businesses,operations, we conduct customer-sponsored R&D activities under government contracts and company-sponsored R&D activities, investing in technologies and capabilities that provide innovative solutions for our customers. In accordance with

13


government regulations, we recover a portion of company-sponsored R&D expenditures through overhead charges to U.S. government contracts. For more information on our company-sponsored R&D activities, including our expenditures for the past three years, see Note A to the Consolidated Financial Statements in Item 8.



INTELLECTUAL PROPERTY
We develop technology, manufacturing processes and systems-integration practices. In addition to owning a large portfolio of proprietary intellectual property, we license some intellectual property rights to and from others. The U.S. government holds licenses to many of our patents developed in the performance of U.S. government contracts, and it may use or authorize others to use the inventions covered by these patents. Although these intellectual property rights are important to the operation of our business, no existing patent, license or other intellectual property right is of such importance that its loss or termination would have a material impact on our business.

EMPLOYEES
On December 31, 2015,2018, our subsidiaries had 99,900105,600 employees, approximately one-fifth of whom work under collective agreements with various labor unions and worker representatives. Agreements covering approximately 6 percent5% of total employees are due to expire in 2016.2019. Historically, we have renegotiated these labor agreements without any significant disruption to operating activities.

RAW MATERIALS, SUPPLIERS AND SEASONALITY
We depend on suppliers and subcontractors for raw materials, components and subsystems. Our U.S. government customer is a supplier on some of our programs. These supply networks can experience price fluctuations and capacity constraints, which can put pressure on our costs. Effective management and oversight of suppliers and subcontractors is an important element of our successful performance. We sometimes rely on only one or two sources of supply that, if disrupted, could impact our ability to meet our customer commitments. We attempt to mitigate these risks with our suppliers by entering into long-term agreements and leveraging company-wide agreements to achieve economies of scale, and by negotiating flexible pricing terms in our customer contracts. We have not experienced, and do not foresee, significant difficulties in obtaining the materials, components or supplies necessary for our business operations.
Our business is not seasonal in nature. The receipt of contract awards, the availability of funding from the customer, the incurrence of contract costs and unit deliveries are all factors that influence the timing of our revenue. In the United States, these factors are influenced by the federal government’s budget cycle based on its October-to-September fiscal year.

REGULATORY MATTERS
U.S. GOVERNMENT CONTRACTS
U.S. government contracts are subject to procurement laws and regulations. The Federal Acquisition Regulation (FAR) and the Cost Accounting Standards (CAS) govern the majority of our contracts. The FAR mandates uniform policies and procedures for U.S. government acquisitions and purchased services. Also, individual agencies can have acquisition regulations that provide implementing language for the FAR or that supplement the FAR. For example, the DoD implements the FAR through the Defense Federal

14


Acquisition Regulation Supplement (DFARS). For all federal government entities, the FAR regulates the phases of any product or service acquisition, including:
acquisition planning,planning;
competition requirements,requirements;
contractor qualifications,qualifications;


protection of source selection and vendor information,information; and
acquisition procedures.
In addition, the FAR addresses the allowability of our costs, while the CAS address howaddresses the allocation of those costs should be allocated to contracts. The FAR subjectsand CAS subject us to audits and other government reviews covering issues such as cost, performance, internal controls and accounting practices relating to our contracts.
NON-U.S. REGULATORY
Our non-U.S. revenue isoperations are subject to the applicable foreign government regulations and procurement policies and practices, as well as U.S. policies and regulations. We are also subject to regulations governing investments, exchange controls, repatriation of earnings and import-export control.
BUSINESS-JET AIRCRAFT
The Aerospace groupsegment is subject to Federal Aviation Administration (FAA)FAA regulation in the U.S.United States and other similar aviation regulatory authorities internationally, including the Civil Aviation Administration of Israel (CAAI), the European Aviation Safety Agency (EASA) and the Civil Aviation Administration of China (CAAC). For an aircraft to be manufactured and sold, the model must receive a type certificate from the appropriate aviation authority, and each aircraft must receive a certificate of airworthiness. Aircraft outfitting and completions also require approval by the appropriate aviation authority, which often is accomplished through a supplemental type certificate. Aviation authorities can require changes to a specific aircraft or model type before granting approval. Maintenance facilities and charter operations must be licensed by aviation authorities as well.
ENVIRONMENTAL
We are subject to a variety of federal, state, local and foreign environmental laws and regulations. These laws and regulations cover the discharge, treatment, storage, disposal, investigation and remediation of materials, substances and wastes identified in the laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and at third-party sites that we do not own but where we have been designated a Potentially Responsible Partypotentially responsible party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. As a PRP, we are potentially liable to the government or third parties for the cost of remediating contamination. In cases where we have been designated a PRP, generally we seek to mitigate these environmental liabilities through available insurance coverage and by pursuing appropriate cost-recovery actions. In the unlikely event that we are required to fully fund the remediation of a site, the current statutory framework would allow us to pursue contributions from other PRPs. We regularly assess our compliance status and management of environmental matters.
Operating and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of our operations. Historically, these costs have not been material. Environmental costs often are recoverable under our contracts with the U.S. government. Based on information currently available and current U.S. government policies relating to cost recovery, we do not expect continued compliance with environmental regulations to have a material impact on our results of operations, financial condition or cash flows. For additional information relating to the impact of environmental matters, see Note NO to the Consolidated Financial Statements in Item 8.

15



AVAILABLE INFORMATION
We file reports and other information with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports and information include an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and


proxy statements. Free copies of these items are made available on our website (www.generaldynamics.com) as soon as practicable and through the General Dynamics investor relations office at (703) 876-3583.practicable. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information. These items also
In addition to the information contained in this Form 10-K, information about the company can be readfound on our website and copied atour Investor Relations website (investorrelations.gd.com). Our Investor Relations website contains a significant amount of information about the company, including financial information, our corporate governance principles and practices, and other information for investors. We encourage investors to visit our website, as we frequently update and post new information about our company on our website, and it is possible that this information could be deemed to be material information.
References to our website and the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operationwebsite in this Form 10-K do not constitute, and should not be viewed as, incorporation by reference of the Public Reference Room isinformation contained on, or available through, the websites. The information should not be considered a part of this Form 10-K, unless otherwise expressly incorporated by calling the SEC at (800) SEC-0330.reference.

ITEM 1A. RISK FACTORS
An investment in our common stock or debt securities is subject to risks and uncertainties. Investors should consider the following factors, in addition to the other information contained in this Annual Report on Form 10-K, before deciding whether to purchase our securities.
Investment risks can be market-wide as well as unique to a specific industry or company. The market risks faced by an investor in our stock are similar to the uncertainties faced by investors in a broad range of industries. There are some risks that apply more specifically to our business.
Our revenue is concentrated with the U.S. government. This customer relationship involves some specific risks. In addition, our sales to non-U.S. customers expose us to different financial and legal risks. Despite the varying nature of our U.S. and non-U.S. defense and business-aviation operations and the markets they serve, each groupsegment shares some common risks, such as the ongoing development of high-technology products and the price, availability and quality of commodities and subsystems.
The U.S. government provides a significant portion of our revenue. Approximately 55 percentIn 2018, approximately 65% of our consolidated revenue iswas from the U.S. government. Levels of U.S. defense spending are driven by threats to national security. Competing demands for federal funds can pressure various areas of spending, and defense investment accounts (budgets for procurement and research and development) remain under pressure.spending. Decreases in U.S. government defense spending including investment accounts, or changes in spending allocation or priorities could result in one or more of our programs being reduced, delayed or terminated, which could impact our financial performance.
The Budget Control Act of 2011 (BCA) establishes caps for defense spending over a 10-year period through 2021, including a sequester mechanism that would impose additional defense cuts. In February 2018, the Congress approved increases to the BCA spending caps through fiscal year (FY) 2019. However, the BCA’s spending limits for FY 2020 and FY 2021 have not been increased or otherwise modified. The President’s defense budget estimates for FY 2020 and beyond exceed the spending limits established by the BCA. As a result, continued budget uncertainty and the risk of future sequestration cuts remain unless the BCA is repealed or significantly modified.
While it is impossible to predict the exact impact on our programs or financial outlook in light of the inherent uncertainty attendant to the sequestration process, the magnitude of potential funding reductions


imposed by the sequester mechanism as written, could in the aggregate have material adverse operational and financial consequences, depending on how the cuts are allocated across the budget.
For additional information relating to the U.S. defense budget, see the Business Environment section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
U.S. government contracts are not always fully funded at inception, and any funding is subject to disruption or delay. Our U.S. government revenue is funded by agency budgets that operate on an October-to-September fiscal year. Early each calendar year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is the result of months of policy and program reviews throughout the Executive branch. For the remainder of the year, the appropriations and authorization committees of the Congress review the President’s budget proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies.
There are two primary risks associated with the U.S. government budget cycle. First, the annual process may be delayed or disrupted, which has occurred in recent years. For example, changes in congressional

