UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~July 2, ~~2016~~2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3671

GENERAL DYNAMICS CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		13-1673581
State or other jurisdiction of incorporation or organization		I.R.S. employer identification no.

2941 Fairview Park Drive, Suite 100 Falls Church, Virginia		22042-4513
Address of principal executive offices		Zip code

(703) 876-3000

Registrant’s telephone number, including area code

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 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 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” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large ~~Accelerated Filer~~accelerated filer ü Accelerated ~~Filer __ Non-Accelerated Filer __~~ filer ___ Non-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

~~304,519,550~~299,461,802 shares of the registrant’s common stock, $1 par value per share, were outstanding on ~~October~~July 2, ~~2016~~.2017.

INDEX




PART I -	FINANCIAL INFORMATION	PAGE
Item 1 -	Unaudited Consolidated Financial Statements
	Consolidated Statements of Earnings (Three Months)	3
	Consolidated Statements of Earnings ~~(Nine~~(Six Months)	4
	Consolidated Statements of Comprehensive Income (Three and ~~Nine~~Six Months)	5
	Consolidated Balance Sheets	6
	Consolidated Statements of Cash Flows	7
	Consolidated Statements of ~~Shareholders'~~Shareholders’ Equity	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3039
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	4551
Item 4 -	Controls and Procedures	4552
	FORWARD-LOOKING STATEMENTS	4552
PART II -	OTHER INFORMATION	4653
Item 1 -	Legal Proceedings	4653
Item 1A -	Risk Factors	4653
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	4753
Item 6 -	Exhibits	4754
	SIGNATURES	4855

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)


	Three Months Ended						Three Months Ended
(Dollars in millions, except per-share amounts)	October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016
Revenue:
Products	$	4,844		$	5,119		$	4,654		$	4,943
Services	2,887			2,875			3,021			2,831
	7,731			7,994			7,675			7,774
Operating costs and expenses:
Products	3,757			4,037			3,582			3,889
Services	2,434			2,447			2,532			2,373
General and administrative (G&A)	471			476			505			485
	6,662			6,960			6,619			6,747
Operating earnings	1,069			1,034			1,056			1,027
Interest, net	(23		)	(23		)	(24		)	(23		)
Other, net	2			2			—			1
Earnings from continuing operations before income tax	1,048			1,013
Earnings before income tax							1,032			1,005
Provision for income tax, net	281			280			283			291
Earnings from continuing operations	767			733
Discontinued operations, net of tax benefit of $46 in 2016 and $7 in 2015	(84		)	—
Net earnings	$	683		$	733		$	749		$	714

Earnings per share
Basic:
Continuing operations	$	2.52		$	2.31
Discontinued operations	(0.27		)	—
Net earnings	$	2.25		$	2.31
Diluted:
Continuing operations	$	2.48		$	2.28
Discontinued operations	(0.27		)	—
Net earnings	$	2.21		$	2.28
Basic							$	2.50		$	2.35
Diluted							$	2.45		$	2.30

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

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)


	Nine Months Ended						Six Months Ended
(Dollars in millions, except per-share amounts)	October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016
Revenue:
Products	$	14,556		$	15,189		$	9,121		$	9,525
Services	8,564			8,471			5,995			5,725
	23,120			23,660			15,116			15,250
Operating costs and expenses:
Products	11,287			11,887			7,018			7,524
Services	7,224			7,185			5,021			4,829
G&A	1,417			1,446			986			946
	19,928			20,518			13,025			13,299
Operating earnings	3,192			3,142			2,091			1,951
Interest, net	(68		)	(64		)	(49		)	(45		)
Other, net	13			5			—			11
Earnings from continuing operations before income tax	3,137			3,083			2,042			1,917
Provision for income tax, net	882			882			530			549
Earnings from continuing operations	2,255			2,201			1,512			1,368
Discontinued operations, net of tax benefit of $46 in 2016 and $7 in 2015	(97		)	—
Discontinued operations							—			(13		)
Net earnings	$	2,158		$	2,201		$	1,512		$	1,355

Earnings per share
Basic:
Continuing operations	$	7.38		$	6.79		$	5.03		$	4.47
Discontinued operations	(0.31		)	—			—			(0.04		)
Net earnings	$	7.07		$	6.79		$	5.03		$	4.43
Diluted:
Continuing operations	$	7.25		$	6.68		$	4.94		$	4.39
Discontinued operations	(0.31		)	—			—			(0.04		)
Net earnings	$	6.94		$	6.68		$	4.94		$	4.35

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended						Nine Months Ended						Three Months Ended					Six Months Ended
(Dollars in millions)	October 2, 2016			October 4, 2015			October 2, 2016			October 4, 2015			July 2, 2017		July 3, 2016			July 2, 2017		July 3, 2016
Net earnings	$	683		$	733		$	2,158		$	2,201		$	749	$	714		$	1,512	$	1,355
Gains (losses) on cash flow hedges	102			53			260			(331		)	135		(24		)	148		158
Unrealized losses on securities	(1		)	(4		)	(5		)	(4		)
Unrealized gains (losses) on securities													2		5			7		(4		)
Foreign currency translation adjustments	(43		)	(195		)	82			(230		)	199		(53		)	281		127
Change in retirement plans' funded status	65			99			191			287
Change in retirement plans’ funded status													63		66			132		126
Other comprehensive income (loss), pretax	123			(47		)	528			(278		)	399		(6		)	568		407
Provision (benefit) for income tax, net	49			46			133			(25		)
Provision for income tax, net													59		15			103		84
Other comprehensive income (loss), net of tax	74			(93		)	395			(253		)	340		(21		)	465		323
Comprehensive income	$	757		$	640		$	2,553		$	1,948		$	1,089	$	693		$	1,977	$	1,678

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

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	(Unaudited)
(Dollars in millions)	October 2, 2016			December 31, 2015			July 2, 2017			December 31, 2016

ASSETS
Current assets:
Cash and equivalents	$	2,303		$	2,785		$	1,856		$	2,334
Accounts receivable	3,502			3,446			3,690			3,399
Contracts in process	5,213			4,357
Unbilled receivables							5,045			4,212
Inventories	3,657			3,366			5,839			5,817
Other current assets	622			617			696			772
Total current assets	15,297			14,571			17,126			16,534
Noncurrent assets:
Property, plant and equipment, net	3,445			3,466			3,424			3,477
Intangible assets, net	715			763			685			678
Goodwill	11,581			11,443			11,679			11,445
Other assets	1,630			1,754			879			1,038
Total noncurrent assets	17,371			17,426			16,667			16,638
Total assets	$	32,668		$	31,997		$	33,793		$	33,172
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	1		$	501		$	989		$	900
Accounts payable	2,276			1,964			2,620			2,538
Customer advances and deposits	5,249			5,674			6,822			6,827
Other current liabilities	4,367			4,306			3,072			3,185
Total current liabilities	11,893			12,445			13,503			13,450
Noncurrent liabilities:
Long-term debt	3,885			2,898			2,989			2,988
Other liabilities	5,573			5,916			6,349			6,433
Commitments and contingencies (See Note L)
Commitments and contingencies (see Note M)
Total noncurrent liabilities	9,458			8,814			9,338			9,421
Shareholders' equity:
Shareholders’ equity:
Common stock	482			482			482			482
Surplus	2,789			2,730			2,796			2,819
Retained earnings	24,661			23,204			25,546			24,543
Treasury stock	(13,724		)	(12,392		)	(14,950		)	(14,156		)
Accumulated other comprehensive loss	(2,891		)	(3,286		)	(2,922		)	(3,387		)
Total shareholders' equity	11,317			10,738
Total liabilities and shareholders' equity	$	32,668		$	31,997
Total shareholders’ equity							10,952			10,301
Total liabilities and shareholders’ equity							$	33,793		$	33,172

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended						Six Months Ended
(Dollars in millions)	October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016
Cash flows from operating activities - continuing operations:
Net earnings	$	2,158		$	2,201		$	1,512		$	1,355
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of property, plant and equipment	272			272			182			181
Amortization of intangible assets	70			88			38			50
Equity-based compensation expense	76			84			49			51
Deferred income tax provision	218			88			93			10
Discontinued operations, net of tax	97			—
Discontinued operations							—			13
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	(52		)	254			(291		)	(38		)
Contracts in process	(957		)	391
Unbilled receivables							(815		)	(523		)
Inventories	(288		)	(29		)	(14		)	(84		)
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	305			334			82			157
Customer advances and deposits	(574		)	(1,508		)	(29		)	(455		)
Other, net	47			95			203			156
Net cash provided by operating activities	1,372			2,270			1,010			873
Cash flows from investing activities:
Capital expenditures	(244		)	(360		)	(153		)	(134		)
Maturities of held-to-maturity securities	—			500
Proceeds from sales of assets	4			290
Other, net	(42		)	(12		)	(42		)	(51		)
Net cash (used) provided by investing activities	(282		)	418
Net cash used by investing activities							(195		)	(185		)
Cash flows from financing activities:
Purchases of common stock	(1,514		)	(2,729		)	(901		)	(1,189		)
Proceeds from fixed-rate notes	992			—
Dividends paid	(678		)	(655		)	(483		)	(447		)
Repayment of fixed-rate notes	(500		)	(500		)
Proceeds from stock option exercises	211			240
Other, net	(39		)	(29		)	108			96
Net cash used by financing activities	(1,528		)	(3,673		)	(1,276		)	(1,540		)
Net cash used by discontinued operations	(44		)	(31		)	(17		)	(34		)
Net decrease in cash and equivalents	(482		)	(1,016		)	(478		)	(886		)
Cash and equivalents at beginning of period	2,785			4,388			2,334			2,785
Cash and equivalents at end of period	$	2,303		$	3,372		$	1,856		$	1,899
Supplemental cash flow information:
Cash payments for:
Income taxes	$	677		$	776		$	328		$	460
Interest	$	58		$	62		$	46		$	42

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

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)


	Common Stock				Retained			Treasury			Accumulated Other Comprehensive			Total Shareholders’			Common Stock					Retained			Treasury			Accumulated Other Comprehensive			Total Shareholders’
(Dollars in millions)	Par		Surplus		Earnings			Stock			Loss			Equity			Par		Surplus			Earnings			Stock			Loss			Equity
December 31, 2016																	$	482	$	2,819		$	24,543		$	(14,156	)	$	(3,387	)	$	10,301
Cumulative-effect adjustment (see Note A)																	—		—			(3		)	—			—			(3		)
Net earnings																	—		—			1,512			—			—			1,512
Cash dividends declared																	—		—			(506		)	—			—			(506		)
Equity-based awards																	—		(23		)	—			99			—			76
Shares purchased																	—		—			—			(893		)	—			(893		)
Other comprehensive income																	—		—			—			—			465			465
July 2, 2017																	$	482	$	2,796		$	25,546		$	(14,950	)	$	(2,922	)	$	10,952

December 31, 2015	$	482	$	2,730	$	23,204		$	(12,392	)	$	(3,286	)	$	10,738		$	482	$	2,730		$	22,903		$	(12,392	)	$	(3,283	)	$	10,440
Net earnings	—		—		2,158			—			—			2,158			—		—			1,355			—			—			1,355
Cash dividends declared	—		—		(701		)	—			—			(701		)	—		—			(466		)	—			—			(466		)
Equity-based awards	—		59		—			206			—			265			—		26			—			90			—			116
Shares purchased	—		—		—			(1,538		)	—			(1,538		)	—		—			—			(1,189		)	—			(1,189		)
Other comprehensive income	—		—		—			—			395			395			—		—			—			—			323			323
October 2, 2016	$	482	$	2,789	$	24,661		$	(13,724	)	$	(2,891	)	$	11,317

December 31, 2014	$	482	$	2,548	$	21,127		$	(9,396	)	$	(2,932	)	$	11,829
Net earnings	—		—		2,201			—			—			2,201
Cash dividends declared	—		—		(673		)	—			—			(673		)
Equity-based awards	—		149		—			210			—			359
Shares purchased	—		—		—			(2,729		)	—			(2,729		)
Other comprehensive loss	—		—		—			—			(253		)	(253		)
October 4, 2015	$	482	$	2,697	$	22,655		$	(11,915	)	$	(3,185	)	$	10,734
July 3, 2016																	$	482	$	2,756		$	23,792		$	(13,491	)	$	(2,960	)	$	10,579

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the unaudited Consolidated Financial Statements. Some prior-year amounts have been reclassified among financial statement accounts or disclosures to conform to the current-year presentation.

Consistent with ~~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.

Further discussion of our significant accounting policies is contained in the other notes to these financial statements.

Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These rules and regulations permit some of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.

Our fiscal quarters are 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2016.~~2017.

The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015.~~July 3, 2016.

These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Accounting Standards Updates. Since the first quarter of 2016, we have adopted the following accounting standards issued by the Financial Accounting Standards Board (FASB) that have impacted our prior-period financial statements:

Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

Accounting Standards Codification (ASC) Topic 606, Revenue ~~Recognition.~~ from Contracts with Customers

ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

See Note Q for further discussion of each of these accounting standards.

We also adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, on January 1, 2017. We recognized the cumulative effect of this standard as a $3 decrease to retained earnings on the date of adoption. ASU 2016-16 requires recognition of the current and deferred income tax effects of an intra-entity asset transfer, other than inventory, when the transfer occurs, as opposed

to former GAAP, which required companies to defer the income tax effects of intra-entity asset transfers until the asset was sold to an outside party. The income tax effects of intra-entity inventory transfers will continue to be deferred until the inventory is sold.

There are several new accounting standards that have been issued by the FASB but are not yet effective, including 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 benefit cost to be reported separately from the other components of net benefit cost in the income statement. The ASU also allows only the service cost component of net benefit cost to be eligible for capitalization. We intend to adopt the standard on the effective date of January 1, 2018. We have not yet determined the effect of the ASU on our results of operations, financial condition or cash flows.