16


schedules due to elections or other legislative priorities, or negotiations for program funding levels can interrupt the process.disrupted. If the annual budget is not approved by the beginning of the government fiscal year, portions of the U.S. government can shut down or operate under a continuing resolution that maintains spending at prior-year levels, which can impact funding for our programs and timing of new awards. Second, the Congress typically appropriates funds on a fiscal-year basis, even though contract performance may extend over many years. Future revenue under existing multi-year contracts is conditioned on the continuing availability of congressional appropriations. Changes in appropriations in subsequent years may impact the funding available for these programs. Delays or changes in funding can impact the timing of available funds or lead to changes in program content.
Our U.S. government contracts are subject to termination rights by the customer. U.S. government contracts generally permit the government to terminate a contract, in whole or in part, for convenience. If a contract is terminated for convenience, a contractor usually is entitled to receive payments for its allowable costs incurred and the proportionate share of fees or earnings for the work performed. The government may also terminate a contract for default in the event of a breach by the contractor. If a contract is terminated for default, the government in most cases pays only for the work it has accepted. The termination of multiple or large programs could have a material adverse effect on our future revenue and earnings.
Government contractors operate in a highly regulated environment and are subject to audit by the U.S. government. Numerous U.S. government agencies routinely audit and review government contractors. These agencies review a contractor’s performance under its contracts and compliance with applicable laws, regulations and standards. The U.S. government also reviews the adequacy of, and compliance with, internal control systems and policies, including the contractor’s purchasing, property, estimating, material, earned value management and accounting systems. In some cases, audits may result in delayed payments or contractor costs not being reimbursed or subject to repayment. If an audit or investigation were to result in allegations against a contractor of improper or illegal activities, civil or criminal penalties and administrative sanctions could result, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, reputational harm could result if allegations of impropriety were made. In some cases, audits may result in disputes with the respective government agency that can result in negotiated settlements, arbitration or litigation. Moreover, new laws, regulations or standards, or changes to existing ones, can increase our performance and compliance costs and reduce our profitability.
Our Aerospace groupsegment is subject to changing customer demand for business aircraft. The business-jet market is driven by the demand for business-aviation products and services by business, corporate,


individual and government customers in the United States and around the world. The Aerospace group’ssegment’s results also depend on other factors, including general economic conditions, the availability of credit, pricing pressures and trends in capital goods markets. In addition, if customers default on existing contracts and the contracts are not replaced, the group’ssegment’s anticipated revenue and profitability could be reduced materially as a result.materially.
Earnings and margin depend on our ability to perform on our contracts. When agreeing to contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting for our contracts and programs requires assumptions and estimates about these conditions and events. These projections and estimates assess:
the productivity and availability of labor,labor;
the complexity of the work to be performed,performed;
the cost and availability of materials and components,components; and
schedule requirements.

17


If there is a significant change in one or more of these circumstances, estimates or assumptions, or if the risks under our contracts are not managed adequately, the profitability of contracts could be adversely affected. This could affect earnings and margin materially.
Earnings and margin depend in part on subcontractor and vendor performance. We rely on other companies to provide materials, components and subsystems for our products. Subcontractors also perform some of the services that we provide to our customers. We depend on these subcontractors and vendors to meet our contractual obligations in full compliance with customer requirements and applicable law. Misconduct by subcontractors, such as a failure to comply with procurement regulations or engaging in unauthorized activities, may harm our future revenue and earnings. We manage our supplier base carefully to avoid customer issues. We sometimes rely on only one or two sources of supply that, if disrupted, could have an adverse effect on our ability to meet our customer commitments. Our ability to perform our obligations may be materially adversely affected if one or more of these suppliers is unable to provide the agreed-upon supplies,materials, perform the agreed-upon services in a timely and cost-effective manner, or engages in misconduct or other improper activities.
Sales and operations outside the United States are subject to different risks that may be associated with doing business in foreign countries. In some countries there is increased chance for economic, legal or political changes, and procurement procedures may be less robust or mature, which may complicate the contracting process. Our non-U.S. businessoperations may be sensitive to and impacted by changes in a foreign government’s budgets,national policies and priorities, political leadership, and national priorities,budgets, which may be influenced by changes in threat environments, geopolitical uncertainties, volatility in economic conditions and other economic and political factors. Changes and developments in any of these matters or factors may occur suddenly.suddenly and could impact funding for programs or delay purchasing decisions or customer payments. Non-U.S. transactions can involve increased financial and legal risks arising from foreign exchange-rate variability and differing legal systems. Our non-U.S. business isoperations are subject to U.S. and foreign laws and regulations, including laws and regulations relating to import-export controls, technology transfers, the Foreign Corrupt Practices Act and other anti-corruption laws, and the International Traffic in Arms Regulations (ITAR). An unfavorable event or trend in any one or more of these factors or a failure to comply with U.S. or foreign laws could result in administrative, civil or criminal liabilities, including suspension or debarment from government contracts or suspension of our export privileges, and could materially adversely affect revenue and earnings associated with our non-U.S. business.operations.


In addition, some non-U.S. government customers require contractors to enter into letters of credit, performance or surety bonds, bank guarantees and other similar financial arrangements. We may also be required to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, that require us to satisfy investment or other requirements or face penalties. Offset requirements may extend over several years and could require us to team with local companies to fulfill these requirements. If we do not satisfy these financial or offset requirements, our future revenue and earnings may be materially adversely affected.
Our future success depends in part on our ability to develop new products and technologies and maintain a qualified workforce to meet the needs of our customers. Many of the products and services we provide involve sophisticated technologies and engineering, with related complex manufacturing and system-integration processes. Our customers’ requirements change and evolve regularly. Accordingly, our future performance depends in part on our ability to continue to develop, manufacture and provide innovative products and services and bring those offerings to market quickly at cost-effective prices. Some new products, particularly in our Aerospace group,segment, must meet extensive and time-consuming regulatory requirements that are often outside our control. Additionally, due to the highly specialized nature of our business, we must hire and retain the skilled and qualified personnel necessary to perform the services required by our customers. To the extent that the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting or training costs in order to attract and retain such employees. If we were unable to develop new products that meet customers’ changing needs

18


and satisfy regulatory requirements in a timely manner or successfully attract and retain qualified personnel, our future revenue and earnings may be materially adversely affected.
We have made and expect to continue to make investments, including acquisitions and joint ventures, that involve risks and uncertainties. When evaluating potential acquisitions and joint ventures, we make judgments regarding the value of business opportunities, technologies, and other assets and the risks and costs of potential liabilities based on information available to us at the time of the transaction. Whether we realize the anticipated benefits from these transactions depends on multiple factors, including our integration of the businesses involved,involved; the performance of the underlying products, capabilities or technologies,technologies; market conditions following the acquisitionacquisition; and acquired liabilities, including some that may not have been identified prior to the acquisition. These factors could materially adversely affect our financial results.
Changes in business conditions may cause goodwill and other intangible assets to become impaired. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized and remains on our balance sheet indefinitely unless there is an impairment or a sale of a portion of the business. Goodwill is subject to an impairment test on an annual basis andor 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 business groupsreporting units or a decision to dispose of a business groupreporting unit or a significant portion of a business group.reporting unit. We face some uncertainty in our business environment due to a variety of challenges, including changes in defense spending. We may experience unforeseen circumstances that adversely affect the value of our goodwill or intangible assets and trigger an evaluation of the amount of the recorded goodwill and intangible assets. Future write-offs of goodwill or other intangible assets as a result of an impairment in the business could materially adversely affect our results of operations and financial condition.
Our business could be negatively impacted by cyber security events and other disruptions. We face various cyber security threats, including threats to our information technology (IT) infrastructure and attempts to gain access to our proprietary or classified information, denial-of-service attacks, as well as


threats to the physical security of our facilities and employees, and threats from terrorist acts. We also design and manage information technologyIT systems and products that contain information technologyIT systems for various customers. We generally face the same security threats for these systems as for our own.own internal systems. In addition, we face cyber threats from entities that may seek to target us through our customers, vendors, subcontractors and subcontractors.other third parties with whom we do business. Accordingly, we maintain information security staff, policies and procedures for managing allrisk to our information systems, and conduct employee training on cyber security. security to mitigate persistent and continuously evolving cyber security threats. However, there can be no assurance that any such actions will be sufficient to prevent cybersecurity breaches, disruptions, unauthorized release of sensitive information or corruption of data.
We have experienced cyber security threats to our information technology infrastructure and attempts to gain access to our sensitive information, includingsuch as viruses and attacks by hackers.targeting our IT systems. Such prior events have not had a material impact on our financial condition, results of operations or liquidity. However, future threats could, among other things, cause harm to our business and our reputationreputation; disrupt our operations; expose us to potential liability, regulatory actions and loss of business; challenge our eligibility for future work on sensitive or classified systems for government customers, as well ascustomers; and impact our results of operations materially. Due to the evolving nature of these security threats, the potential impact of any future incident cannot be predicted. Our insurance coverage may not be adequate to cover all the costs related to cyber security attacks or disruptions resulting from such events.