For a discussion of other accounting standards that have been issued by the FASB but are not yet effective, refer to the Accounting Standards Updates section in our Annual Report on Form 10-K for the year ended December 31, 2016.

B. 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~~in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2017, using the ~~percentage-of-completion~~retrospective method. ~~Under this method, we recognize~~See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements.

Performance Obligations. A performance obligation is a promise in a contract ~~costs~~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 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, therefore, not distinct. 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.

Our performance obligations are satisfied over time as work progresses ~~either~~or at a point in time. Revenue from products and services transferred to customers over time accounted for 71% and 70% of our revenue for the three- and six-month periods ended July 2, 2017, and 68% and 71% of our revenue for the three- and six-month periods ended July 3, 2016, respectively. Substantially all of our revenue in the defense groups is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. 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 29% and 30% of our revenue for the three- and six-month periods ended July 2, 2017, and 32% and 29% of our revenue for the three- and six-month periods ended July 3, 2016, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace group. Revenue on these contracts is recognized when the customer accepts the fully outfitted aircraft.

On July 2, 2017, we had $58.6 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 55% of our remaining performance obligations as revenue by 2018, an additional 30% by 2020 and the ~~products are produced or as services are rendered. We~~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 quarter it is identified.

We review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of an adjustment in estimate is recognized prospectively over the remaining contract term. The ~~net~~ impact of adjustments in contract estimates on our operating earnings ~~(and on a~~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 per-share basis) totaled favorable adjustments of $44 ($0.09) and $231 ($0.48) for the three- and nine-month periods ended October 2, 2016, and $44 ($0.09) and $152 ($0.30) for the three- and nine-month periods ended October 4, 2015, respectively. earnings per share as follows:



	Three Months Ended				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Revenue	$	90	$	55	$	162	$	123
Operating earnings	121		59		171		117
Diluted earnings per share	$	0.26	$	0.12	$	0.36	$	0.24

No adjustment on any one contract was material to our unaudited Consolidated Financial Statements infor the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015.~~July 3, 2016.

Revenue by Category. Our portfolio of products and services consists of over 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

~~In the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,~~ Revenue from Contracts with Customers (Topic 606). 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 recognizedby major product line was as ~~performance obligations within a~~follows:



	Three Months Ended				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Aircraft manufacturing, outfitting and completions	$	1,600	$	1,842	$	3,229	$	3,218
Aircraft services	445		404		880		805
Pre-owned aircraft	33		38		43		42
Total Aerospace	2,078		2,284		4,152		4,065
Wheeled combat vehicles	566		545		1,126		1,108
Weapons systems, armament and munitions	409		355		755		696
Tanks and tracked vehicles	278		238		525		430
Engineering and other services	161		159		295		308
Total Combat Systems	1,414		1,297		2,701		2,542
C4ISR* solutions	1,052		1,119		2,140		2,305
Information technology (IT) services	1,052		1,096		2,110		2,238
Total Information Systems and Technology	2,104		2,215		4,250		4,543
Nuclear-powered submarines	1,342		1,278		2,546		2,665
Surface combatants	254		282		501		555
Auxiliary and commercial ships	155		152		298		301
Repair and other services	328		266		668		579
Total Marine Systems	2,079		1,978		4,013		4,100
Total revenue	$	7,675	$	7,774	$	15,116	$	15,250

* Command, control, communications, computers, intelligence, surveillance and reconnaissance.

Revenue by contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. Several ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09, are intended to promote a more consistent interpretation and application of the principles outlined in the standard. The FASB has also issued two exposure drafts with technical corrections and updates intended to clarify ASU 2014-09. The exposure drafts are not expected to have a significant impact on the application of ASU 2014-09 and are anticipated to be issuedtype was as ~~final ASUs prior to December 31, 2016.~~follows:

ASU 2014-09 is effective in the first quarter of 2018 for public companies. However, companies 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.

Because the new standard will impact our business processes, systems and controls, we commenced our assessment of the standard during the second half of 2014 and developed a comprehensive change management project plan to guide the implementation. This project plan includes analyzing the standard’s impact on our contract portfolio, comparing our historical accounting policies and practices to the requirements of the new standard, and identifying potential differences from applying the requirements of the new standard to our contracts. With the assessment nearing completion, we plan to adopt the standard in the first quarter of 2017 using the retrospective transition method.

We anticipate that the adoption of ASU 2014-09 will have primarily two impacts on our portfolio of contracts and our Consolidated Financial Statements. The majority of our long-term contracts will continue to recognize revenue and earnings over time as the work progresses because of the continuous transfer of control to the customer, generally using an input measure (e.g., costs incurred) to reflect progress. However, we will be precluded from using the reallocation method of recognizing adjustments in estimated profit on contracts discussed previously. The total impact of an adjustment in estimated profit recorded to date on a contract will be recognized in the period it is identified (cumulative catch-up method), rather than recognizing the impact of an adjustment prospectively over the remaining contract term. As a result, adjustments in contract estimates may be larger and likely more variable from period to period, particularly on our contracts of greater value and longer performance period (for example, in our Marine Systems group), and may introduce an element of variability to our operating results that we have not experienced using the reallocation method. Despite this variability, a contract’s cash flows and overall profitability at completion are the same under the cumulative catch-up method versus our current method of prospectively recognizing adjustments in estimate. Anticipated losses on contracts will continue to be recognized in the quarter they are identified.

For our contracts for the manufacture of business-jet aircraft in the Aerospace group, we currently record revenue at two contractual milestones, green and outfitted aircraft delivery. Under ASU 2014-09, we will record revenue when control is transferred to the customer, generally when the customer accepts the fully outfitted aircraft. ASU 2014-09 will not change the total revenue or operating earnings recognized on our new aircraft contracts, only the timing of when those amounts are recognized.

Numerous other contracts in our portfolio will be impacted by ASU 2014-09, due primarily to the identification of multiple performance obligations within a single contract. However, we do not anticipate that these impacts will be material to our Consolidated Financial Statements.



Three Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	1,913	$	1,207	$	892	$	1,253	$	5,265
Cost-reimbursement	—		196		1,018		824		2,038
Time-and-materials	165		11		194		2		372
Total revenue	$	2,078	$	1,414	$	2,104	$	2,079	$	7,675
Three Months Ended July 3, 2016
Fixed-price	$	2,133	$	1,081	$	1,010	$	1,223	$	5,447
Cost-reimbursement	—		207		994		752		1,953
Time-and-materials	151		9		211		3		374
Total revenue	$	2,284	$	1,297	$	2,215	$	1,978	$	7,774

~~We have assessed~~



Six Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	3,815	$	2,280	$	1,822	$	2,383	$	10,300
Cost-reimbursement	—		403		2,028		1,625		4,056
Time-and-materials	337		18		400		5		760
Total revenue	$	4,152	$	2,701	$	4,250	$	4,013	$	15,116
Six Months Ended July 3, 2016
Fixed-price	$	3,774	$	2,105	$	2,087	$	2,544	$	10,510
Cost-reimbursement	—		423		2,043		1,552		4,018
Time-and-materials	291		14		413		4		722
Total revenue	$	4,065	$	2,542	$	4,543	$	4,100	$	15,250

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 ~~2015 operating~~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 profitability.

Revenue by customer was as follows:



Three Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	32	$	636	$	1,137	$	2,016	$	3,821
Non-DoD	—		25		663		—		688
Foreign Military Sales (FMS)	9		83		21		40		153
Total U.S. government	41		744		1,821		2,056		4,662
U.S. commercial	877		42		94		17		1,030
Non-U.S. government	64		594		155		4		817
Non-U.S. commercial	1,096		34		34		2		1,166
Total revenue	$	2,078	$	1,414	$	2,104	$	2,079	$	7,675
Three Months Ended July 3, 2016
U.S. government:
DoD	$	64	$	499	$	1,198	$	1,840	$	3,601
Non-DoD	—		25		676		1		702
FMS	45		80		12		39		176
Total U.S. government	109		604		1,886		1,880		4,479
U.S. commercial	940		64		98		92		1,194
Non-U.S. government	238		603		181		6		1,028
Non-U.S. commercial	997		26		50		—		1,073
Total revenue	$	2,284	$	1,297	$	2,215	$	1,978	$	7,774



Six Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
U.S. government:
DoD	$	72	$	1,223	$	2,312	$	3,853	$	7,460
Non-DoD	—		49		1,328		—		1,377
FMS	18		191		33		98		340
Total U.S. government	90		1,463		3,673		3,951		9,177
U.S. commercial	1,813		103		183		50		2,149
Non-U.S. government	69		1,096		331		8		1,504
Non-U.S. commercial	2,180		39		63		4		2,286
Total revenue	$	4,152	$	2,701	$	4,250	$	4,013	$	15,116
Six Months Ended July 3, 2016
U.S. government:
DoD	$	110	$	1,013	$	2,504	$	3,832	$	7,459
Non-DoD	—		45		1,394		3		1,442
FMS	90		155		24		76		345
Total U.S. government	200		1,213		3,922		3,911		9,246
U.S. commercial	1,913		119		185		177		2,394
Non-U.S. government	315		1,150		341		12		1,818
Non-U.S. commercial	1,637		60		95		—		1,792
Total revenue	$	4,065	$	2,542	$	4,543	$	4,100	$	15,250

Contract Balances. The timing of revenue recognition, billings and cash collections results ~~under ASU 2014-09.~~in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our three defense groups, the assessment under ASU 2014-09 did not have a material impact on our results of operations. Our defense groups’ revenue and operating margin for 2015 were essentially unchanged. In our Aerospace group, the assessment under ASU 2014-09 increased revenue and operating margin by 4 percent and 40 basis points, respectively, as compared to 2015 operating results under existing GAAP. The increase in revenue and operating margin compared to as-reported 2015 operating results is due to the relationship between green and outfitted aircraft deliveries and the timing and mix of those aircraft deliveries. Because we delivered more outfitted aircraft than green aircraft in 2015, revenue and operating earnings were higher in 2015 under ASU 2014-09 versus under existing GAAP.

The impact of ASU 2014-09 on our 2015 operating results may or may not be representative of the impact on subsequent years' results. As noted above, aircraft manufacturing revenue in our Aerospace group will be recognized when control is transferred to the customer, generally when the customer accepts the fully outfitted aircraft, which will depend on annual delivery rates. Moreover, as described above in our defense groups, ~~use~~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 ~~the cumulative catch-up method of recognizing adjustments~~contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in ~~estimated profits~~contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our ~~long-term~~international contracts, ~~will require us to recognize~~before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the ~~total impact of an adjustment in the period it is identified rather than prospectively over the remaining contract term as we have in the past.~~

~~On our~~ Consolidated Balance Sheet ~~long-term contracts will continue to be reported in a net asset (contracts in process) or liability (customer advances and deposits) position~~ on a contract-by-contract basis at the end of each reporting period. ~~Business-jet components in~~In our Aerospace group, ~~will be reported~~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 ~~inventory until control of~~ the ~~aircraft transfers to~~contract asset and liability balances during the ~~customer. The assessment of our December 31, 2015, Consolidated Balance Sheet under ASU 2014-09 resulted in some reclassifications among financial statement accounts, but these reclassifications did~~six-month period ended July 2, 2017, were not materially ~~change~~impacted by any other factors.

Revenue recognized for the ~~total amount of net assets as of December 31, 2015.~~

~~Once we adopt ASU 2014-09, we do not anticipate~~three- and six-month periods ended July 2, 2017, and July 3, 2016, that our internal control framework will materially change, but rather that existing internal controls will be modified and augmented, as necessary, to consider our new revenue recognition policy effective January 1, 2017. As we implement the new standard, we have developed internal controls to ensure that we adequately evaluate our portfolio of contracts under the five-step model and accurately restate our prior-period operating results under ASU 2014-09.

~~Discontinued Operations.~~ ~~In 2013, we settled litigation with the U.S. Navy related to the terminated A-12 aircraft contract~~was included in the ~~company's former tactical military aircraft business. In connection with the settlement, we released some rights to reimbursement of costs on ships under~~ contract liability balance at the time at our Bath, Maine shipyard. As we have progressed through the shipbuilding process, we have determined that the cost associated with this settlement is greater than anticipated. Therefore, in the third quarterbeginning of ~~2016, we recognized an $84 loss, net of taxes, to adjust the previously-recognized settlement value.~~

~~In addition, in the first quarter of 2016, we recognized a final adjustment to the loss on~~each year was $1.3 billion and $2.9 billion, and $1.4 billion and $2.8 billion, respectively. This revenue represented primarily the sale of ~~a business further discussed in Note B.~~

~~Accounting Standards Updates~~. The standards described below were issued by the FASB in 2016 and should be read in conjunction with the discussion of New Accounting Standards in our Annual Report on Form 10-K for the year ended December 31, 2015.

•

ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We adopted ASU 2016-09 in the second quarter of 2016. ASU 2016-09 impacted several aspects of our accounting for share-based payment transactions. The ASU requires that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the Consolidated Statement of Earnings. Previously, these amounts were recognized directly to

shareholders' equity. In the Consolidated Statement of Cash Flows, the excess tax benefit from equity-based compensation, previously classified as a financing activity, is now classified as an operating activity. Additionally, cash paid when directly withholding shares on an employee's behalf for tax withholding purposes is classified as a financing activity.

~~The impact of the adoption in the~~ ~~nine~~-month period ended October 2, 2016, was a tax benefit of approximately $60. As this area of the ASU permits only prospective adoption, there was no impact on our 2015 Consolidated Financial Statements.