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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “outlook,” “estimates,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples include projections of revenue, earnings, operating margin, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog. In making these statements we rely on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we consider appropriate under the circumstances. We believe our estimates and judgments are reasonable based on information available to us at the time. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation, the risk factors discussed in this Form 10-K.
All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to General Dynamics or any person acting on our behalf are qualified by the cautionary statements in this section. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report. These factors may be revised or supplemented in subsequent reports on SEC Forms 10-Q and 8-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS


None.

ITEM 2. PROPERTIES
We operate in a number of offices, manufacturing plants, laboratories, warehouses and other facilities in the United States and abroad. We believe our facilities are adequate for our present needs and, given planned improvements and construction, expect them to remain adequate for the foreseeable future.
On December 31, 2015,2018, our business groupssegments had primary operations at the following locations:
Aerospace – Burbank, Lincoln, and Long Beach and Van Nuys, California; West Palm Beach, Florida; Brunswick, Pooler and Savannah, Georgia; Cahokia, Illinois; Bedford and Westfield, Massachusetts; Las Vegas, Nevada; Teterboro, New Jersey; New York, New York; Tulsa, Oklahoma; San Juan, Puerto Rico; Dallas and Houston, Texas; Dulles, Virginia; Appleton, Wisconsin; Brisbane, Cairns, Darwin, Perth and Sydney, Australia; Vienna, Austria; Sorocaba, Brazil; Beijing, and Hong Kong and Shanghai, China; Berlin, Dusseldorf and Munich, Germany; Jakarta, Indonesia; Kuala Lumpur, Malaysia; Valetta, Malta; Mexicali, Mexico; Amsterdam and Rotterdam, the Netherlands; Manila, Philippines; Moscow, Russia; Singapore; Basel, Geneva and Zurich, Switzerland; Bangkok, Thailand; Dubai and Fujairah, United Arab Emirates; Luton and Stansted, United Kingdom.
Combat Systems – Anniston, Alabama; East Camden and Hampton, Arkansas; Crawfordsville, St. Petersburg and Tallahassee, Florida; Marion, Illinois; Saco, Maine; Shelby Township and Sterling Heights, Michigan; Joplin, Missouri; Lincoln, Nebraska; Lima, and Springboro, Ohio; Eynon, Red Lion and Scranton, Pennsylvania; Ladson, South Carolina; Garland, Texas; Williston, Vermont; Marion, Virginia; Auburn and Sumner, Washington; Vienna, Austria; Edmonton, La Gardeur, London, St.

20


Augustin and Valleyfield, Canada; Kaiserslautern, Neubrandenburg and Woldegk, Germany; Granada, Madrid, Sevilla and Trubia, Spain; Kreuzlingen, Switzerland; Oakdale and Merthyr Tydfil and Oakdale, United Kingdom.
Information SystemsTechnology – Daleville, Alabama; Pawcatuck, Connecticut; Bossier City, Louisiana; Annapolis Junction, Columbia and TechnologyTowson, Maryland; Westwood, Massachusetts; Rensselaer, New York; Fayetteville, North Carolina; Arlington, Chesapeake, Sterling and several locations in Fairfax County, Virginia.
Mission Systems – Cullman, Alabama; Phoenix and Scottsdale, Arizona; Santa Clara,San Jose, California; Lynn Haven and Riverview, Florida; Coralville and West Des Moines, Iowa; Lawrence, Kansas; Annapolis Junction, and Towson, Maryland; Dedham, Pittsfield Taunton and Westwood,Taunton, Massachusetts; Bloomington, Minnesota; Hattiesburg, Mississippi;Florham Park, New Jersey; Catawba, Conover Greensboro and Newton,Greensboro, North Carolina; Kilgore, Plano and Wortham, Texas; Sandy, Utah; Chantilly, Chesapeake, Chester, Fairfax Herndon, Springfield and Sterling,Marion, Virginia; Spokane Valley, Washington; Calgary and Ottawa, Canada; Tallinn, Estonia; Merthyr Tydfil, Oakdale and St. Leonards, United Kingdom.
Marine Systems – San Diego, California; Groton, and New London and Stonington, Connecticut; Jacksonville, Florida; Bath and Brunswick, Maine; North Kingstown, Rhode Island; Norfolk and Portsmouth, Virginia; Bremerton, Washington; Mexicali, Mexico.


A summary of floor space by business groupsegment on December 31, 2015,2018, follows:
(Square feet in millions)
Company-owned
Facilities
 
Leased
Facilities
 
Government-owned
Facilities
 Total    
Company-owned
Facilities
 
Leased
Facilities
 
Government-owned
Facilities
 Total
Aerospace5.9
 6.8
 —
 12.7
6.2
 8.1
 —
 14.3
Combat Systems7.7
 3.4
 5.6
 16.7
6.3
 4.4
 5.5
 16.2
Information Systems and Technology2.6
 8.8
 0.9
 12.3
Information Technology0.2
 5.2
 —
 5.4
Mission Systems3.8
 3.6
 0.9
 8.3
Marine Systems8.1
 2.5
 —
 10.6
8.3
 3.4
 —
 11.7
Total24.3
 21.5
 6.5
 52.3
Total square feet24.8
 24.7
 6.4
 55.9

ITEM 3. LEGAL PROCEEDINGS
For information relating to legal proceedings, see Note NO to the Consolidated Financial Statements in Item 8.
 
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
All of our executive officers are appointed annually. None of our executive officers were selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions of our executives held for at least the past five years as of February 8, 2016,13, 2019, were as follows (references are to positions with General Dynamics Corporation, unless otherwise noted):
Name, Position and OfficeAge
  
Jason W. Aiken - Senior Vice President and Chief Financial Officer since January 2014; Vice President of the company and Chief Financial Officer of Gulfstream Aerospace Corporation, September 2011 - December 2013; Vice President and Controller, April 2010 - August 2011; Staff Vice President, Accounting, July 2006 - March 2010

4346
  

21


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 20155659
  
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 20036164
  
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 20085659
  


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 20095457
  
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 20134144
  
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 20086867
  
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 20074851
  
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 20065659
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 201555
  
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 20055861
  
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 20085760
  
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 20115558

22


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.

23


Cumulative Total Return
Based on Investments of $100 Beginning December 31, 20102013
(Assumes Reinvestment of Dividends)
gd20181231chart-4.jpg

24



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.

25



(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.


26



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

27


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 312015 2014 Variance2018 2017 Variance
Revenue$31,469
 $30,852
 $617
 2.0 %$36,193
 $30,973
 $5,220
 16.9%
Operating costs and expenses27,291
 26,963
 (328) (1.2)%(31,736) (26,737) (4,999) 18.7%
Operating earnings4,178
 3,889
 289
 7.4 %4,457
 4,236
 221
 5.2%
Operating margin13.3% 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.

28


REVIEW OF 20142017 VS. 20132016
Year Ended December 312014 2013 Variance2017 2016 Variance
Revenue$30,852
 $30,930
 $(78) (0.3)%$30,973
 $30,561
 $412
 1.3 %
Operating costs and expenses26,963
 27,241
 278
 1.0 %(26,737) (26,817) 80
 (0.3)%
Operating earnings3,889
 3,689
 200
 5.4 %4,236
 3,744
 492
 13.1 %
Operating margin12.6% 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 312015 2014 20132018 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 Systems5,640
 882
 5,732
 862
 5,832
 908
6,241
 962
 5,949
 937
 5,530
 831
Information Systems and Technology8,965
 903
 9,159
 785
 10,268
 795
Information Technology8,269
 608
 4,410
 373
 4,428
 340
Mission Systems4,726
 659
 4,481
 638
 4,716
 601
Marine Systems8,013
 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.

29


AEROSPACE
Review of 20152018 vs. 20142017
Year Ended December 312015 2014 Variance2018 2017 Variance
Revenue$8,851
 $8,649
 $202
 2.3%$8,455
 $8,129
 $326
 4.0 %
Operating earnings1,706
 1,611
 95
 5.9%1,490
 1,577
 (87) (5.5)%
Operating margin19.3% 18.6%    17.6% 19.4%    
Gulfstream aircraft deliveries (in units):       
Green147 144 3
 2.1%
Outfitted154 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 aircraft44
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$(206)
Aircraft services64
Pre-owned aircraft2
G&A/other expenses53
Total decrease$(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 312017 2016 Variance
Revenue$8,129
 $7,815
 $314
 4.0 %
Operating earnings1,577
 1,394
 183
 13.1 %
Operating margin19.4% 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 312018 2017 Variance
Revenue$6,241
 $5,949
 $292
 4.9%
Operating earnings962
 937
 25
 2.7%
Operating margin15.4% 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 services9
Pre-owned aircraft(7)
G&A/other expenses(7)
Total increase$95
U.S. military vehicles$130
International military vehicles99
Weapons systems and munitions63
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 312017 2016 Variance
Revenue$5,949
 $5,530
 $419
 7.6%
Operating earnings937
 831
 106
 12.8%
Operating margin15.8% 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.

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Review of 2014 vs. 2013
Year Ended December 312014 2013 Variance
Revenue$8,649
 $8,118
 $531
 6.5%
Operating earnings1,611
 1,416
 195
 13.8%
Operating margin18.6% 17.4%    
Gulfstream aircraft deliveries (in units):       
    Green144 139 5
 3.6%
Outfitted150 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 312018 2017 Variance
Revenue$8,269
 $4,410
 $3,859
 87.5%
Operating earnings608
 373
 235
 63.0%
Operating margin7.4% 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 312017 2016 Variance
Revenue$4,410
 $4,428
 $(18) (0.4)%
Operating earnings373
 340
 33
 9.7 %
Operating margin8.5% 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 312015 2014 Variance2018 2017 Variance
Revenue$5,640
 $5,732
 $(92) (1.6)%$4,726
 $4,481
 $245
 5.5%
Operating earnings882
 862
 20
 2.3 %659
 638
 21
 3.3%
Operating margin15.6% 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 products69
Naval, air and electronic systems58
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 312017 2016 Variance
Revenue$4,481
 $4,716
 $(235) (5.0)%
Operating earnings638
 601
 37
 6.2 %
Operating margin14.2% 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.

31


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 312014 2013 Variance
Revenue$5,732
 $5,832
 $(100) (1.7)%
Operating earnings862
 908
 (46) (5.1)%
Operating margin15.0% 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 312015 2014 Variance2018 2017 Variance
Revenue$8,965
 $9,159
 $(194) (2.1)%$8,502
 $8,004
 $498
 6.2%
Operating earnings903
 785
 118
 15.0 %761
 685
 76
 11.1%
Operating margin10.1% 8.6%    9.0% 8.6%    
The Informationincrease in the Marine Systems and Technology group’ssegment’s revenue in 2015 was slightly lower than 2014. The decrease from the prior year2018 consisted of the following:
Information technology (IT) services$(155)
C4ISR solutions*(39)
Total decrease$(194)
U.S. Navy ship construction$424
Commercial ship construction171
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

32


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 312014 2013 Variance
Revenue$9,159
 $10,268
 $(1,109) (10.8)%
Operating earnings785
 795
 (10) (1.3)%
Operating margin8.6% 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 312015 2014 Variance
Revenue$8,013
 $7,312
 $701
 9.6%
Operating earnings728
 703
 25
 3.6%
Operating margin9.1% 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 services210
Commercial ship construction164
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
33
Year Ended December 312017 2016 Variance
Revenue$8,004
 $8,072
 $(68) (0.8)%
Operating earnings685
 595
 90
 15.1 %
Operating margin8.6% 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 312018 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 312014 2013 Variance
Revenue$7,312
 $6,712
 $600
 8.9%
Operating earnings703
 666
 37
 5.6%
Operating margin9.6% 9.9%  
  
Year Ended December 312018 2017 Variance
Revenue:       
Products$20,149
 $19,016
 $1,133
 6.0%
Services16,044
 11,957
 4,087
 34.2%
Operating Costs:       
Products$(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 production307
Other, net228
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 services353
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 312017 2016 Variance
Revenue:       
Products$19,016
 $19,010
 $6
 — %
Services11,957
 11,551
 406
 3.5 %
Operating Costs:       
Products$(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 completions246
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 services118
Other, net45
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 312015 2014 Variance
Revenue:       
Products$20,280
 $19,564
 $716
 3.7 %
Services11,189
 11,288
 (99) (0.9)%
Operating Costs:       
Products$15,871
 $15,335
 $536
 3.5 %
Services9,468
 9,644
 (176) (1.8)%
The increase in product revenue in 2015 consisted of the following:
Ship construction$476
Aircraft manufacturing, outfitting and completions200
Other, net40
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.

34


Review of 2014 vs. 2013
Year Ended December 312014 2013 Variance
Revenue:       
Products$19,564
 $19,100
 $464
 2.4 %
Services11,288
 11,830
 (542) (4.6)%
Operating Costs:       
Products$15,335
 $15,065
 $270
 1.8 %
Services9,644
 10,137
 (493) (4.9)%
The increase in product revenue in 2014 consisted of the following:
Ship construction$626
Aircraft manufacturing, outfitting and completions619
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, net31
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

35


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
gd20181231chart-1.jpg
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

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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
gd20181231chart-3.jpg
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

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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
gd20181231chart-2.jpg
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.

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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
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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
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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.

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$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 
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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.

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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 312015 2014 2013
Net cash provided by operating activities$2,499
 $3,728
 $3,111
Net cash provided (used) by investing activities200
 (1,102) (363)
Net cash used by financing activities(4,259) (3,575) (725)
Net cash (used) provided by discontinued operations(43) 36
 (18)
Net (decrease) increase in cash and equivalents(1,603) (913) 2,005
Cash and equivalents at beginning of year4,388
 5,301
 3,296
Cash and equivalents at end of year2,785
 4,388
 5,301
Marketable securities—
 500
 —
Short- and long-term debt(3,399) (3,893) (3,888)
Net (debt) cash$(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 312018 2017 2016
Net cash provided by operating activities$3,148
 $3,876
 $2,163
Net cash used by investing activities(10,234) (788) (391)
Net cash provided (used) by financing activities5,086
 (2,399) (2,169)
Net cash used by discontinued operations(20) (40) (54)
Net (decrease) increase in cash and equivalents(2,020) 649
 (451)
Cash and equivalents at beginning of year2,983
 2,334
 2,785
Cash and equivalents at end of year963
 2,983
 2,334
Short- and long-term debt(12,417) (3,982) (3,888)
Net debt$(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.

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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.


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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 312015 2014 2013 2012 20112018 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 activities84% 139% 125% NM*
 126%94% 133% 81% 86% 143%
Free cash flow from operations65% 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.

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ROIC is calculated as follows:
Year Ended December 312015 2014 2013 2012* 2011
Earnings from continuing operations$2,965
 $2,673
 $2,486
 $1,414
 $2,500
After-tax interest expense64
 67
 67
 109
 101
After-tax amortization expense75
 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 capital17.4% 15.1% 14.1% 8.4% 14.7%
Year Ended December 312018 2017 2016 2015 2014*
Earnings from continuing operations$3,358
 $2,912
 $2,679
 $3,036
 $2,673
After-tax interest expense295
 76
 64
 64
 67
After-tax amortization expense213
 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 capital15.2% 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 ObligationsTotal Amount Committed Less Than 1 Year 1-3 Years 4-5 Years More Than 5 YearsTotal 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 obligations32
 2
 4
 4
 22
433
 92
 162
 109
 70
Operating leases1,037
 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 CommitmentsTotal Amount Committed Less Than 1 Year 1-3 Years 4-5 Years More Than 5 YearsTotal 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.


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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

45


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.

46


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

47


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

48


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.


49


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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTSSTATEMENT OF EARNINGS

Year Ended December 31Year Ended December 31
(Dollars in millions, except per-share amounts)2015 2014 20132018 2017 2016
Revenue:          
Products$20,280
 $19,564
 $19,100
$20,149
 $19,016
 $19,010
Services11,189
 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:          
Products15,871
 15,335
 15,065
(15,894) (14,773) (15,155)
Services9,468
 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 earnings4,178
 3,889
 3,689
4,457
 4,236
 3,744
Interest, net(83) (86) (86)(356) (103) (91)
Other, net7
 (1) 8
(16) (56) 3
Earnings from continuing operations before income tax4,102
 3,802
 3,611
4,085
 4,077
 3,656
Provision for income tax, net1,137
 1,129
 1,125
(727) (1,165) (977)
Earnings from continuing operations2,965
 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.



51



CONSOLIDATED STATEMENTSSTATEMENT OF COMPREHENSIVE INCOME

Year Ended December 31Year 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.



52



CONSOLIDATED BALANCE SHEETSSHEET

December 31December 31
(Dollars in millions)2015 20142018 2017
   
ASSETS      
Current assets:      
Cash and equivalents$2,785
 $4,388
$963
 $2,983
Accounts receivable3,446
 4,050
3,759
 3,617
Contracts in process4,357
 4,591
Unbilled receivables6,576
 5,240
Inventories3,366
 3,221
5,977
 5,303
Other current assets617
 1,157
914
 1,185
Total current assets14,571
 17,407
18,189
 18,328
Noncurrent assets:      
Property, plant and equipment, net3,466
 3,329
4,348
 3,517
Intangible assets, net763
 912
2,585
 702
Goodwill11,443
 11,731
19,594
 11,914
Other assets1,754
 1,958
692
 585
Total noncurrent assets17,426
 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 payable1,964
 2,057
3,179
 3,207
Customer advances and deposits5,674
 7,335
7,270
 6,992
Other current liabilities4,306
 3,858
3,317
 2,898
Total current liabilities12,445
 13,751
14,739
 13,099
Noncurrent liabilities:      
Long-term debt2,898
 3,392
11,444
 3,980
Other liabilities5,916
 6,365
7,493
 6,532
Commitments and contingencies (see Note N)

 

Commitments and contingencies (see Note O)

 

Total noncurrent liabilities8,814
 9,757
18,937
 10,512
Shareholders’ equity:      
Common stock482
 482
482
 482
Surplus2,730
 2,548
2,946
 2,872
Retained earnings23,204
 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’ equity10,738
 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.