~~In the Consolidated Statement of Cash Flows, the impact of the adoption in the~~ ~~nine~~-month period ended October 2, 2016, was a $91 increase in net cash provided by operating activities and a corresponding $91 increase in net cash used by financing activities. The areas of the ASU that relate to the Consolidated Statement of Cash Flows were adopted retrospectively. We have restated our prior-period Consolidated Statement of Cash Flows accordingly, resulting in a $100 increase in net cash provided by operating activities and a corresponding $100 increase in net cash used by financing activities for the ~~nine-month period ended October 4, 2015. The other aspects of the ASU did not have a material impact on our results of operations, financial condition or cash flows.~~

~~Several other ASUs issued by the FASB in 2016 are not yet effective, 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 the modified retrospective method of adoption, with early adoption permitted. We are in the preliminary phases of assessing the effect of the ASU on our portfolio of leases. While this assessment continues, we have not yet selected a transition date nor have we yet determined the effect of the ASU on our Consolidated Financial Statements.

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. ASU 2016-15 is effective retrospectively on January 1, 2018, with early adoption permitted. We have not yet determined the effect of the ASU on our Consolidated Financial Statements nor have we selected a transition date.

~~We do not expect other ASUs issued by the FASB in 2016 to have a material effect on our Consolidated Financial Statements.~~business-jet aircraft.

B.C. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS

Acquisitions and Divestitures

In 2017, we acquired a fixed-base-operations (FBO) facility in our Aerospace group and a manufacturer of electronics and communications products in our Information Systems and Technology group. In 2016, we acquired an aircraft management and charter services provider in our Aerospace group and a manufacturer

of unmanned underwater vehicles (UUVs) in our Information Systems and Technology group. As the purchase prices of these acquisitions are ~~immaterial,~~not material, they are included in other investing activities in the unaudited Consolidated Statement of Cash Flows. ~~We did not acquire any businesses in 2015.~~

The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.

We did not have any divestitures in 2017 or 2016. In 2015, we completed the sale of our axle business in our Combat Systems ~~group and a commercial cyber security business in our Information Systems and Technology~~ group. In the first ~~quarter~~six months of 2016, we recognized in discontinued operations a final adjustment of $13 to the loss on the sale of ~~the axle business of $13 in discontinued operations.~~this business.

Goodwill

The changes in the carrying amount of goodwill by reporting unit for the ~~nine~~six-month period ended ~~October~~July 2, ~~2016,~~2017, were as follows:


	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Goodwill		Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Goodwill
December 31, 2015 (a)	$	2,542	$	2,591	$	6,021	$	289	$	11,443
December 31, 2016 (a)											$	2,537	$	2,598	$	6,013	$	297	$	11,445
Acquisitions (b)	28		—		6		—		34		32		—		29		—		61
Other (c)	61		43		—		—		104		113		47		13		—		173
October 2, 2016	$	2,631	$	2,634	$	6,027	$	289	$	11,581
July 2, 2017 (a)											$	2,682	$	2,645	$	6,055	$	297	$	11,679

(a)Goodwill on December 31, ~~2015,~~2016, and July 2, 2017, in the Information Systems and Technology reporting unit is net of $2 billion of accumulated impairment losses.

(b)Includes adjustments during the purchase price allocation period.

(c)Consists primarily of adjustments for foreign currency translation.

Intangible Assets

Intangible assets consisted of the following:


	Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount
	October 2, 2016							December 31, 2015							July 2, 2017							December 31, 2016
Contract and program intangible assets (b)	$	1,636	$	(1,270	)	$	366	$	1,626	$	(1,214	)	$	412	$	1,628	$	(1,287	)	$	341	$	1,633	$	(1,281	)	$	352
Trade names and trademarks	470		(141		)	329		455		(127		)	328		475		(157		)	318		446		(139		)	307
Technology and software	120		(100		)	20		119		(96		)	23		129		(104		)	25		121		(102		)	19
Other intangible assets	154		(154		)	—		154		(154		)	—		155		(154		)	1		154		(154		)	—
Total intangible assets	$	2,380	$	(1,665	)	$	715	$	2,354	$	(1,591	)	$	763	$	2,387	$	(1,702	)	$	685	$	2,354	$	(1,676	)	$	678


(a)	Change in gross carrying amounts consists primarily of adjustments for foreign currency translation and acquired intangible assets.


(b)	Consists of acquired backlog and probable follow-on work and associated customer relationships.

Amortization expense was ~~$20~~$19 and ~~$70~~$38 for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~$29~~$23 and ~~$88~~$50 for the three- and ~~nine-month~~six-month periods ended ~~October 4, 2015.~~July 3, 2016.

C.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~~in 2017 and 2016 ~~and 2015~~ due to share repurchases. See Note JK for ~~additional details~~further discussion of our share repurchases. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs). ~~The dilutive effect of stock options and restricted stock/RSUs increased because of the adoption of ASU 2016-09 in 2016. See Note A for additional detail of our adoption of this accounting standard.~~

Basic and diluted weighted average shares outstanding were as follows (in thousands):


	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	October 2, 2016	October 4, 2015	October 2, 2016	October 4, 2015	July 2, 2017	July 3, 2016	July 2, 2017	July 3, 2016
Basic weighted average shares outstanding	303,938	316,680	305,445	323,996	299,790	304,470	300,780	306,199
Dilutive effect of stock options and restricted stock/RSUs*	5,790	5,258	5,679	5,418	5,560	5,738	5,560	5,610
Diluted weighted average shares outstanding	309,728	321,938	311,124	329,414	305,350	310,208	306,340	311,809

* Excludes outstanding options to purchase shares of common stock ~~because these options~~that had exercise prices in excess of the average market price of our common stock during the period and, therefore, the effect of including these options would be antidilutive. These options totaled ~~4,622~~1,846 and ~~4,080~~1,251 for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~2,034~~4,664 and ~~1,605~~3,792 for the three- and ~~nine-month~~six-month periods ended ~~October 4, 2015,~~July 3, 2016, respectively.

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 ~~October~~July 2, ~~2016,~~2017, or December 31, ~~2015.~~2016.

Our financial instruments include cash and equivalents ~~marketable securities~~ and other ~~investments;~~investments, accounts receivable and ~~payable;~~payable, short- and long-term ~~debt;~~debt, and derivative financial instruments. The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt on the unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on ~~October~~July 2, ~~2016,~~2017, and December 31, ~~2015,~~2016, 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) (b)
Financial Assets (Liabilities) (a) October 2, 2016
Available-for-sale securities $ 179
$ 179
$ 93
$ 86
Derivatives (403 ) (403 ) —
(403 )
Long-term debt, including current portion (3,923 ) (4,002 ) —
(4,002 )

December 31, 2015
Available-for-sale securities $ 186
$ 186
$ 124
$ 62
Derivatives (673 ) (673 ) —
(673 )
Long-term debt, including current portion (3,425 ) (3,381 ) —
(3,381 )



	Carrying Value			Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2) (b)
Financial Assets (Liabilities) (a)	July 2, 2017
Available-for-sale securities	$	171		$	171		$	55	$	116
Cash flow hedges	(343		)	(343		)	—		(343		)
Short- and long-term debt principal	(4,011		)	(3,975		)	—		(3,975		)

	December 31, 2016
Available-for-sale securities	$	177		$	177		$	59	$	118
Cash flow hedges	(477		)	(477		)	—		(477		)
Short- and long-term debt principal	(3,924		)	(3,849		)	—		(3,849		)

(a)We had no Level 3 financial instruments on ~~October~~July 2, ~~2016~~2017, or December 31, ~~2015~~2016.

(b)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.

E.F. INCOME TAXES

Net Deferred Tax Asset. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax asset consisted of the following:

October 2, 2016 December 31, 2015
Current deferred tax asset $ 8
$ 3
Current deferred tax liability (1,048 ) (829 )
Noncurrent deferred tax asset 1,152
1,272
Noncurrent deferred tax liability (88 ) (75 )
Net deferred tax asset $ 24
$ 371



	July 2, 2017			December 31, 2016
Deferred tax asset	$	392		$	564
Deferred tax liability	(202		)	(183		)
Net deferred tax asset	$	190		$	381

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 percent 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 ~~October~~July 2, ~~2016, is~~2017, was not material to our results of operations, financial condition or cash ~~flow.~~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 2015. 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 ~~October~~July 2, ~~2016,~~2017, is 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. CONTRACTS IN PROCESS~~G. UNBILLED RECEIVABLES

~~Contracts in process~~Unbilled receivables represent ~~recoverable costs and, where applicable, accrued profit related to~~revenue recognized on long-term contracts less associated advances and progress ~~payments.~~billings. These amounts ~~have been inventoried until the customer is~~will be billed ~~generally~~ in accordance with the agreed-upon ~~billing~~contractual terms or upon shipment of products or rendering of services. ~~Contracts in process~~Unbilled receivables consisted of the following:

October 2, 2016 December 31, 2015
Contract costs and estimated profits $ 26,633
$ 20,742
Other contract costs 811
965
27,444
21,707
Advances and progress payments (22,231 ) (17,350 )
Total contracts in process $ 5,213
$ 4,357



	July 2, 2017			December 31, 2016
Unbilled revenue	$	27,400		$	25,543
Advances and progress billings	(22,355		)	(21,331		)
Net unbilled receivables	$	5,045		$	4,212

~~Contract costs include primarily~~The increase in unbilled receivables during the six-month period ended July 2, 2017, is due in part to the timing of billings on a large contract for a Middle Eastern customer in our Combat Systems group.

H.INVENTORIES

The majority of our inventories are for business-jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and ~~when appropriate, G&A expenses. Contract costs also may include~~is based primarily on the estimated ~~contract recoveries for matters such as contract changes and claims for unanticipated contract costs.~~average unit cost in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record ~~revenue associated~~pre-owned aircraft acquired in connection with ~~these matters only when~~ the ~~amount~~sale of ~~recovery can be~~new aircraft at the lower of the trade-in value or the estimated ~~reliably and realization is probable.~~net realizable value.

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.

G.~~INVENTORIES~~

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:


	October 2, 2016		December 31, 2015		July 2, 2017		December 31, 2016
Work in process	$	2,204	$	1,889	$	3,917	$	3,643
Raw materials	1,380		1,376		1,360		1,429
Finished goods	33		28		27		24
Pre-owned aircraft	40		73		10		22
Other contract costs					525		699
Total inventories	$	3,657	$	3,366	$	5,839	$	5,817

H.I. DEBT

Debt consisted of the following:


		October 2, 2016		December 31, 2015			July 2, 2017		December 31, 2016
Fixed-rate notes due:	Interest rate					Interest rate:
July 2016	2.250%	$	—	$	500
November 2017	1.000%	900		900		1.000%	$	900	$	900
July 2021	3.875%	500		500		3.875%	500		500
November 2022	2.250%	1,000		1,000		2.250%	1,000		1,000
August 2023	1.875%	500		—		1.875%	500		500
August 2026	2.125%	500		—		2.125%	500		500
November 2042	3.600%	500		500		3.600%	500		500
Other	Various	23		25		Various	111		24
Total debt - principal		3,923		3,425
Total debt principal							4,011		3,924
Less unamortized debt issuance costs and discounts		37		26			33		36
Total debt		3,886		3,399			3,978		3,888
Less current portion		1		501			989		900
Long-term debt		$	3,885	$	2,898		$	2,989	$	2,988

Our fixed-rate notes are fully and unconditionally guaranteed by several of our ~~100-percent-owned~~100%-owned subsidiaries. See Note OP for condensed consolidating financial statements. We have the option to redeem the notes prior to their maturity in whole or in part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.

Fixed-rate notes of $900 mature in November of 2017. As we approach the maturity date of this debt, we will determine whether to repay these notes with cash on hand or refinance the obligation.

On ~~October~~July 2, ~~2016,~~2017, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. We have $2 billion in committed bank credit facilities for general corporate purposes and working capital needs. These credit facilities include a $1 billion multi-year facility expiring in July 2018 and a $1 billion multi-year facility expiring in November 2020. These facilities are required by credit rating agencies to support our commercial paper issuances. 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-owned~~100%-owned subsidiaries. We also have an effective shelf registration on file with the SEC that allows us to access the debt markets.

~~In the third quarter of 2016, we repaid $500 of fixed-rate notes on their maturity date with cash on hand. We also issued $1 billion of fixed-rate notes for general corporate purposes.~~

Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants on ~~October~~July 2, ~~2016.~~2017.

I.J. OTHER LIABILITIES

A summary of significant other liabilities by balance sheet caption follows:


	October 2, 2016		December 31, 2015		July 2, 2017		December 31, 2016
Deferred income taxes	$	1,048	$	829

Salaries and wages	741		648		$	692	$	693
Fair value of cash flow hedges	478		780		419		521
Workers' compensation	382		369
Workers’ compensation					338		337
Retirement benefits	299		304		297		303
Other (a)	1,419		1,376		1,326		1,331
Total other current liabilities	$	4,367	$	4,306	$	3,072	$	3,185

Retirement benefits	$	4,011	$	4,251	$	4,310	$	4,393
Customer deposits on commercial contracts	359		506		695		719
Deferred income taxes	88		75		202		183
Other (b)	1,115		1,084		1,142		1,138
Total other liabilities	$	5,573	$	5,916	$	6,349	$	6,433

(a)Consists primarily of dividends payable, taxes payable, environmental remediation reserves, warranty reserves, deferred revenue and supplier contributions in the Aerospace group, liabilities of discontinued operations, and insurance-related costs.

(b)Consists primarily of warranty reserves, ~~workers'~~workers’ compensation liabilities and liabilities of discontinued operations.

~~J. SHAREHOLDERS'~~K. SHAREHOLDERS’ EQUITY

Share Repurchases. Our board of directors authorizes management’s repurchase of outstanding shares of our common stock on the open market from time to time. On March 1, 2017, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the ~~nine~~six-month period ended ~~October~~July 2, ~~2016,~~2017, we repurchased ~~11.2~~4.6 million of our outstanding shares for ~~$1.5 billion. As some of these shares had not settled on October~~$893. On July 2, ~~2016, the associated $23 cash outflow will be reported in the fourth quarter. On October 2, 2016, 8.4~~2017, 10.8 million shares remained authorized by our board of directors for repurchase, approximately 34 percent of our total shares outstanding. We repurchased ~~19.3~~8.9 million shares for ~~$2.7~~$1.2 billion in the ~~nine~~six-month period ended ~~October 4, 2015.~~July 3, 2016.