53



CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS

Year Ended December 31Year Ended December 31
(Dollars in millions)2015 2014 20132018 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 equipment366
 375
 382
493
 362
 365
Amortization of intangible assets116
 121
 143
270
 79
 88
Equity-based compensation expense110
 128
 120
140
 123
 95
Excess tax benefit from equity-based compensation(77) (83) (23)
Deferred income tax provision167
 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 receivable604
 330
 (223)417
 (195) (122)
Contracts in process231
 281
 177
Unbilled receivables(800) (987) (1,048)
Inventories(156) (303) (200)(591) (182) (377)
Other current assets310
 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, net101
 (214) 126
(285) 235
 (278)
Net cash provided by operating activities2,499
 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 securities500
 —
 —
Purchases of held-to-maturity securities—
 (500) —
Proceeds from sales of assets291
 102
 104
562
 50
 9
Purchases of available-for-sale securities(123) (136) (135)
Sales of available-for-sale securities122
 135
 99
Maturities of available-for-sale securities6
 4
 14
Other, net(27) (186) (9)(7) (11) 50
Net cash provided (used) by investing activities200
 (1,102) (363)
Net cash used by investing activities(10,234) (788) (391)
Cash flows from financing activities:          
Proceeds from fixed-rate notes6,461
 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 notes1,000
 —
 —
Proceeds from commercial paper, net851
 —
 —
Repayment of CSRA accounts receivable purchase agreement(450) —
 —
Proceeds from stock option exercises136
 163
 292
Repayment of fixed-rate notes(500) —
 —
—
 (900) (500)
Proceeds from stock option exercises268
 547
 583
Other, net79
 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 activities5,086
 (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 year4,388
 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.

54



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 EquityPar 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, 2016482

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, 2013482
 2,226
 19,428
 (6,450) (1,185) 14,501
December 31, 2017482
 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, 2014482
 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.

55



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

56


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

57


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 312015 2014 20132018 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

58


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 debt2,846
Cash settlement of outstanding CSRA stock options and restricted stock units78
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 receivable154
Unbilled receivables510
Other current assets301
Property, plant and equipment, net673
Intangible assets, net2,066
Goodwill7,859
Other noncurrent assets20
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 312018 2017
Revenue$37,534
 $35,828
Earnings from continuing operations3,390
 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, 20142,555
 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 AmortizationNet Carrying Amount Gross Carrying Amount (a)Accumulated AmortizationNet Carrying AmountGross Carrying Amount (a)Accumulated AmortizationNet Carrying Amount Gross Carrying Amount (a)Accumulated AmortizationNet Carrying Amount
December 31, 2015 December 31, 2014
December 312018 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 trademarks455
(127)328
 462
(113)349
469
(177)292
 465
(160)305
Technology and software119
(96)23
 130
(97)33
165
(116)49
 137
(105)32
Other intangible assets154
(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 assets2-7

60


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
201775
201865
201952
202048
Year Ended December 31Amortization Expense
2019$280
2020265
2021217
2022192
2023175

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 312018 2017 2016
Revenue$377
 $292
 $95
Operating earnings345
 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 312018 2017 2016
Aircraft manufacturing and completions$6,226
 $6,320
 $6,074
Aircraft services2,096
 1,743
 1,625
Pre-owned aircraft133
 66
 116
Total Aerospace8,455
 8,129
 7,815
Military vehicles4,027
 3,731
 3,378
Weapons systems, armament and munitions1,798
 1,633
 1,517
Engineering and other services416
 585
 635
Total Combat Systems6,241
 5,949
 5,530
IT services8,269
 4,410
 4,428
Total Information Technology8,269
 4,410
 4,428
C4ISR solutions4,726
 4,481
 4,716
Total Mission Systems4,726
 4,481
 4,716
Nuclear-powered submarines5,712
 5,175
 5,264
Surface ships1,872
 1,607
 1,648
Repair and other services918
 1,222
 1,160
Total Marine Systems8,502
 8,004
 8,072
Total revenue$36,193
 $30,973
 $30,561
Revenue by contract type was as follows:
Year Ended December 31, 2018Aerospace 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-materials855
 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-materials650
 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-materials607
 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, 2018Aerospace 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. government334
 3,228
 8,025
 3,774
 8,245
 23,606
U.S. commercial4,175
 251
 163
 138
 245
 4,972
Non-U.S. government551
 2,698
 81
 662
 10
 4,002
Non-U.S. commercial3,395
 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
FMS42
 374
 22
 46
 192
 676
Total U.S. government231
 3,084
 4,164
 3,629
 7,913
 19,021
U.S. commercial3,885
 220
 214
 108
 71
 4,498
Non-U.S. government210
 2,580
 32
 607
 13
 3,442
Non-U.S. commercial3,803
 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
FMS130
 333
 23
 25
 202
 713
Total U.S. government361
 2,614
 4,147
 3,837
 7,717
 18,676
U.S. commercial3,501
 287
 259
 108
 329
 4,484
Non-U.S. government496
 2,520
 8
 613
 26
 3,663
Non-U.S. commercial3,457
 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 31201520142013201820172016
Basic weighted average shares outstanding321,313
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 outstanding326,652
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

61


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 securities186
 $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 securities188
 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 securities121
 121
 —
 121
 —
        Equity securities52
 52
 52
 —
 —
    Other investments4
 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 securities117
 117
 —
 117
 —
        Equity securities54
 54
 54
 —
 —
    Other investments4
 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 312018 2017 2016
Current:     
U.S. federal$587
 $656
 $698
State48
 31
 24
International95
 77
 71
Total current730
 764
 793
Deferred:     
U.S. federal(37) 215
 140
State8
 7
 7
International26
 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 312015 2014 2013
Current:     
U.S. federal$841
 $856
 $850
State31
 31
 28
International98
 106
 132
Total current970
 993
 1,010
Deferred:     
U.S. federal116
 110
 119
State5
 (3) 1
International46
 29
 (5)
Total deferred167
 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.

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The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:
Year Ended December 312015 2014 20132018 2017 2016
Statutory federal income tax rate35.0 % 35.0 % 35.0 %21.0 % 35.0 % 35.0 %
State tax on commercial operations, net of federal benefits0.6
 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 rate27.7 % 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 312015 20142018 2017
Retirement benefits$1,347
 $1,403
$1,055
 $935
Tax loss and credit carryforwards522
 701
393
 437
Salaries and wages275
 301
160
 137
Workers’ compensation248
 257
138
 139
Other406
 363
351
 335
Deferred assets2,798
 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 312015 2014
Current deferred tax asset$3
 $16
Current deferred tax liability(829) (729)
Noncurrent deferred tax asset1,272
 1,439
Noncurrent deferred tax liability(75) (82)
Net deferred tax asset$371
 $644
December 312018 2017
Deferred tax asset$38
 $75
Deferred tax liability(577) (244)
Net deferred tax liability$(539) $(169)

63


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:

64


December 312015 20142018 2017
Non-U.S. government$2,144
 $2,529
$2,035
 $2,228
U.S. government683
 822
1,189
 971
Commercial619
 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 312015 2014
Contract costs and estimated profits$20,742
 $18,691
Other contract costs965
 1,064
 21,707
 19,755
Advances and progress payments(17,350) (15,164)
Total contracts in process$4,357
 $4,591
December 312018 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.

65



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 312015 20142018 2017
Work in process$1,889
 $1,828
$4,357
 $3,872
Raw materials1,376
 1,290
1,504
 1,357
Finished goods28
 28
33
 51
Pre-owned aircraft73
 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 312015 20142018 2017
Machinery and equipment$4,394
 $4,182
$5,534
 $4,736
Buildings and improvements2,666
 2,518
3,011
 2,837
Land and improvements328
 331
386
 357
Construction in process288
 261
472
 307
Total PP&E7,676
 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.


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J.K. DEBT
Debt consisted of the following:
December 31 2015 2014 2018 2017
Fixed-rate notes due:Interest Rate   Interest rate:   
January 20151.375%$—
 $500
July 20162.250%500
 500
November 20171.000%900
 900
May 20202.875%$2,000
 $—
May 20213.000%2,000
 —
July 20213.875%500
 500
3.875%500
 500
November 20222.250%1,000
 1,000
2.250%1,000
 1,000
May 20233.375%750
 —
August 20231.875%500
 500
November 20242.375%500
 500
May 20253.500%750
 —
August 20262.125%500
 500
November 20272.625%500
 500
May 20283.750%1,000
 —
November 20423.600%500
 500
3.600%500
 500
Floating-rate notes due:    
May 20203-month LIBOR + 0.29%500
 —
May 20213-month LIBOR + 0.38%500
 —
Commercial paper2.568%850
 —
OtherVarious25
 25
Various168
 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
2017903
20181
20191
$973
20201
2,501
20213,002
20221,002
20231,252
Thereafter2,018
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.

67


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 312015 20142018 2017
Deferred income taxes$829
 $729
Salaries and wages$952
 $786
Retirement benefits272
 295
Workers’ compensation244
 320
Fair value of cash flow hedges780
 292
141
 180
Salaries and wages648
 718
Workers’ compensation369
 420
Retirement benefits304
 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 taxes75
 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.

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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 HedgesUnrealized Gains on SecuritiesForeign Currency Translation AdjustmentsChanges in Retirement Plans’ Funded StatusAOCLLosses on Cash Flow HedgesUnrealized Gains on Marketable SecuritiesForeign Currency Translation AdjustmentsChanges in Retirement Plans’ Funded StatusAOCL
December 31, 2012$6
$7
$1,092
$(3,880)$(2,775)
December 31, 2015$(487)$20
$181
$(2,997)$(3,283)
Other comprehensive loss, pretax191
(9)(112)(192)(122)
Benefit from income tax, net(49)3
—
64
18
Other comprehensive loss, net of tax142
(6)(112)(128)(104)
December 31, 2016(345)14
69
(3,125)(3,387)
Other comprehensive income, pretax3
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 tax3
8
(118)1,697
1,590
251
5
333
(22)567
December 31, 20139
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.


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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:

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Year Ended December 31Year Ended December 31
Future Minimum
Lease Payments
2016$220
2017179
2018136
201990
$297
202090
234
2021196
2022154
2023110
Thereafter322
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

72


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 312015 2014 20132018 2017 2016
Beginning balance$428
 $354
 $316
$467
 $474
 $434
Warranty expense158
 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
202084
202178
202279
202330
Thereafter70
Total future minimum lease payments433
Less amount representing interest95
Less amount representing executory costs19
Present value of net minimum lease payments319
Less current maturities of capital lease liability64
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 312018 2017 2016
Stock options$45
 $34
 $25
Restricted stock/RSUs65
 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 312018 2017 2016
Expected volatility17.6-18.2% 17.3-19.4% 19.1-20.0%
Weighted average expected volatility17.6% 19.4% 20.0%
Expected term (in months)68 68 70
Risk-free interest rate2.6-2.9% 2.0-2.2% 1.5-1.6%
Expected dividend yield1.8% 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 DollarsShares Under Option  
Weighted Average
Exercise Price Per Share
Outstanding on December 31, 201710,620,389
 $126.08
Granted1,730,430
 223.06
Exercised(1,388,110) 104.48
Forfeited/canceled(197,514) 182.08
Outstanding on December 31, 201810,765,195
 $143.43
Vested and expected to vest on December 31, 201810,595,953
 $142.32
Exercisable on December 31, 20186,119,560
 $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
Outstanding5.5 $320
Vested and expected to vest5.4 319
Exercisable3.4 294
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.

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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 312015 2014 2013
Stock options$32
 $38
 $48
Restricted stock40
 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 312015 2014 2013
Expected volatility20.1-24.1%
 19.4-20.8%
 21.6-27.3%
Weighted average expected volatility24.0% 20.2% 23.5%
Expected term (in months)74
 43/53
 43/53
Risk-free interest rate1.7-1.9%
 1.1-1.4%
 0.5-1.0%
Expected dividend yield2.0% 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.

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A summary of stock option activity during 2015 follows:
 Shares Under Option   
Weighted Average
Exercise Price Per Share
Outstanding on December 31, 201414,026,526
 $83.40
Granted2,125,970
 136.90
Exercised(3,620,295) 75.42
Forfeited/canceled(356,540) 115.56
Outstanding on December 31, 201512,175,661
 $94.17
Vested and expected to vest on December 31, 201512,058,610
 $93.78
Exercisable on December 31, 20158,153,380
 $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
Outstanding4.8 $526
Vested and expected to vest4.8 526
Exercisable3.7 475
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, 20142,740,177
 $78.83
In Shares and Dollars
Shares/
Share-Equivalent 
Units
 
Weighted Average
Grant-Date Fair Value Per Share
Nonvested at December 31, 20171,983,173
 $135.38
Granted708,700
 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, 20152,859,171
 $91.03
Nonvested at December 31, 20181,262,276
 $171.62
The total fair value of vesting shares was $76$242 in 2015, $472018, $200 in 20142017 and $63$68 in 2013.2016.

75



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.

76


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
2017589
 64
2018616
 64
2019643
 64
2020675
 63
2021-20253,797
 310
 
Pension
Benefits
 Other  Post-retirement
Benefits
2019$816
 $68
2020846
 67
2021873
 66
2022899
 65
2023927
 64
2024-20284,947
 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.

77


OurNet annual defined-benefit pension and other post-retirement benefit costscost (credit) consisted of the following:
Pension BenefitsPension Benefits
Year Ended December 312015 2014 20132018 2017 2016
Service cost$210
 $186
 $298
$180
 $168
 $173
Interest cost529
 532
 492
532
 453
 456
Expected return on plan assets(693) (655) (590)(856) (679) (713)
Recognized net actuarial loss417
 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 BenefitsOther Post-retirement Benefits
Year Ended December 312015 2014 20132018 2017 2016
Service cost$11
 $12
 $15
$10
 $9
 $10
Interest cost44
 52
 53
33
 30
 34
Expected return on plan assets(32) (31) (29)(40) (34) (33)
Recognized net actuarial loss6
 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 BenefitsPension Benefits Other Post-retirement Benefits
Year Ended December 312015 2014 2015 20142018 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) $(1,005)
Service cost(210) (186) (11) (12)(180) (168) (10) (9)
Interest cost(529) (532) (44) (52)(532) (453) (33) (30)
Acquisitions(2,758) —
 (62) —
Amendments6
 (1) (10) 55
15
 1
 —
 —
Actuarial gain (loss)685
 (2,083) 104
 (30)1,183
 (1,098) 78
 (42)
Settlement/curtailment/other195
 64
 35
 15
23
 (58) 21
 27
Benefits paid535
 515
 65
 77
741
 586
 67
 63
Benefit obligation at end of year$(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
Acquisitions2,328
 —
 77
 —
Employer contributions187
 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)

78


Amounts recognized on ourthe Consolidated Balance SheetsSheet consisted of the following:
Pension Benefits Other Post-retirement BenefitsPension Benefits Other Post-retirement Benefits
December 312015 2014 2015 20142018 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 BenefitsPension Benefits Other Post-retirement Benefits
December 312015 2014 2015 20142018 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 BenefitsPension Benefits Other Post-retirement Benefits
Year Ended December 312015 2014 2015 20142018 2017 2018 2017
Net actuarial loss (gain)$93
 $2,074
 $(85) $(7)$422
 $308
 $(34) $(6)
Prior service (credit) cost(6) 1
 10
 (55)
Prior service cost(15) (1) —
 —
Amortization of:              
Net actuarial loss from prior years(417) (320) (6) (9)
Net actuarial (loss) gain from prior
years
(359) (362) 4
 4
Prior service credit67
 67
 5
 2
46
 66
 4
 3
Other*(152) (9) (9) 1
(5) 7
 (2) (39)
Change in AOCL, pretax$(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:

79


December 312015 20142018 2017
PBO$(12,368) $(12,797)$(15,067) $(13,660)
ABO(12,082) (12,363)(14,856) (13,398)
Fair value of plan assets8,360
 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 312015 20142018 2017
Pension Benefits      
Discount rate4.46% 4.10%
Benefit obligation discount rate4.28% 3.62%
Rate of increase in compensation levels3.40% 3.43%2.79% 2.82%
Other Post-retirement Benefits      
Discount rate4.35% 4.03%
Benefit obligation discount rate4.24% 3.64%
Healthcare cost trend rate:      
Trend rate for next year7.00% 7.00%6.50% 6.50%
Ultimate trend rate5.00% 5.00%5.00% 5.00%
Year rate reaches ultimate trend rate2024
 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 312015 2014 20132018 2017 2016
Pension Benefits          
Discount rate4.10% 4.95% 4.22%
Discount rates:     
Benefit obligation3.69% 4.19% 4.46%
Service cost3.51% 4.13% 4.42%
Interest cost3.34% 3.56% 3.71%
Expected long-term rate of return on assets8.15% 8.16% 8.14%7.45% 7.43% 8.14%
Rate of increase in compensation levels3.43% 3.78% 3.79%2.79% 2.90% 3.39%
Other Post-retirement Benefits          
Discount rate4.03% 4.74% 3.97%
Discount rates:     
Benefit obligation3.64% 4.11% 4.35%
Service cost3.79% 4.34% 4.52%
Interest cost3.27% 3.43% 3.53%
Expected long-term rate of return on assets8.03% 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.