Dividends per Share. Dividends declared per share were ~~$0.76~~$0.84 and ~~$2.28~~ $1.68for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016~~2017,and ~~$0.69~~$0.76 and ~~$2.07~~$1.52 for the three- and ~~nine-month~~six-month periods ended ~~October 4, 2015,~~July 3, 2016, respectively. Cash dividends paid were ~~$231~~$253 and ~~$678~~$483 for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016~~, 2017, and ~~$223~~$232 and ~~$655~~$447 for the three- and ~~nine-month~~six-month periods ended ~~October 4, 2015~~July 3, 2016, respectively.

Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of accumulated other comprehensive loss (AOCL) consisted of the following:


	Losses on Cash Flow Hedges			Unrealized Gains on Securities			Foreign Currency Translation Adjustments		Changes in Retirement Plans’ Funded Status			AOCL			Losses on Cash Flow Hedges			Unrealized Gains on Securities		Foreign Currency Translation Adjustments		Changes in Retirement Plans’ Funded Status			AOCL
December 31, 2015	$	(487	)	$	20		$	178	$	(2,997	)	$	(3,286	)
December 31, 2016															$	(345	)	$	14	$	69	$	(3,125	)	$	(3,387	)
Other comprehensive income, pretax	260			(5		)	82		191			528			148			7		281		132			568
Provision for income tax, net	65			(2		)	1		69			133			39			2		15		47			103
Other comprehensive income, net of tax	195			(3		)	81		122			395			109			5		266		85			465
October 2, 2016	$	(292	)	$	17		$	259	$	(2,875	)	$	(2,891	)
July 2, 2017															$	(236	)	$	19	$	335	$	(3,040	)	$	(2,922	)

December 31, 2014 $ (173 ) $ 22
$ 541
$ (3,322 ) $ (2,932 )
Other comprehensive loss, pretax (331 ) (4 ) (230 ) 287
(278 )
Benefit for income tax, net (115 ) (1 ) (6 ) 97
(25 )
Other comprehensive loss, net of tax (216 ) (3 ) (224 ) 190
(253 )
October 4, 2015 $ (389 ) $ 19
$ 317
$ (3,132 ) $ (3,185 )



December 31, 2015	$	(487	)	$	20		$	181	$	(2,997	)	$	(3,283	)
Other comprehensive income, pretax	158			(4		)	127		126			407
Provision for income tax, net	37			(2		)	3		46			84
Other comprehensive income, net of tax	121			(2		)	124		80			323
July 3, 2016	$	(366	)	$	18		$	305	$	(2,917	)	$	(2,960	)

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 ~~$249~~$170 and ~~$334~~$166 for the ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015,~~July 3, 2016, respectively. This was offset partially by pretax amortization of prior service credit of ~~$56~~$35 and ~~$54~~$37 for the ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015,~~July 3, 2016, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note MN for additional details.

K.L. 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 had ~~$6.5~~$6.6 billion in notional forward exchange contracts outstanding on ~~October~~July 2, ~~2016,~~2017, and ~~$7.2~~$6.3 billion on December 31, ~~2015.~~2016. We do not use ~~derivatives~~derivative financial instruments for trading or speculative purposes. We recognize derivative financial instruments on the Consolidated Balance Sheet at fair value. See Note DE for additional details.

Foreign Currency Risk and Hedging Activities. 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-year average maturity of these instruments generally matches the duration of the activities that are at risk.

We record changes in the fair value of derivative financial instruments in operating costs and expenses in the Consolidated Statement of Earnings or in other comprehensive loss (OCL) within the Consolidated Statement of Comprehensive Income depending on whether the derivative is designated and qualifies for hedge accounting. Gains and losses related to ~~derivatives~~derivative financial instruments 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

Statement 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 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 for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015.~~July 3, 2016. Net gains and losses reclassified to earnings from OCL were not material to our results of operations for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015,~~July 3, 2016, and we do not expect the amount of these gains and losses that will be reclassified to earnings during the next 12 months to be material.

We had no material derivative financial instruments designated as fair value or net investment hedges on ~~October~~July 2, ~~2016,~~2017, or December 31, ~~2015.~~2016.

Interest Rate Risk. Our financial instruments subject to interest rate risk include fixed-rate long-term debt obligations and variable-rate commercial paper. However, the risk associated with these 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 ~~derivatives~~derivative financial instruments but are not accounted for separately because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.

Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On ~~October~~July 2, ~~2016,~~2017, we held ~~$2.3~~$1.9 billion in cash and equivalents, but held no marketable securities.

Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international ~~businesses'~~businesses’ functional currency (generally the respective local currency) to U.S. dollars at end-of-period exchange rates, and statements of earnings at average exchange rates for each period. The resulting foreign currency translation adjustments are a component of OCL.

We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international ~~operations'~~operations’ results into U.S. dollars. The negative impact of translating our non-U.S. operations’ revenue into U.S. dollars was not material to our results of operations for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, or ~~October 4, 2015.~~July 3, 2016. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material infor the ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015.~~July 3, 2016.

L.M. COMMITMENTS AND CONTINGENCIES

Litigation

In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant

in a lawsuit related to this matter filed under seal in U.S. district court. ~~In May~~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 ~~official.~~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 legal proceedings incidental to the normal course of business are pending or threatened against us. These other matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these other matters. However, based on information currently available, we believe any potential liabilities in these ~~other~~ proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.

Environmental

We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a Potentially Responsible Party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.

As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liabilities. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions, will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.

Other

Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government audits and investigations will not have a material impact on our results of operations, financial condition or cash flows.

In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based onupon 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 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 billion on ~~October~~July 2, ~~2016.~~2017. In addition, from time to time and in the

ordinary course of business, we contractually guarantee the ~~payment~~payments 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 group has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are 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. 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.

Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business-jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheet.

The changes in the carrying amount of warranty liabilities for the ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015,~~July 3, 2016, were as follows:


Nine Months Ended	October 2, 2016			October 4, 2015
Six Months Ended							July 2, 2017			July 3, 2016
Beginning balance	$	465		$	428		$	474		$	434
Warranty expense	85			128			65			64
Payments	(72		)	(92		)	(46		)	(42		)
Adjustments	(1		)	(1		)	(28		)	(12		)
Ending balance	$	477		$	463		$	465		$	444

M.N. RETIREMENT PLANS

We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits.

Net periodic defined-benefit pension and other post-retirement benefit cost for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015,~~July 3, 2016, consisted of the following:


	Pension Benefits						Other Post-retirement Benefits						Pension Benefits						Other Post-retirement Benefits
Three Months Ended	October 2, 2016			October 4, 2015			October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Service cost	$	44		$	57		$	3		$	3		$	42		$	44		$	3		$	2
Interest cost	114			133			8			11			113			114			9			9
Expected return on plan assets	(178		)	(174		)	(8		)	(8		)	(170		)	(178		)	(9		)	(8		)
Recognized net actuarial loss (gain)	84			110			(1		)	2			86			84			(1		)	(1		)
Amortization of prior service credit	(17		)	(17		)	(2		)	(1		)	(16		)	(17		)	(1		)	(1		)
Net periodic benefit cost	$	47		$	109		$	—		$	7		$	55		$	47		$	1		$	1
Six Months Ended
Service cost													$	84		$	88		$	6		$	5
Interest cost													226			228			17			17
Expected return on plan assets													(339		)	(356		)	(17		)	(16		)
Recognized net actuarial loss (gain)													172			168			(2		)	(2		)
Amortization of prior service credit													(33		)	(34		)	(2		)	(3		)
Net periodic benefit cost													$	110		$	94		$	2		$	1

Pension Benefits Other Post-retirement Benefits
Nine Months Ended October 2, 2016 October 4, 2015 October 2, 2016 October 4, 2015
Service cost $ 132
$ 171
$ 8
$ 9
Interest cost 342
399
25
33
Expected return on plan assets (534 ) (522 ) (24 ) (24 )
Recognized net actuarial loss (gain) 252
329
(3 ) 5
Amortization of prior service credit (51 ) (51 ) (5 ) (3 )
Net periodic benefit cost $ 141
$ 326
$ 1
$ 20

~~Beginning~~In 2017, we decreased the expected long-term rate of return on assets in ~~2016, we refined~~our primary U.S. government and commercial pension plans by 75 basis points following an assessment of the ~~method used to determine the service~~historical and ~~interest cost components~~expected long-term returns of our net periodic benefit cost. Previously, the cost was determined using a single weighted-average discount rate derived from a yield curve developed from a portfolio of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. Under the refined method, known as the spot rate approach, we 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 decreased the service and interest components of our benefit costs slightly in 2016. We accounted for this change prospectively as a change in accounting estimate.various asset classes.

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. 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 recovery of the cost is considered probable based on our backlog and probable follow-on contracts, we defer the excess in ~~contracts~~other contract costs in ~~process~~inventory on the Consolidated Balance Sheet until the cost is allocable to contracts. See Note FH for discussion of our ~~deferred~~other contract costs. For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have deferred recognition of these excess earnings, ~~to provide a better matching of revenue and expenses. These~~classifying these deferrals ~~have been classified~~ against the plan assets on the Consolidated Balance Sheet.

N.O. BUSINESS GROUP INFORMATION

We operate in four business groups: Aerospace, Combat Systems, Information Systems and Technology, and Marine Systems. We organize our business groups in accordance with the nature of products and services offered. We measure each group’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.

Summary financial information for each of our business groups follows:

Revenue Operating Earnings
Three Months Ended October 2, 2016 October 4, 2015 October 2, 2016 October 4, 2015
Aerospace $ 2,017
$ 2,343
$ 437
$ 426
Combat Systems 1,330
1,345
219
218
Information Systems and Technology 2,341
2,219
256
219
Marine Systems 2,043
2,087
166
181
Corporate* —
—
(9 ) (10 )
Total $ 7,731
$ 7,994
$ 1,069
$ 1,034


	Revenue				Operating Earnings						Revenue				Operating Earnings
Nine Months Ended	October 2, 2016		October 4, 2015		October 2, 2016			October 4, 2015
Three Months Ended											July 2, 2017		July 3, 2016		July 2, 2017			July 3, 2016
Aerospace	$	6,138	$	6,709	$	1,282		$	1,296		$	2,078	$	2,284	$	425		$	424
Combat Systems	3,918		4,116		655			648			1,414		1,297		225			205
Information Systems and Technology	6,903		6,804		748			673			2,104		2,215		240			234
Marine Systems	6,161		6,031		539			556			2,079		1,978		178			172
Corporate*	—		—		(32		)	(31		)	—		—		(12		)	(8		)
Total	$	23,120	$	23,660	$	3,192		$	3,142		$	7,675	$	7,774	$	1,056		$	1,027
Six Months Ended
Aerospace											$	4,152	$	4,065	$	868		$	756
Combat Systems											2,701		2,542		430			392
Information Systems and Technology											4,250		4,543		476			471
Marine Systems											4,013		4,100		339			356
Corporate*											—		—		(22		)	(24		)
Total											$	15,116	$	15,250	$	2,091		$	1,951

* Corporate operating results consist primarily of stock option expense.

O.P. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The fixed-rate notes described in Note HI are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of our ~~100-percent-owned~~100%-owned subsidiaries (the guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the guarantors on a combined basis (each guarantor together with its majority-owned subsidiaries) and all other subsidiaries on a combined basis.

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)


Three Months Ended October 2, 2016	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Three Months Ended July 2, 2017																Parent			Guarantors on a Combined Basis		Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Revenue	$	—		$	6,782		$	949		$	—		$	7,731		$	—		$	6,732	$	943		$	—		$	7,675
Cost of sales	(2		)	5,479			714			—			6,191			—			5,400		714			—			6,114
G&A	10			381			80			—			471			13			416		76			—			505
Operating earnings	(8		)	922			155			—			1,069			(13		)	916		153			—			1,056
Interest, net	(23		)	(1		)	1			—			(23		)	(23		)	—		(1		)	—			(24		)
Other, net	1			(4		)	5			—			2
Earnings before income tax	(30		)	917			161			—			1,048			(36		)	916		152			—			1,032
Provision for income tax, net	(42		)	306			17			—			281			(26		)	301		8			—			283
Discontinued operations, net of tax	(84		)	—			—			—			(84		)
Equity in net earnings of subsidiaries	755			—			—			(755		)	—			759			—		—			(759		)	—
Net earnings	$	683		$	611		$	144		$	(755	)	$	683		$	749		$	615	$	144		$	(759	)	$	749
Comprehensive income	$	757		$	608		$	175		$	(783	)	$	757		$	1,089		$	642	$	427		$	(1,069	)	$	1,089
Three Months Ended October 4, 2015
Three Months Ended July 3, 2016
Revenue	$	—		$	7,037		$	957		$	—		$	7,994		$	—		$	6,808	$	966		$	—		$	7,774
Cost of sales	1			5,729			754			—			6,484			(2		)	5,514		750			—			6,262
G&A	9			399			68			—			476			9			402		74			—			485
Operating earnings	(10		)	909			135			—			1,034			(7		)	892		142			—			1,027
Interest, net	(23		)	(1		)	1			—			(23		)	(23		)	—		—			—			(23		)
Other, net	2			—			—			—			2			1			—		—			—			1
Earnings before income tax	(31		)	908			136			—			1,013			(29		)	892		142			—			1,005
Provision for income tax, net	(47		)	296			31			—			280			(23		)	287		27			—			291
Equity in net earnings of subsidiaries	717			—			—			(717		)	—			720			—		—			(720		)	—
Net earnings	$	733		$	612		$	105		$	(717	)	$	733		$	714		$	605	$	115		$	(720	)	$	714
Comprehensive income	$	640		$	613		$	(33	)	$	(580	)	$	640		$	693		$	602	$	69		$	(671	)	$	693