80


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:
Equities48 - 68%48-68%
Fixed income20 - 48%20-48%
Cash0 - 5%0-5%
Other asset classes0 - 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.

81


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 CategoryDecember 31, 2015December 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. companies64
 64
 —
 —
117
 117
 —
 —
Private equity investments12
 —
 —
 12
20
 —
 —
 20
Fixed-income securities:              
Corporate bonds (b)1,600
 —
 1,600
 —
Treasury securities261
 —
 261
 —
1,410
 —
 1,410
 —
Corporate bonds (b)1,986
 —
 1,986
 —
Commingled funds:              
Equity funds4,006
 —
 4,006
 —
5,243
 —
 5,243
 —
Fixed-income funds560
 —
 560
 —
624
 —
 624
 —
Real estate funds380
 —
 —
 380
68
 —
 —
 68
Other investments:       
Insurance deposit contracts128
 —
 —
 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 funds445
 —
 —
 445
910
      
Other investments:       
Insurance deposit agreements103
 —
 —
 103
Real estate funds420
      
Fixed-income funds101
      
Equity funds86
      
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 CategoryDecember 31, 2014December 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. companies90
 90
 —
 —
97
 97
 —
 —
Private equity investments9
 —
 —
 9
18
 —
 —
 18
Fixed-income securities:              
Corporate bonds (b)1,604
 —
 1,604
 —
Treasury securities292
 —
 292
 —
1,361
 —
 1,361
 —
Corporate bonds (b)2,188
 —
 2,188
 —
Commingled funds:              
Equity funds4,272
 —
 4,272
 —
5,018
 —
 5,018
 —
Fixed-income funds606
 —
 606
 —
325
 —
 325
 —
Real estate funds139
 —
 —
 139
51
 —
 —
 51
Commodity funds6
 —
 6
 —
Other investments:       
Insurance deposit contracts120
 —
 —
 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 funds390
      
Hedge funds510
 —
 —
 510
328
      
Other investments:       
Insurance deposit agreements103
 —
 —
 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 securities80
 80
 —
Fixed-income securities87
 —
 87
Commingled funds:     
Equity funds237
 —
 237
Fixed-income funds111
 —
 111
Real estate funds2
 2
 —
Total plan assets in fair value hierarchy$540
 $82
 $458
Plan assets measured using NAV as a practical expedient (b):     
Hedge funds22
    
Equity funds3
    
Fixed-income funds3
    
Real estate funds2
    
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 CategoryDecember 31, 2015
Cash and equivalents$79
 $—
 $79
 $—
Equity securities77
 77
 —
 —
Fixed-income securities21
 —
 21
 —
Commingled funds:       
Equity funds246
 —
 246
 —
Fixed-income funds99
 —
 99
 —
Real estate funds3
 2
 —
 1
Hedge funds2
 —
 —
 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.

83





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, 2014December 31, 2017
Cash and equivalents$3
 $—
 $3
 $—
$18
 $—
 $18
Equity securities164
 164
 —
 —
70
 70
 —
Fixed-income securities10
 —
 10
 —
89
 —
 89
Commingled funds:            
Equity funds314
 5
 309
 —
260
 —
 260
Fixed-income funds57
 6
 51
 —
99
 —
 99
Real estate funds3
 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 funds2
    
Hedge funds2
 —
 —
 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 AssetsPrivate 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, net1
 96
 —
 —
 97
December 31, 20149
 139
 512
 103
 763
December 31, 2016$13
 $42
 $109
 $164
Actual return on plan assets:
 
 
 
 
      
Unrealized gains, net1
 15
 14
 2
 32
1
 4
 4
 9
Realized gains, net—
 —
 6
 —
 6
—
 —
 2
 2
Purchases, sales, and settlements, net2
 227
 (85) (2) 142
December 31, 2015$12
 $381
 $447
 $103
 $943
Purchases, sales and settlements, net4
 5
 5
 14
December 31, 201718
 51
 120
 189
Actual return on plan assets:
 
 
 
Unrealized losses, net—
 (1) —
 (1)
Realized gains, net—
 —
 3
 3
Purchases, sales and settlements, net2
 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.

84


Summary financial information for each of our business groupssegments follows:
RevenueOperating EarningsRevenue from U.S. GovernmentRevenue Operating Earnings Revenue from U.S. Government
Year Ended December 31201520142013201520142013201520142013201820172016 201820172016 201820172016
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 Systems5,640
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 Technology8,965
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 Systems4,726
4,481
4,716
 659
638
601
 3,774
3,629
3,837
Marine Systems8,013
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 AssetsCapital ExpendituresDepreciation and AmortizationIdentifiable Assets Capital Expenditures Depreciation and Amortization
Year Ended December 31201520142013201520142013201520142013201820172016 201820172016 201820172016
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 Systems8,800
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 Technology8,577
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 Systems5,984
5,856
5,667
 49
47
87
 65
60
61
Marine Systems2,970
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 312015 2014 20132018 2017 2016
North America:          
United States$23,257
 $23,222
 $24,646
$28,578
 $23,519
 $23,160
Other1,080
 1,174
 959
755
 915
 709
Total North America24,337
 24,396
 25,605
29,333
 24,434
 23,869
Europe2,485
 2,410
 2,795
2,772
 2,558
 2,152
Asia/Pacific1,678
 1,608
 1,466
2,252
 2,011
 1,650
Africa/Middle East2,508
 2,163
 736
1,565
 1,655
 2,617
South America461
 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.

85



R. CONDENSED CONSOLIDATING STATEMENTSSTATEMENT OF EARNINGS

Year Ended December 31, 2015Parent
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&A46
1,609
297
—
1,952
Operating earnings(40)3,598
620
—
4,178
Interest, net(89)(1)7
—
(83)
Other, net4
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 subsidiaries2,939
—
—
(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, 2018Parent
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 sales9
21,792
3,178
—
24,979
67
(22,841)(6,704)—
(29,478)
G&A62
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 subsidiaries2,783
—
—
(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 sales76
(21,695)(3,112)—
(24,731)
G&A(48)(1,643)(315)—
(2,006)
Operating earnings28
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, net154
(1,262)(57)—
(1,165)
Equity in net earnings of subsidiaries2,899
—
—
(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 sales20
22,175
3,007
—
25,202
21
(21,811)(3,106)—
(24,896)
G&A74
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, net1
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 subsidiaries2,621
—
—
(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

86



R. CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2015Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
December 31, 2018Parent
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 process514
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 assets140
213
264
—
617
(45)441
518
—
914
Total current assets2,386
7,511
4,674
—
14,571
415
10,225
7,549
—
18,189
Noncurrent assets:  
Property, plant and equipment189
6,386
1,101
—
7,676
PP&E273
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 assets1,379
207
168
—
1,754
195
258
239
—
692
Investment in subsidiaries40,062
—
—
(40,062)—
Net investment in subsidiaries25,313
—
—
(25,313)—
Total noncurrent assets41,571
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 liabilities1,331
3,309
1,630
—
6,270
552
3,944
2,000
—
6,496
Total current liabilities1,831
6,348
4,266
—
12,445
1,402
8,485
4,852
—
14,739
Noncurrent liabilities:  
Long-term debt2,874
24
—
—
2,898
11,398
39
7
—
11,444
Other liabilities3,417
2,021
478
—
5,916
1,581
4,073
1,839
—
7,493
Total noncurrent liabilities6,291
2,045
478
—
8,814
12,979
4,112
1,846
—
18,937
Intercompany25,097
(23,816)(1,281)—
—
Shareholders’ equity: 
Common stock482
6
2,354
(2,360)482
Other shareholders’ equity10,256
34,422
3,280
(37,702)10,256
Total shareholders’ equity10,738
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


87



R. CONDENSED CONSOLIDATING BALANCE SHEET
 
December 31, 2014Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
December 31, 2017Parent
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 process542
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 assets781
215
161
—
1,157
351
461
373
—
1,185
Total current assets3,859
7,733
5,815
—
17,407
2,281
9,483
6,564
—
18,328
Noncurrent assets:  
Property, plant and equipment148
6,035
1,109
—
7,292
PP&E221
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 assets1,461
213
284
—
1,958
199
232
154
—
585
Investment in subsidiaries37,449
—
—
(37,449)—
Net investment in subsidiaries15,771
—
—
(15,771)—
Total noncurrent assets39,006
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 liabilities1,298
3,511
1,106
—
5,915
561
3,758
1,786
—
6,105
Total current liabilities1,798
7,041
4,912
—
13,751
561
7,939
4,599
—
13,099
Noncurrent liabilities:  
Long-term debt3,368
24
—
—
3,392
3,950
21
9
—
3,980
Other liabilities3,514
2,369
482
—
6,365
2,451
3,473
608
—
6,532
Total noncurrent liabilities6,882
2,393
482
—
9,757
6,401
3,494
617
—
10,512
Intercompany22,356
(22,557)201
—
—
Shareholders’ equity: 
Common stock482
6
2,043
(2,049)482
Other shareholders’ equity11,347
32,389
3,011
(35,400)11,347
Total shareholders’ equity11,829
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