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)


Nine Months Ended October 2, 2016	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Six Months Ended July 2, 2017																Parent			Guarantors on a Combined Basis		Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Revenue																$	—		$	13,276	$	1,840		$	—		$	15,116
Cost of sales																(3		)	10,641		1,401			—			12,039
G&A																24			810		152			—			986
Operating earnings																(21		)	1,825		287			—			2,091
Interest, net																(47		)	—		(2		)	—			(49		)
Earnings before income tax																(68		)	1,825		285			—			2,042
Provision for income tax, net																(93		)	594		29			—			530
Equity in net earnings of subsidiaries																1,487			—		—			(1,487		)	—
Net earnings																$	1,512		$	1,231	$	256		$	(1,487	)	$	1,512
Comprehensive income																$	1,977		$	1,259	$	634		$	(1,893	)	$	1,977
Six Months Ended July 3, 2016
Revenue	$	—		$	20,291		$	2,829		$	—		$	23,120		$	—		$	13,407	$	1,843		$	—		$	15,250
Cost of sales	1			16,348			2,162			—			18,511			2			10,905		1,446			—			12,353
G&A	30			1,162			225			—			1,417			20			781		145			—			946
Operating earnings	(31		)	2,781			442			—			3,192			(22		)	1,721		252			—			1,951
Interest, net	(69		)	(1		)	2			—			(68		)	(46		)	—		1			—			(45		)
Other, net	11			(3		)	5			—			13			10			1		—			—			11
Earnings before income tax	(89		)	2,777			449			—			3,137			(58		)	1,722		253			—			1,917
Provision for income tax, net	(93		)	903			72			—			882			(51		)	549		51			—			549
Discontinued operations, net of tax	(97		)	—			—			—			(97		)
Discontinued operations																(13		)	—		—			—			(13		)
Equity in net earnings of subsidiaries	2,251			—			—			(2,251		)	—			1,375			—		—			(1,375		)	—
Net earnings	$	2,158		$	1,874		$	377		$	(2,251	)	$	2,158		$	1,355		$	1,173	$	202		$	(1,375	)	$	1,355
Comprehensive income	$	2,553		$	1,866		$	674		$	(2,540	)	$	2,553		$	1,678		$	1,168	$	469		$	(1,637	)	$	1,678
Nine Months Ended October 4, 2015
Revenue	$	—		$	20,688		$	2,972		$	—		$	23,660
Cost of sales	(2		)	16,765			2,309			—			19,072
G&A	33			1,196			217			—			1,446
Operating earnings	(31		)	2,727			446			—			3,142
Interest, net	(66		)	(2		)	4			—			(64		)
Other, net	3			2			—			—			5
Earnings before income tax	(94		)	2,727			450			—			3,083
Provision for income tax, net	(88		)	884			86			—			882
Equity in net earnings of subsidiaries	2,207			—			—			(2,207		)	—
Net earnings	$	2,201		$	1,843		$	364		$	(2,207	)	$	2,201
Comprehensive income	$	1,948		$	1,850		$	(59	)	$	(1,791	)	$	1,948

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)


October 2, 2016	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
July 2, 2017																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	1,077		$	—		$	1,226		$	—		$	2,303		$	847		$	—		$	1,009		$	—		$	1,856
Accounts receivable	—			1,235			2,267			—			3,502			—			1,120			2,570			—			3,690
Contracts in process	227			3,193			1,793			—			5,213
Unbilled receivables																—			2,633			2,412			—			5,045
Inventories																188			5,558			93			—			5,839
Work in process	—			2,191			13			—			2,204
Raw materials	—			1,347			33			—			1,380
Finished goods	—			22			11			—			33
Pre-owned aircraft	—			40			—			—			40
Other current assets	210			198			214			—			622			227			195			274			—			696
Total current assets	1,514			8,226			5,557			—			15,297			1,262			9,506			6,358			—			17,126
Noncurrent assets:
Property, plant and equipment (PP&E)	194			6,501			1,155			—			7,850			202			6,597			1,211			—			8,010
Accumulated depreciation of PP&E	(65		)	(3,609		)	(731		)	—			(4,405		)	(70		)	(3,748		)	(768		)	—			(4,586		)
Intangible assets	—			1,448			932			—			2,380
Accumulated amortization of intangible assets	—			(1,172		)	(493		)	—			(1,665		)
Intangible assets, net																—			252			433			—			685
Goodwill	—			8,047			3,534			—			11,581			—			8,081			3,598			—			11,679
Other assets	1,256			213			161			—			1,630			497			228			154			—			879
Investment in subsidiaries	42,766			—			—			(42,766		)	—			42,559			—			—			(42,559		)	—
Total noncurrent assets	44,151			11,428			4,558			(42,766		)	17,371			43,188			11,410			4,628			(42,559		)	16,667
Total assets	$	45,665		$	19,654		$	10,115		$	(42,766	)	$	32,668		$	44,450		$	20,916		$	10,986		$	(42,559	)	$	33,793
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	—		$	1		$	—		$	—		$	1		$	899		$	2		$	88		$	—		$	989
Customer advances and deposits	—			2,665			2,584			—			5,249			—			4,008			2,814			—			6,822
Other current liabilities	1,616			3,584			1,443			—			6,643			601			3,556			1,535			—			5,692
Total current liabilities	1,616			6,250			4,027			—			11,893			1,500			7,566			4,437			—			13,503
Noncurrent liabilities:
Long-term debt	3,863			22			—			—			3,885			2,968			21			—			—			2,989
Other liabilities	3,136			1,923			514			—			5,573			2,344			3,368			637			—			6,349
Total noncurrent liabilities	6,999			1,945			514			—			9,458			5,312			3,389			637			—			9,338
Intercompany	25,733			(24,962		)	(771		)	—			—			26,686			(26,606		)	(80		)	—			—
Shareholders' equity:
Shareholders’ equity:
Common stock	482			6			2,411			(2,417		)	482			482			6			2,126			(2,132		)	482
Other shareholders' equity	10,835			36,415			3,934			(40,349		)	10,835
Total shareholders' equity	11,317			36,421			6,345			(42,766		)	11,317
Total liabilities and shareholders' equity	$	45,665		$	19,654		$	10,115		$	(42,766	)	$	32,668
Other shareholders’ equity																10,470			36,561			3,866			(40,427		)	10,470
Total shareholders’ equity																10,952			36,567			5,992			(42,559		)	10,952
Total liabilities and shareholders’ equity																$	44,450		$	20,916		$	10,986		$	(42,559	)	$	33,793

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)


December 31, 2015	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
December 31, 2016																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	1,732		$	—		$	1,053		$	—		$	2,785		$	1,254		$	—		$	1,080		$	—		$	2,334
Accounts receivable	—			1,181			2,265			—			3,446			—			1,155			2,244			—			3,399
Contracts in process	514			2,795			1,048			—			4,357
Unbilled receivables																—			2,235			1,977			—			4,212
Inventories																304			5,417			96			—			5,817
Work in process	—			1,882			7			—			1,889
Raw materials	—			1,344			32			—			1,376
Finished goods	—			23			5			—			28
Pre-owned aircraft	—			73			—			—			73
Other current assets	140			213			264			—			617			330			204			238			—			772
Total current assets	2,386			7,511			4,674			—			14,571			1,888			9,011			5,635			—			16,534
Noncurrent assets:
PP&E	189			6,386			1,101			—			7,676			197			6,586			1,146			—			7,929
Accumulated depreciation of PP&E	(59		)	(3,462		)	(689		)	—			(4,210		)	(67		)	(3,653		)	(732		)	—			(4,452		)
Intangible assets	—			1,445			909			—			2,354
Accumulated amortization of intangible assets	—			(1,122		)	(469		)	—			(1,591		)
Intangible assets, net																—			265			413			—			678
Goodwill	—			8,040			3,403			—			11,443			—			8,050			3,395			—			11,445
Other assets	1,379			207			168			—			1,754			640			232			166			—			1,038
Investment in subsidiaries	40,062			—			—			(40,062		)	—			41,956			—			—			(41,956		)	—
Total noncurrent assets	41,571			11,494			4,423			(40,062		)	17,426			42,726			11,480			4,388			(41,956		)	16,638
Total assets	$	43,957		$	19,005		$	9,097		$	(40,062	)	$	31,997		$	44,614		$	20,491		$	10,023		$	(41,956	)	$	33,172
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	500		$	1		$	—		$	—		$	501		$	898		$	2		$	—		$	—		$	900
Customer advances and deposits	—			3,038			2,636			—			5,674			—			4,339			2,488			—			6,827
Other current liabilities	1,331			3,309			1,630			—			6,270			564			3,465			1,694			—			5,723
Total current liabilities	1,831			6,348			4,266			—			12,445			1,462			7,806			4,182			—			13,450
Noncurrent liabilities:
Long-term debt	2,874			24			—			—			2,898			2,966			22			—			—			2,988
Other liabilities	3,417			2,021			478			—			5,916			3,520			2,330			583			—			6,433
Total noncurrent liabilities	6,291			2,045			478			—			8,814			6,486			2,352			583			—			9,421
Intercompany	25,097			(23,816		)	(1,281		)	—			—			26,365			(25,827		)	(538		)	—			—
Shareholders' equity:
Shareholders’ equity:
Common stock	482			6			2,354			(2,360		)	482			482			6			2,354			(2,360		)	482
Other shareholders' equity	10,256			34,422			3,280			(37,702		)	10,256
Total shareholders' equity	10,738			34,428			5,634			(40,062		)	10,738
Total liabilities and shareholders' equity	$	43,957		$	19,005		$	9,097		$	(40,062	)	$	31,997
Other shareholders’ equity																9,819			36,154			3,442			(39,596		)	9,819
Total shareholders’ equity																10,301			36,160			5,796			(41,956		)	10,301
Total liabilities and shareholders’ equity																$	44,614		$	20,491		$	10,023		$	(41,956	)	$	33,172

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)


Nine Months Ended October 2, 2016	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Six Months Ended July 2, 2017															Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Net cash provided by operating activities*	$	98		$	1,161		$	113		$	—	$	1,372		$	215		$	846		$	(51	)	$	—	$	1,010
Cash flows from investing activities:
Capital expenditures	(5		)	(208		)	(31		)	—		(244		)	(6		)	(114		)	(33		)	—		(153		)
Other, net	3			(3		)	(38		)	—		(38		)	—			9			(51		)	—		(42		)
Net cash used by investing activities	(2		)	(211		)	(69		)	—		(282		)	(6		)	(105		)	(84		)	—		(195		)
Cash flows from financing activities:
Purchases of common stock	(1,514		)	—			—			—		(1,514		)	(901		)	—			—			—		(901		)
Proceeds from fixed-rate notes	992			—			—			—		992
Dividends paid	(678		)	—			—			—		(678		)	(483		)	—			—			—		(483		)
Repayment of fixed-rate notes	(500		)	—			—			—		(500		)
Proceeds from stock option exercises	211			—			—			—		211
Other, net	(38		)	(1		)	—			—		(39		)	21			(1		)	88			—		108
Net cash used by financing activities	(1,527		)	(1		)	—			—		(1,528		)	(1,363		)	(1		)	88			—		(1,276		)
Net cash used by discontinued operations	(44		)	—			—			—		(44		)	(17		)	—			—			—		(17		)
Cash sweep/funding by parent	820			(949		)	129			—		—			764			(740		)	(24		)	—		—
Net decrease in cash and equivalents	(655		)	—			173			—		(482		)	(407		)	—			(71		)	—		(478		)
Cash and equivalents at beginning of period	1,732			—			1,053			—		2,785			1,254			—			1,080			—		2,334
Cash and equivalents at end of period	$	1,077		$	—		$	1,226		$	—	$	2,303		$	847		$	—		$	1,009		$	—	$	1,856
Nine Months Ended October 4, 2015
Six Months Ended July 3, 2016
Net cash provided by operating activities*	$	(230	)	$	1,916		$	584		$	—	$	2,270		$	280		$	399		$	194		$	—	$	873
Cash flows from investing activities:
Maturities of held-to-maturity securities	500			—			—			—		500
Capital expenditures	(29		)	(314		)	(17		)	—		(360		)	(3		)	(111		)	(20		)	—		(134		)
Proceeds from sales of assets	162			128			—			—		290
Other, net	2			(14		)	—			—		(12		)	1			(15		)	(37		)	—		(51		)
Net cash provided by investing activities	635			(200		)	(17		)	—		418
Net cash used by investing activities															(2		)	(126		)	(57		)	—		(185		)
Cash flows from financing activities:
Purchases of common stock	(2,729		)	—			—			—		(2,729		)	(1,189		)	—			—			—		(1,189		)
Dividends paid	(655		)	—			—			—		(655		)	(447		)	—			—			—		(447		)
Repayment of fixed-rate notes	(500		)	—			—			—		(500		)
Proceeds from stock option exercises	240			—			—			—		240
Other, net	(31		)	2			—			—		(29		)	61			(1		)	36			—		96
Net cash used by financing activities	(3,675		)	2			—			—		(3,673		)	(1,575		)	(1		)	36			—		(1,540		)
Net cash used by discontinued operations	(31		)	—			—			—		(31		)	(34		)	—			—			—		(34		)
Cash sweep/funding by parent	2,049			(1,718		)	(331		)	—		—			610			(272		)	(338		)	—		—
Net decrease in cash and equivalents	(1,252		)	—			236			—		(1,016		)	(721		)	—			(165		)	—		(886		)
Cash and equivalents at beginning of period	2,536			—			1,852			—		4,388			1,732			—			1,053			—		2,785
Cash and equivalents at end of period	$	1,284		$	—		$	2,088		$	—	$	3,372		$	1,011		$	—		$	888		$	—	$	1,899

* Continuing operations only.

~~(Dollars~~Q. PRIOR-PERIOD FINANCIAL STATEMENTS

Our prior-period financial statements were restated for the adoption of three ASUs that are discussed below.

ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We adopted ASU 2016-09 in ~~millions, except per-share~~the second quarter of 2016. ASU 2016-09 impacted several aspects of our accounting for share-based payment transactions. The ASU requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statement of Earnings. Previously, these amounts were recognized directly to shareholders’ equity. While this area of the ASU permits only prospective adoption, because we adopted the standard in the second quarter of 2016, we were required to subsequently restate the first-quarter 2016 financial statements to reflect the adoption as of the beginning of the year. Therefore, the Consolidated Statement of Earnings for the three-month period ended July 3, 2016, has been restated accordingly.

ASC Topic 606. We adopted ASC Topic 606 on January 1, 2017, using the retrospective method. The adoption of ASC Topic 606 had two primary impacts on our Consolidated Financial Statements. The impact of adjustments on profit recorded to date is now recognized in the period identified (cumulative catch-up method), rather than prospectively over the remaining contract term. For our contracts for the manufacture of business-jet aircraft, we now recognize revenue at a single point in time when control is transferred to the customer, generally when the customer accepts the fully outfitted aircraft. Prior to the adoption of ASC Topic 606, we recognized revenue for these contracts at two contractual milestones: when green aircraft were completed and accepted by the customer and when the customer accepted final delivery of the fully outfitted aircraft. The cumulative effect of the adoption was recognized as a decrease to retained earnings of $372 on January 1, 2015.

We applied the standard's practical expedient that permits the omission of prior-period information about our remaining performance obligations. No other practical expedients were applied.

ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. We adopted ASU 2015-17 on January 1, 2017, using the retrospective method. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the Consolidated Balance Sheet. The adoption of ASU 2015-17 resulted in reclassifications among accounts on the Consolidated Balance Sheet, but had no other impacts on our results of operations, financial condition or ~~unless otherwise noted)~~cash flows.

The following tables summarize the effects of adopting these accounting standards on our unaudited Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)



	Three Months Ended				Effect of the Adoption of								Three Months Ended
	July 3, 2016				ASU			ASC			ASU		July 3, 2016
(Dollars in millions, except per-share amounts)	As Reported				2016-09			Topic 606			2015-17		As Adjusted
Revenue:
Products	$	4,848			$	—		$	95		$	—	$	4,943
Services	2,817				—			14			—		2,831
	7,665				—			109			—		7,774
Operating costs and expenses:
Products	3,747				—			142			—		3,889
Services	2,362				—			11			—		2,373
G&A	486				—			(1		)	—		485
	6,595				—			152			—		6,747
Operating earnings	1,070				—			(43		)	—		1,027
Interest, net	(23		)		—			—			—		(23		)
Other, net	1				—			—			—		1
Earnings before income tax	1,048				—			(43		)	—		1,005
Provision for income tax, net	290				15			(14		)	—		291
Net earnings	$	758			$	(15	)	$	(29	)	$	—	$	714

Earnings per share
Basic	$	2.49			$	(0.05	)	$	(0.09	)	$	—	$	2.35
Diluted	$	2.44		—	$	(0.04	)	$	(0.10	)	$	—	$	2.30

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)



	Six Months Ended			Effect of the Adoption of							Six Months Ended
	July 3, 2016			ASU		ASC			ASU		July 3, 2016
(Dollars in millions, except per-share amounts)	As Reported			2016-09		Topic 606			2015-17		As Adjusted
Revenue:
Products	$	9,712		$	—	$	(187	)	$	—	$	9,525
Services	5,677			—		48			—		5,725
	15,389			—		(139		)	—		15,250
Operating costs and expenses:
Products	7,530			—		(6		)	—		7,524
Services	4,790			—		39			—		4,829
G&A	946			—		—			—		946
	13,266			—		33			—		13,299
Operating earnings	2,123			—		(172		)	—		1,951
Interest, net	(45		)	—		—			—		(45		)
Other, net	11			—		—			—		11
Earnings from continuing operations before income tax	2,089			—		(172		)	—		1,917
Provision for income tax, net	601			—		(52		)	—		549
Earnings from continuing operations	1,488			—		(120		)	—		1,368
Discontinued operations	(13		)	—		—			—		(13		)
Net earnings	$	1,475		$	—	$	(120	)	$	—	$	1,355

Earnings per share
Basic:
Continuing operations	$	4.86		$	—	$	(0.39	)	$	—	$	4.47
Discontinued operations	(0.04		)	—		—			—		(0.04		)
Net earnings	$	4.82		$	—	$	(0.39	)	$	—	$	4.43
Diluted:
Continuing operations	$	4.77		$	—	$	(0.38	)	$	—	$	4.39
Discontinued operations	(0.04		)	—		—			—		(0.04		)
Net earnings	$	4.73		$	—	$	(0.38	)	$	—	$	4.35

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	Three Months Ended			Effect of the Adoption of								Three Months Ended
	July 3, 2016			ASU			ASC			ASU		July 3, 2016
(Dollars in millions)	As Reported			2016-09			Topic 606			2015-17		As Adjusted
Net earnings	$	758		$	(15	)	$	(29	)	$	—	$	714
Losses on cash flow hedges	(24		)	—			—			—		(24		)
Unrealized gains on securities	5			—			—			—		5
Foreign currency translation adjustments	(56		)	—			3			—		(53		)
Change in retirement plans’ funded status	66			—			—			—		66
Other comprehensive loss, pretax	(9		)	—			3			—		(6		)
Provision for income tax, net	15			—			—			—		15
Other comprehensive loss, net of tax	(24		)	—			3			—		(21		)
Comprehensive income	$	734		$	(15	)	$	(26	)	$	—	$	693



	Six Months Ended			Effect of the Adoption of							Six Months Ended
	July 3, 2016			ASU		ASC			ASU		July 3, 2016
(Dollars in millions)	As Reported			2016-09		Topic 606			2015-17		As Adjusted
Net earnings	$	1,475		$	—	$	(120	)	$	—	$	1,355
Gains on cash flow hedges	158			—		—			—		158
Unrealized losses on securities	(4		)	—		—			—		(4		)
Foreign currency translation adjustments	125			—		2			—		127
Change in retirement plans’ funded status	126			—		—			—		126
Other comprehensive income, pretax	405			—		2			—		407
Provision for income tax, net	84			—		—			—		84
Other comprehensive income, net of tax	321			—		2			—		323
Comprehensive income	$	1,796		$	—	$	(118	)	$	—	$	1,678

CONSOLIDATED BALANCE SHEET (UNAUDITED)



				Effect of the Adoption of
	December 31, 2016			ASU		ASC			ASU			December 31, 2016
(Dollars in millions)	As Reported			2016-09		Topic 606			2015-17*			As Adjusted

ASSETS
Current assets:
Cash and equivalents	$	2,334		$	—	$	—		$	—		$	2,334
Accounts receivable	3,611			—		(212		)	—			3,399
Unbilled receivables	5,282			—		(1,070		)	—			4,212
Inventories	3,523			—		2,294			—			5,817
Other current assets	697			—		90			(15		)	772
Total current assets	15,447			—		1,102			(15		)	16,534
Noncurrent assets:
Property, plant and equipment, net	3,467			—		10			—			3,477
Intangible assets, net	678			—		—			—			678
Goodwill	11,445			—		—			—			11,445
Other assets	1,835			—		—			(797		)	1,038
Total noncurrent assets	17,425			—		10			(797		)	16,638
Total assets	$	32,872		$	—	$	1,112		$	(812	)	$	33,172

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	900		$	—	$	—		$	—		$	900
Accounts payable	2,538			—		—			—			2,538
Customer advances and deposits	4,939			—		1,888			—			6,827
Other current liabilities	4,469			—		(361		)	(923		)	3,185
Total current liabilities	12,846			—		1,527			(923		)	13,450
Noncurrent liabilities:
Long-term debt	2,988			—		—			—			2,988
Other liabilities	6,062			—		260			111			6,433
Commitments and contingencies (see Note M)
Total noncurrent liabilities	9,050			—		260			111			9,421
Shareholders’ equity:
Common stock	482			—		—			—			482
Surplus	2,819			—		—			—			2,819
Retained earnings	25,227			—		(684		)	—			24,543
Treasury stock	(14,156		)	—		—			—			(14,156		)
Accumulated other comprehensive loss	(3,396		)	—		9			—			(3,387		)
Total shareholders’ equity	10,976			—		(675		)	—			10,301
Total liabilities and shareholders’ equity	$	32,872		$	—	$	1,112		$	(812	)	$	33,172

* The effect of the adoption of ASU 2015-17 includes the reclassification of current deferred tax assets and liabilities of $10 and $335, respectively, which are included as effects of adopting ASC Topic 606.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)



	Six Months Ended			Effect of the Adoption of							Six Months Ended
	July 3, 2016			ASU		ASC			ASU		July 3, 2016
(Dollars in millions)	As Reported			2016-09		Topic 606			2015-17		As Adjusted
Cash flows from operating activities - continuing operations:
Net earnings	$	1,475		$	—	$	(120	)	$	—	$	1,355
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of property, plant and equipment	182			—		(1		)	—		181
Amortization of intangible assets	50			—		—			—		50
Equity-based compensation expense	51			—		—			—		51
Deferred income tax provision	62			—		(52		)	—		10
Discontinued operations	13			—		—			—		13
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	(83		)	—		45			—		(38		)
Unbilled receivables	(619		)	—		96			—		(523		)
Inventories	(150		)	—		66			—		(84		)
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	157			—		—			—		157
Customer advances and deposits	(423		)	—		(32		)	—		(455		)
Other, net	158			—		(2		)	—		156
Net cash provided by operating activities	873			—		—			—		873
Cash flows from investing activities:
Capital expenditures	(134		)	—		—			—		(134		)
Other, net	(51		)	—		—			—		(51		)
Net cash used by investing activities	(185		)	—		—			—		(185		)
Cash flows from financing activities:
Purchases of common stock	(1,189		)	—		—			—		(1,189		)
Dividends paid	(447		)	—		—			—		(447		)
Other, net	96			—		—			—		96
Net cash used by financing activities	(1,540		)	—		—			—		(1,540		)
Net cash used by discontinued operations	(34		)	—		—			—		(34		)
Net decrease in cash and equivalents	(886		)	—		—			—		(886		)
Cash and equivalents at beginning of period	2,785			—		—			—		2,785
Cash and equivalents at end of period	$	1,899		$	—	$	—		$	—	$	1,899

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)



	Common Stock				Retained			Treasury			Accumulated Other Comprehensive			Total Shareholders’
(Dollars in millions)	Par		Surplus		Earnings			Stock			Loss			Equity
December 31, 2015 - as reported	$	482	$	2,730	$	23,204		$	(12,392	)	$	(3,286	)	$	10,738
Cumulative-effect adjustment of ASC Topic 606 on January 1, 2016	—		—		(301		)	—			3			(298		)
December 31, 2015 - as adjusted	482		2,730		22,903			(12,392		)	(3,283		)	10,440
Six months ended July 3, 2016 - as reported	—		26		1,009			(1,099		)	321			257
Effect of the adoption of ASU 2016-09	—		—		—			—			—			—
Effect of the adoption of ASC Topic 606	—		—		(120		)	—			2			(118		)
Effect of the adoption of ASU 2015-17	—		—		—			—			—			—
July 3, 2016 - as adjusted	$	482	$	2,756	$	23,792		$	(13,491	)	$	(2,960	)	$	10,579

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

(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 and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) ~~solutions~~solutions; and ~~information technology (IT) services;~~shipbuilding and ~~shipbuilding.~~ ship repair.

We operate through four business groups: Aerospace, Combat Systems, Information Systems and Technology, and Marine Systems. Our primary customer is the U.S. government, including the Department of Defense (DoD), the intelligence community and other U.S. government customers. We also have significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business-jet aircraft. The following discussion should be read in conjunction with our ~~2015~~2016 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

~~DEFENSE BUSINESS ENVIRONMENT~~

With approximately 60 percent of our revenue derived from contracts with the U.S. government, our financial performance is impacted by U.S. government spending levels, particularly defense spending. Prior to the U.S. government's new fiscal year (FY) that began on October 1, 2016, the President's FY 2017 budget request had not been approved by the Congress. On September 28, 2016, a continuing resolution (CR), which prescribes defense funding at prior-year levels, was approved through December 9, 2016. As the current CR funding level supports our expected revenue, we do not anticipate that the CR will have a material impact on our operating results during the fourth quarter of 2016.

RESULTS OF OPERATIONS

INTRODUCTION

An understanding of our accounting practices is important to evaluate 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 recognizing~~we recognize revenue and operating costs in our business groups. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2017. As a result of adoption, our prior-period results of operations and backlog have been restated.

In the Aerospace group, we record revenue on contracts for new aircraft have two major phases: the manufacture of the “green” aircraft 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~~control is transferred to ~~and accepted by~~ the customer, ~~and~~generally 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 deposits from the customer and other factors. Revenue associated with the group’s completions of other original equipment ~~manufacturers'~~manufacturers’ (OEMs) aircraft and the ~~group's~~group’s services businesses ~~are~~is 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 of aircraft service activity during the period.

The majority of the Aerospace group’s operating costs relates to new aircraft production on firm orders and consists 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’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-margin~~ large-cabin and ~~lower-margin~~ mid-cabin aircraft deliveries. Additional factors affecting the group’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 research and development (R&D) costs incurred by the group.