88



R. CONDENSED CONSOLIDATING STATEMENTSSTATEMENT OF CASH FLOWS
 
Year Ended December 31, 2015Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Year Ended December 31, 2018Parent
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 securities500
—
—
—
500
Proceeds from sales of assets162
129
—
—
291
90
472
—
—
562
Other, net4
(26)—
—
(22)4
(12)1
—
(7)
Net cash provided by investing activities624
(372)(52)—
200
Net cash used by investing activities(9,706)(127)(401)—
(10,234)
Cash flows from financing activities:  
Proceeds from fixed-rate notes6,461
—
—
—
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 exercises268
—
—
—
268
Proceeds from floating-rate notes1,000
—
—
—
1,000
Proceeds from commercial paper, net851
—
—
—
851
Repayment of CSRA accounts receivable purchase
agreement
—
—
(450)—
(450)
Other, net77
2
—
—
79
2
35
31
—
68
Net cash used by financing activities(4,261)2
—
—
(4,259)
Net cash provided by financing activities5,470
35
(419)—
5,086
Net cash used by discontinued operations(43)—
—
—
(43)(20)—
—
—
(20)
Cash sweep/funding by parent2,934
(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 year2,536
—
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, net3
(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 exercises547
—
—
—
547
Proceeds from fixed-rate notes985
—
—
—
985
Repayment of fixed-rate notes(900)—
—
—
(900)
Other, net83
(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 operations36
—
—
—
36
Net cash used by discontinued operations(40)—
—
—
(40)
Cash sweep/funding by parent2,759
(2,314)(445)—
—
2,816
(1,719)(1,097)—
—
Net decrease in cash and equivalents(1,643)—
730
—
(913)
Net increase in cash and equivalents676
—
(27)—
649
Cash and equivalents at beginning of year4,179
—
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.

89



R. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2013Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Year Ended December 31, 2016Parent
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, net3
59
11
—
73
7
32
(38)—
1
Net cash used by investing activities2
(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 notes992
—
—
—
992
Dividends paid(591)—
—
—
(591)(911)—
—
—
(911)
Repayment of fixed-rate notes(500)—
—
—
(500)
Proceeds from stock option exercises583
—
—
—
583
292
—
—
—
292
Other, net23
—
—
—
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 parent3,074
(2,488)(586)—
—
1,528
(1,576)48
—
—
Net increase in cash and equivalents1,879
—
126
—
2,005
Net decrease in cash and equivalents(478)—
27
—
(451)
Cash and equivalents at beginning of year2,300
—
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.

90



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.
 
  
kpmgsignature2018.gif
We have served as the Company’s auditor since 2002.
McLean, Virginia
February 8, 201613, 2019
 

91



SUPPLEMENTARY DATA
(UNAUDITED)
(Dollars in millions, except per-share amounts)2014 20152017 2018
1Q 2Q (a) 3Q  4Q (b) 1Q 2Q 3Q   4Q1Q 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 earnings874
 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 operations596
 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
Low93.85
 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.

92



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.
 
pnnsignature2018.gif
   
jwasignature2018.jpg

Phebe N. Novakovic   Jason W. Aiken
Chairman and Chief Executive Officer   Senior Vice President and Chief Financial Officer



93



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.

94


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.
 
  
kpmgsignature2018.gif
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.


95


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.

96


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.

97


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. BarraDirector
*
Nicholas D. ChabrajaDirector
*
James S. CrownDirector
*
Rudy F. deLeonDirector
*
William P. FricksDirector
*
John M. KeaneDirector
*
Lester L. LylesDirector
*
Mark M. MalcolmDirector
*
James N. MattisDirector
*
William A. OsbornDirector
*
Laura J. SchumacherDirectorIndex 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

98


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
Restated Certificate of Incorporation of the company (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission October 7, 2004)
  


3.2
Amended and Restated Bylaws of General Dynamics Corporation (as amended effective December 2, 2015) (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission December 3, 2015)
  
4.1
Indenture dated as of August 27, 2001, among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-4, filed with the Commission January 18, 2002)
  
4.2
Sixth Supplemental Indenture dated as of July 12, 2011, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission July 12, 2011)
  
4.3
Seventh Supplemental Indenture dated as of November 6, 2012, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission November 6, 2012)
  
4.4
Indenture dated as of March 24, 2015, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-3, filed with the Commission March 24, 2015)
4.5
First Supplemental Indenture dated as of August 12, 2016, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission August 12, 2016)
4.6
Second Supplemental Indenture dated as of September 14, 2017, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission September 14, 2017)

4.7
Indenture dated as of March 22, 2018, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-3, filed with the Commission March 22, 2018)

4.8
First Supplemental Indenture dated as of May 11, 2018, among the company, the Guarantors (as defined therein) and The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission May 11, 2018)

  
10.1*
General Dynamics Corporation 2009 Equity Compensation Plan (incorporated herein by reference from the company’s registration statement on Form S-8 (No. 333-159038) filed with the Commission May 7, 2009)
  
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*
Form of Non-Statutory 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)
  
10.4*10.3*
General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (incorporated herein by reference from the company’s registration statement on Form S-8 (No. 333-181124)333-217656) filed with the Commission May 3, 2012)4, 2017)
  

99


10.4*
10.5*
Form of Non-Statutory Stock Option 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)
  


10.6*
10.5*
Form of Non-Statutory Stock Option 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)
10.6*
Form of Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for grants made March 4, 2015, through March 1, 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, filed with the Commission April 29, 2015)
  
10.7*
Form of Non-Statutory Stock Option 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 3, 2016, filed with the Commission April 27, 2016)
10.8*
Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for grants beginning March 4, 2015, 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, filed with the Commission April 29, 2015)
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*
Form of 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)grants made March 4, 2015, through March 1, 2016) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended March 30, 2014,April 5, 2015, filed with the Commission April 23, 2014)29, 2015)
  
10.10*
Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for grants beginning March 4, 2015,2, 2016) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended April 3, 2016, filed with the Commission April 27, 2016)
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*
Form of RestrictedNon-Statutory Stock Unit AwardOption 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)
10.12*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)

100


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*
Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants beginning 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 July 2, 2017, filed with the Commission July 26, 2017)

10.14*
Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants beginning May 3, 2017) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended July 2, 2017, filed with the Commission July 26, 2017)

10.15*
Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants beginning 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 July 2, 2017, filed with the Commission July 26, 2017)

  
10.16*
Successor Retirement Plan for Directors (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2003,2001, filed with the Commission March 5, 2004)29, 2002)
  
10.17*
General Dynamics Corporation Supplemental Savings Plan, amended and restated effective as of January 1, 20142017 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2013,2016, filed with the Commission on February 7, 2014)6, 2017)
  
10.18*Amendment to General Dynamics Corporation Supplemental Savings Plan, effective January 5, 2015
Form of Severance Protection Agreement for executive officers (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2014,2016, filed with the Commission on February 9, 2015)6, 2017)
  
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*
General Dynamics Corporation Supplemental Retirement Plan, restated effective January 1, 2010 (incorporating amendments through March 31, 2011) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended April 3, 2011, filed with the Commission May 3, 2011)
  
10.22*10.20*
Amendment to the General Dynamics Corporation Supplemental Retirement Plan, effective January 5, 2015 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2014, filed with the Commission on February 9, 2015)
10.21*
Amendment to the General Dynamics Corporation Supplemental Retirement Plan, effective January 1, 2016 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the Commission February 6, 2017)
10.22*
Amendment to the General Dynamics Corporation Supplemental Retirement Plan, effective January 1, 2019**
  
21Subsidiaries*
Subsidiaries**
  
23
Consent of Independent Registered Public Accounting Firm*Firm**
  
24
Power of Attorney*Attorney**
  
31.1
Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002**
  


31.2
Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002**
  
32.1
Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*2002**
  
32.2
Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*2002**
  
101Interactive 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.

101
GENERAL DYNAMICS CORPORATION

by
wamsignature2018.gif
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.


pnnsignature2018.gif
Chairman, Chief Executive Officer and Director
Phebe N. Novakovic(Principal Executive Officer)
jwasignature2018.jpg

Senior Vice President and Chief Financial Officer
Jason W. Aiken(Principal Financial Officer)
wamsignature2018.gif
Vice President and Controller
William A. Moss(Principal Accounting Officer)
*
James S. CrownDirector
*
Rudy F. deLeonDirector
*
Lester L. LylesDirector
*
Mark M. MalcolmDirector
*
C. Howard NyeDirector
*
William A. OsbornDirector
*
Catherine B. ReynoldsDirector
*
Laura J. SchumacherDirector
*
Peter A. WallDirector

 * 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.
gsgsignature2018.gif
Gregory S. Gallopoulos
Senior Vice President, General Counsel and Secretary

121