In the three defense groups, revenue on long-term government contracts is recognized generally over time as the work progresses, either as the products are produced or as services are rendered. ~~As a result, variations in~~Typically, revenue ~~are discussed generally in terms of volume, typically measured by the level of activity on individual contracts or programs. Year-over-year variances attributed~~is recognized over time using an input measure (e.g., costs incurred to ~~volume are due~~date relative to ~~changes in production or service levels and delivery schedules.~~

total estimated costs at completion) to measure progress. Operating costs for the defense groups consist of labor, material, subcontractor, overhead and G&A costs and are recognized generally as incurred. Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual ~~contracts and, therefore, result largely from the same factors that drive~~contracts. 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 groups are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- versus lower-margin work. Additionally, higher or lower margins can be inherent in the contract type (e.g., fixed-price/cost-reimbursable) or type of work (e.g., development/production).

CONSOLIDATED OVERVIEW


Three Months Ended	October 2, 2016			October 4, 2015			Variance					July 2, 2017			July 3, 2016			Variance
Revenue	$	7,731		$	7,994		$	(263	)	(3.3	)%	$	7,675		$	7,774		$	(99	)	(1.3	)%
Operating costs and expenses	6,662			6,960			(298		)	(4.3	)%	6,619			6,747			(128		)	(1.9	)%
Operating earnings	1,069			1,034			35			3.4	%	1,056			1,027			29			2.8	%
Operating margin	13.8		%	12.9		%						13.8		%	13.2		%
Nine Months Ended	October 2, 2016			October 4, 2015			Variance
Six Months Ended												July 2, 2017			July 3, 2016			Variance
Revenue	$	23,120		$	23,660		$	(540	)	(2.3	)%	$	15,116		$	15,250		$	(134	)	(0.9	)%
Operating costs and expenses	19,928			20,518			(590		)	(2.9	)%	13,025			13,299			(274		)	(2.1	)%
Operating earnings	3,192			3,142			50			1.6	%	2,091			1,951			140			7.2	%
Operating margin	13.8		%	13.3		%						13.8		%	12.8		%

Our consolidated results for the ~~third~~second quarter of ~~2016 continued to reflect superb~~2017 reflected strong operating performance, with operating earnings over $1 billion ~~for the eighth consecutive quarter~~ and a robust operating ~~margins at 13.8 percent~~margin of 13.8% in the ~~third~~second quarter and first ~~nine~~six months of ~~2016.~~2017.

Revenue was ~~lower~~down in the ~~third~~second quarter of ~~2016~~2017 driven ~~primarily~~ by fewer aircraft deliveries and lower pre-owned aircraft sales in our Aerospace group ~~offset partially by higher C4ISR solutions~~and lower volume in our Information Systems and Technology group. ~~For the first nine months of 2016, lower revenue in our Aerospace and Combat Systems groups was~~These decreases were offset partially by ~~higher~~increased revenue from U.S. Navy ship ~~construction work~~engineering, repair and other services in our Marine Systems group and ~~C4ISR solutions~~higher volume on U.S. military vehicles and weapons systems and munitions programs in our Combat Systems group.

In the first six months of 2017, revenue decreased due to lower volume in our Information Systems and Technology group. This decrease was offset in part by higher volume in our Combat Systems and Aerospace groups.

~~In both periods, operating~~

Operating costs and expenses decreased at a greater rate than revenue in the second quarter and first six months of 2017, resulting in operating earnings and margin growth compared with the prior-year periods. Operating ~~margins~~margin increased 9060 basis points in the ~~third~~second quarter and 50100 basis points in the first ~~nine~~six months of ~~2016.~~2017. This margin expansion was attributable primarily to improved operating performance ~~and continued cost reduction efforts~~ in the Aerospace ~~Combat Systems,~~ and Information Systems and Technology ~~groups.~~groups and, to a somewhat lesser extent, our Combat Systems group.

REVIEW OF BUSINESS GROUPS

Following is a discussion of the operating results and outlook for each of our business groups. For the Aerospace group, results are analyzed by specific types of products and services, consistent with how the group is managed. For the defense groups, the discussion is based on the lines of products and services each group offers with a supplemental discussion of specific contracts and programs when significant to the ~~group's~~group’s results. ~~Information~~Additional information regarding our business groups can be found in Note NO to the unaudited Consolidated Financial Statements in Part I, Item 1.

AEROSPACE


Three Months Ended	October 2, 2016			October 4, 2015			Variance					July 2, 2017			July 3, 2016			Variance
Revenue	$	2,017		$	2,343		$	(326	)	(13.9	)%	$	2,078		$	2,284		$	(206	)	(9.0	)%
Operating earnings	437			426			11			2.6	%	425			424			1			0.2	%
Operating margin	21.7		%	18.2		%						20.5		%	18.6		%

Gulfstream aircraft deliveries (in units):
Green	30			40			(10		)	(25.0	)%
Outfitted	27			43			(16		)	(37.2	)%
Nine Months Ended	October 2, 2016			October 4, 2015			Variance
Gulfstream aircraft deliveries (in units)												30			36			(6		)	(16.7	)%
Six Months Ended												July 2, 2017			July 3, 2016			Variance
Revenue	$	6,138		$	6,709		$	(571	)	(8.5	)%	$	4,152		$	4,065		$	87		2.1	%
Operating earnings	1,282			1,296			(14		)	(1.1	)%	868			756			112			14.8	%
Operating margin	20.9		%	19.3		%						20.9		%	18.6		%

Gulfstream aircraft deliveries (in units):
Green	92			110			(18		)	(16.4	)%
Outfitted	88			116			(28		)	(24.1	)%
Gulfstream aircraft deliveries (in units)												60			64			(4		)	(6.3	)%

Operating Results

The change in the Aerospace ~~group's~~group’s revenue in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:


	Third Quarter			Nine Months			Second Quarter			Six Months
Aircraft manufacturing, outfitting and completions	$	(341	)	$	(596	)	$	(242	)	$	11
Aircraft services	(22		)	19			41			75
Pre-owned aircraft	37			6			(5		)	1
Total decrease	$	(326	)	$	(571	)
Total (decrease) increase							$	(206	)	$	87

Aircraft manufacturing, outfitting and completions revenue decreased in the ~~third~~second quarter ~~and first nine months~~ of ~~2016~~2017 due ~~primarily~~ to ~~planned~~ fewer ~~deliveries of~~ G550 ~~and G450~~ large-cabin aircraft deliveries, offset partially by additional deliveries of the ultra-large-cabin G650 aircraft. In the first six months of 2017, additional deliveries of G650 aircraft offset the decrease in G550 deliveries. Aircraft services revenue ~~decreased somewhat~~increased in the ~~third~~second quarter ~~but was up for the~~and first ~~nine~~six months of ~~2016~~2017 driven by higher demand for maintenance ~~work.~~work and the acquisitions of an aircraft management and charter services provider in 2016 and a fixed-base-operations (FBO) facility in 2017. We had ~~one additional~~two pre-owned aircraft ~~sale~~sales in the ~~third~~second quarter ~~and first nine months~~ of ~~2016~~2017 compared with four in the ~~prior-year periods.~~second quarter of 2016.

The ~~change~~increase in the ~~group's~~group’s operating earnings in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:


	Third Quarter			Nine Months			Second Quarter			Six Months
Aircraft manufacturing, outfitting and completions	$	(4	)	$	(64	)	$	(4	)	$	120
Aircraft services	6			44			5			(2		)
Pre-owned aircraft	(2		)	(8		)	2			4
G&A/other expenses	11			14			(2		)	(10		)
Total increase (decrease)	$	11		$	(14	)
Total increase							$	1		$	112

~~Operating margin in~~In the ~~third~~second quarter of 2016 increased 350 basis points compared with the prior-year period to a record-high 21.7 percent. In the first nine months of 2016, operating margin increased 160 basis points. The margin expansion was driven primarily by ongoing cost savings initiatives and improved operating performance across the group.

~~Operating earnings were up slightly in the third quarter of 2016 compared with the prior-year period despite the top-line decrease in revenue. In the first nine months of 2016,~~2017, aircraft manufacturing, outfitting and completions earnings were down slightly due to ~~planned~~ fewer aircraft deliveries, ~~and the absence of a supplier settlement received in the first quarter of 2015,~~ offset ~~partially~~largely by favorable cost performance. ~~The group’s aircraft services operating~~Aircraft manufacturing, outfitting and completions earnings ~~have been particularly strong~~were up significantly in ~~2016~~the first six months of 2017 compared with the prior-year period due to a favorable mix of ~~work~~large-cabin aircraft deliveries and ~~improved labor efficiencies. In addition, G&A expenses were lower as~~effective cost containment. As a result, the group's operating margin increased 190 basis points and 230 basis points in the second quarter and first six months of ~~cost savings initiatives including recent reductions in indirect support staff across the group.~~2017, respectively.

Outlook

We expect the ~~group's~~group’s full-year ~~2016~~2017 revenue to be ~~between $8.4 and $8.5 billion with operating~~approximately $8.1 billion. Operating margin ~~slightly above 20 percent, resulting in a modest increase in operating earnings from 2015~~is expected to ~~2016.~~

be 19.5 to 19.6%.

COMBAT SYSTEMS


Three Months Ended	October 2, 2016			October 4, 2015			Variance					July 2, 2017			July 3, 2016			Variance
Revenue	$	1,330		$	1,345		$	(15	)	(1.1	)%	$	1,414		$	1,297		$	117	9.0	%
Operating earnings	219			218			1			0.5	%	225			205			20		9.8	%
Operating margin	16.5		%	16.2		%						15.9		%	15.8		%
Nine Months Ended	October 2, 2016			October 4, 2015			Variance
Six Months Ended												July 2, 2017			July 3, 2016			Variance
Revenue	$	3,918		$	4,116		$	(198	)	(4.8	)%	$	2,701		$	2,542		$	159	6.3	%
Operating earnings	655			648			7			1.1	%	430			392			38		9.7	%
Operating margin	16.7		%	15.7		%						15.9		%	15.4		%

Operating Results

The ~~change~~increase in the Combat Systems ~~group's~~group’s revenue in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:


	Third Quarter			Nine Months			Second Quarter			Six Months
U.S. military vehicles							$	68		$	112
Weapons systems and munitions							55			66
International military vehicles	$	(31	)	$	(157	)	(6		)	(19		)
Weapon systems and munitions	—			(50		)
U.S. military vehicles	16			9
Total decrease	$	(15	)	$	(198	)
Total increase							$	117		$	159

~~The transition~~Revenue from ~~engineering to production on a major combat-vehicle contract~~U.S. military vehicles increased in the Middle East and timing of work on the group's contract to upgrade and modernize LAV III combat vehicles for the Canadian army resulted in lower revenue on our international military vehicle programs in the thirdsecond quarter and first ~~nine~~six months of ~~2016. Weapon~~2017 due to higher volume on the Stryker program to produce vehicles with a 30-millimeter cannon. Weapons systems

and munitions revenue was ~~steady~~up in the ~~third quarter of 2016, but declined in the first nine months of 2016 due primarily to the timing of production of Hydra-70 rockets.~~

Translation of our international businesses' revenue into U.S. dollars in 2016 has been affected negatively by foreign currency exchange rate fluctuations, continuing a trend we have been experiencing since last year. In the thirdsecond quarter and first ~~nine~~six months of ~~2016, the translation impact was~~2017 due ~~primarily~~ to ~~the strengthening~~increased production of several products, including bombs and Hydra-70 rockets for the U.S. dollar against the Canadian dollar and British pound. Had foreign currency exchange rates in the third quarter and first nine months of 2016 held constant from the same periods in 2015, revenue in the Combat Systems group would have been essentially flat in the third quarter and decreased 2.7 percent in the first nine months of 2016 compared with the prior-year periods.government.

The Combat Systems ~~group's~~group’s operating margin increased 3010 basis points in the ~~third~~second quarter and ~~100~~50 basis points in the first ~~nine~~six months of 2017, respectively, driven by improved operating performance. Operating results in the first six months of 2016 ~~driven by~~included a ~~favorable contract mix~~loss on the design and ~~improved operating performance.~~development phase of the British AJAX armoured fighting vehicles program.

Outlook

We expect the Combat Systems group’s full-year revenue to increase ~~slightly~~approximately 7% in ~~2016 despite the foreign exchange translation headwind discussed above. Full-year 2016 operating~~2017. Operating margin is expected to be ~~approximately 16 percent.~~

15.6 to 15.7%.

INFORMATION SYSTEMS AND TECHNOLOGY


Three Months Ended	October 2, 2016			October 4, 2015			Variance				July 2, 2017			July 3, 2016			Variance
Revenue	$	2,341		$	2,219		$	122	5.5	%	$	2,104		$	2,215		$	(111	)	(5.0	)%
Operating earnings	256			219			37		16.9	%	240			234			6			2.6	%
Operating margin	10.9		%	9.9		%					11.4		%	10.6		%
Nine Months Ended	October 2, 2016			October 4, 2015			Variance
Six Months Ended											July 2, 2017			July 3, 2016			Variance
Revenue	$	6,903		$	6,804		$	99	1.5	%	$	4,250		$	4,543		$	(293	)	(6.4	)%
Operating earnings	748			673			75		11.1	%	476			471			5			1.1	%
Operating margin	10.8		%	9.9		%					11.2		%	10.4		%

Operating Results

The change in the Information Systems and Technology ~~group's~~group’s revenue in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:


	Third Quarter			Nine Months			Second Quarter			Six Months
C4ISR solutions	$	132		$	173		$	(67	)	$	(165	)
IT services	(10		)	(74		)	(44		)	(128		)
Total increase	$	122		$	99
Total decrease							$	(111	)	$	(293	)

C4ISR solutions revenue ~~increased~~decreased in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 due primarily to ~~higher~~lower volume on the Common Hardware Systems-4 (CHS-4) ruggedized computing equipment and Warfighter Information Network-Tactical (WIN-T) mobile communications network ~~program and several international programs in Canada and the United Kingdom.~~programs. Revenue decreased in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 in our IT services business driven by lower volume on ~~our health solutions programs, including less contact-center services work for~~ the ~~Centers for Medicare & Medicaid Services.~~Department of State supply chain management program.

~~Operating~~Despite the lower revenue, operating earnings increased, and operating margin ~~increased 100~~expanded 80 basis points in the ~~third~~second quarter and ~~90 basis points in the~~ first ~~nine~~six months of ~~2016~~2017. The margin expansion was driven primarily by strong program performance and favorable program mix across our portfolio. The group also continues to benefit from the 2015 consolidation of two of our businesses. Operating earnings in the first nine months of 2015 included a gain of $23 on the sale of a commercial cyber security product business. Excluding the impact of this gain on the prior-year period, the group's operating margin increased 120 basis points in the first nine months of 2016.

Outlook

We expect full-year ~~2016~~ revenue in the Information Systems and Technology group to be ~~up slightly~~essentially flat from ~~2015. Full-year operating~~2016. Operating margin is expected to ~~be in the mid-~~increase to ~~high-10 percent range.~~11.2 to 11.4%.

MARINE SYSTEMS


Three Months Ended	October 2, 2016			October 4, 2015			Variance					July 2, 2017			July 3, 2016			Variance
Revenue	$	2,043		$	2,087		$	(44	)	(2.1	)%	$	2,079		$	1,978		$	101		5.1	%
Operating earnings	166			181			(15		)	(8.3	)%	178			172			6			3.5	%
Operating margin	8.1		%	8.7		%						8.6		%	8.7		%
Nine Months Ended	October 2, 2016			October 4, 2015			Variance
Six Months Ended												July 2, 2017			July 3, 2016			Variance
Revenue	$	6,161		$	6,031		$	130		2.2	%	$	4,013		$	4,100		$	(87	)	(2.1	)%
Operating earnings	539			556			(17		)	(3.1	)%	339			356			(17		)	(4.8	)%
Operating margin	8.7		%	9.2		%						8.4		%	8.7		%

Operating Results

The change in the Marine Systems group’s revenue in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:


	Third Quarter			Nine Months			Second Quarter			Six Months
U.S. Navy ship engineering, repair and other services							$	135		$	228
U.S. Navy ship construction	$	(53	)	$	117		39			(191		)
U.S. Navy ship engineering, repair and other services	33			99
Commercial ship construction	(24		)	(86		)	(73		)	(124		)
Total (decrease) increase	$	(44	)	$	130
Total increase (decrease)							$	101		$	(87	)

U.S. Navy ship construction revenue decreased in the third quarter of 2016 due to lower material volume on Block III of the Virginia-class submarine program, offset partially by higher volume on the Expeditionary Sea Base (ESB) ship program and the start of construction of the TAO-205 next-generation fleet oilers. In the first nine months of 2016, U.S. Navy ship construction revenue increased due to higher volume on the Virginia-class and ESB programs and the start of construction of the TAO-205 program. Revenue from U.S. Navy ship engineering, repair and other services increased in the ~~third~~second quarter and first ~~nine~~six months of ~~2016 due to~~2017 driven by additional development work on the Columbia-class submarine program ~~(the Ohio-class~~and a higher volume of submarine ~~replacement program),~~and surface ship repair work. In the second quarter of 2017, U.S. Navy ship construction revenue increased due to higher volume on the Expeditionary Sea Base (ESB) contract. In the first six months of 2017, this increase was offset ~~partially~~ by lower material volume on Block III of the ~~timing of availabilities for repair work.~~Virginia-class submarine program. Jones Act commercial ship construction revenue decreased due to reduced construction activity following the ~~planned~~ delivery of ~~five~~six ships in ~~2016.~~2016 and two ships in the first six months of 2017.

The Marine Systems group’s operating margin decreased 6010 basis points in the ~~third~~second quarter and 5030 basis points in the first ~~nine~~six months of ~~2016 driven primarily by cost growth associated with the restart of the Navy's DDG-51 program. The group’s operating margin was also affected unfavorably~~2017. Operating results in the first ~~nine~~six months of ~~2016 due~~2017 included the impact of a delay in the scheduled delivery of one ship in Block III of the Virginia-class submarine program. The ship was delivered to ~~lower-margin engineering services and commercial ship work.~~the Navy in the second quarter of 2017.

Outlook

We expect the Marine Systems group’s full-year ~~2016~~ revenue to be ~~somewhat higher~~about $8.1 billion. Operating margin is expected to improve to around 8.6%.

CORPORATE

Corporate costs totaled $12 in the second quarter of 2017 compared with ~~2015. We expect the group's operating margin to be~~$8 in the ~~high-8 percent range reflecting~~second quarter of 2016, and $22 in the ~~full-year impact~~first six months of 2017 compared with $24 in the ~~third-quarter cost growth associated with the restart of the Navy's DDG-51 program.~~

~~CORPORATE~~

2016 period. Corporate results consist primarily of ~~compensation expense for~~ stock ~~options. Corporate costs totaled $9 in the third quarter of 2016 compared with $10 in the third quarter of 2015, and $32 in the first nine months of 2016 compared with $31 in the 2015 period.~~option expense. We expect ~~full-year 2016~~2017 Corporate operating costs of approximately ~~$40.~~$50.

OTHER INFORMATION

PRODUCT REVENUE AND OPERATING COSTS


Three Months Ended	October 2, 2016		October 4, 2015		Variance					July 2, 2017		July 3, 2016		Variance
Revenue	$	4,844	$	5,119	$	(275	)	(5.4	)%	$	4,654	$	4,943	$	(289	)	(5.8	)%
Operating costs	3,757		4,037		(280		)	(6.9	)%	3,582		3,889		(307		)	(7.9	)%
Nine Months Ended	October 2, 2016		October 4, 2015		Variance
Six Months Ended										July 2, 2017		July 3, 2016		Variance
Revenue	$	14,556	$	15,189	$	(633	)	(4.2	)%	$	9,121	$	9,525	$	(404	)	(4.2	)%
Operating costs	11,287		11,887		(600		)	(5.0	)%	7,018		7,524		(506		)	(6.7	)%

The change in product revenue in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:


	Third Quarter			Nine Months			Second Quarter			Six Months
Aircraft manufacturing, outfitting and completions	$	(344	)	$	(598	)	$	(242	)	$	11
Military vehicle products	22			(194		)
C4ISR products							(79		)	(157		)
Ship construction	(81		)	14			(31		)	(316		)
C4ISR products	84			95
Other, net	44			50			63			58
Total decrease	$	(275	)	$	(633	)	$	(289	)	$	(404	)

~~Product~~Aircraft manufacturing, outfitting and completions revenue decreased in ~~2016~~the second quarter due ~~primarily~~ to fewer Gulfstream aircraft ~~deliveries, the transition~~deliveries. Revenue from ~~engineering to production on a major combat-vehicle contract~~C4ISR products decreased in the ~~Middle East,~~second quarter and ~~timing~~first six months of ~~work~~2017 driven by lower volume on ~~a contract to upgrade~~the CHS-4 and ~~modernize LAV III combat vehicles for the Canadian army.~~WIN-T programs. Ship construction revenue decreased in the ~~third~~second quarter and first six months of ~~2016~~2017 due to lower material volume on Block III of the Virginia-class submarine program and decreased Jones Act commercial ship construction volume. These decreases in ship construction revenue were more than offset in the first nine months of 2016 by higher volume on the Virginia-class and ESB programs and the start of construction of the TAO-205 program. Revenue for C4ISR products increased in the third quarter and first nine months of 2016 due to higher volume on the WIN-T program.

Product operating costs decreased in the ~~third~~second quarter and first ~~nine~~six months of ~~2016 consistent with~~2017 at a higher rate than revenue declined due primarily to improved operating performance in the ~~lower volume on the programs described above.~~Aerospace and Information Systems and Technology groups.

SERVICE REVENUE AND OPERATING COSTS


Three Months Ended	October 2, 2016		October 4, 2015		Variance					July 2, 2017		July 3, 2016		Variance
Revenue	$	2,887	$	2,875	$	12		0.4	%	$	3,021	$	2,831	$	190	6.7	%
Operating costs	2,434		2,447		(13		)	(0.5	)%	2,532		2,373		159		6.7	%
Nine Months Ended	October 2, 2016		October 4, 2015		Variance
Six Months Ended										July 2, 2017		July 3, 2016		Variance
Revenue	$	8,564	$	8,471	$	93		1.1	%	$	5,995	$	5,725	$	270	4.7	%
Operating costs	7,224		7,185		39			0.5	%	5,021		4,829		192		4.0	%

The ~~change~~increase in service revenue in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 consisted of the following:



	Second Quarter		Six Months
Ship engineering, repair and other services	$	132	$	229
Aircraft services	41		75
Other, net	17		(34		)
Total increase	$	190	$	270

Third Quarter Nine Months
IT services $ (6 ) $ (146 )
Ship engineering, repair and other services 37
116
C4ISR services 48
78
Military vehicle services (37 ) 45
Other, net (30 ) —
Total increase $ 12
$ 93

Service revenue increased in the ~~third~~second quarter and first ~~nine~~six months of ~~2016 despite a decrease in IT services revenue~~2017 due primarily to ~~lower volume on our health solutions programs. The increase in service revenue was driven by increased~~additional development work on the Columbia-class submarine program and a higher volume ~~on several C4ISR programs. While military vehicle~~of submarine and surface ship repair work. Aircraft services revenue ~~decreased~~increased driven by higher demand for aircraft maintenance work and the acquisitions of an aircraft management and charter services provider in ~~the third quarter of~~ 2016 ~~due to timing of support services for a major military vehicle production program~~and an FBO facility in ~~the Middle East, revenue~~2017. Service operating costs increased in the second quarter and first ~~nine~~six months of ~~2016 driven by additional services on the Stryker Engineering Change Proposal (ECP) upgrade program.~~

Service operating costs were essentially flat in the third quarter of 2016 as there was little change in the overall volume of services. In the first nine months of 2016, service operating costs increased2017 consistent with the higher volume on the programs described above.

OTHER FINANCIAL INFORMATION

G&A Expenses

As a percentage of revenue, G&A expenses were ~~6.1 percent~~6.5% in the first ~~nine~~six months of~~2016 and 2015.~~2017 compared with 6.2% in the first six months of 2016. We expect full-year G&A expenses in ~~2016~~2017 to be ~~approximately 6 percent.~~generally consistent with 2016.

Interest, Net

Net interest expense was ~~$68~~$49 in the first ~~nine~~six months of ~~2016~~2017 compared with ~~$64~~$45 in the ~~same period~~prior-year period. The increase is due primarily to a $500 net increase in ~~2015.~~long-term debt beginning in the third quarter of 2016. We expect full-year ~~2016~~2017 net interest expense to be approximately ~~$95.~~$105.

Provision for Income Tax, Net

Our effective tax rate was ~~28.1 percent~~26% in the first ~~nine~~six months of ~~2016~~2017 compared with ~~28.6 percent~~28.6% in the prior-year period. The ~~effective~~decrease is due primarily to additional tax ~~rate~~benefits from equity-based compensation in ~~2016 has been favorably impacted by~~ the ~~adoption~~first six months of ~~Accounting Standards Update (ASU) 2016-09. For further discussion~~2017 associated with stock option exercises and the vesting of the adoption of ASU 2016-09, see Note A to the unaudited Consolidated Financial Statements in Part I, Item 1. The effective tax rate in 2015 included the impact of favorable contract close-outs. For 2016, werestricted stock and restricted stock units. We anticipate ~~the~~a full-year 2017 effective tax rate to be ~~in the high-28 percent range.~~approximately 27.5%.

Discontinued Operations ~~Net of Tax~~

In ~~2013, we settled litigation with~~ the U.S. Navy related to the terminated A-12 aircraft contract in the company's former tactical military aircraft business. In connection with the settlement, we released some rights to reimbursement of costs on ships under contract at the time at our Bath, Maine shipyard. As we have progressed through the shipbuilding process, we have determined that the cost associated with this settlement is greater than anticipated. Therefore, in the third quarterfirst six months of 2016, we recognized ~~an $84 loss, net of taxes, to adjust the previously-recognized settlement value.~~

~~In addition,~~ in ~~the first quarter of 2016, we recognized~~discontinued operations a final adjustment of $13 to the loss on the sale of our axle business in the Combat Systems group. The business was sold in 2015.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was ~~$62 billion at the end of the third quarter of 2016, down 2 percent from $63.2~~$58.6 billion at the end of the second ~~quarter.~~quarter of 2017 compared with $60.4 billion on April 2, 2017. Our total backlog is equal to our remaining performance obligations as discussed in Note B to the unaudited Consolidated Financial Statements in Part I, Item 1. Our total estimated contract value, which combines total backlog with estimated potential contract value, was ~~$87.2~~$83 billion on ~~October~~July 2, ~~2016.~~2017.

The following table details the backlog and estimated potential contract value of each business group at the end of the second and first quarters of 2017:



	Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Estimated Contract Value
	July 2, 2017
Aerospace	$	12,116	$	120	$	12,236	$	1,911	$	14,147
Combat Systems	16,749		281		17,030		4,845		21,875
Information Systems and Technology	6,809		2,085		8,894		14,389		23,283
Marine Systems	16,033		4,374		20,407		3,282		23,689
Total	$	51,707	$	6,860	$	58,567	$	24,427	$	82,994

	April 2, 2017
Aerospace	$	12,446	$	133	$	12,579	$	1,929	$	14,508
Combat Systems	17,058		523		17,581		4,970		22,551
Information Systems and Technology	6,682		2,038		8,720		13,994		22,714
Marine Systems	17,071		4,413		21,484		3,756		25,240
Total	$	53,257	$	7,107	$	60,364	$	24,649	$	85,013

AEROSPACE

Aerospace funded backlog represents 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 group ended the second quarter of 2017 with backlog of $12.2 billion compared with $12.6 billion on April 2, 2017.

Orders in the second quarter of 2017 reflected strong demand across our product and services portfolio. We received orders for all models of in-production Gulfstream aircraft, as well as additional orders for the G500 and G600 aircraft, which are expected to enter into service in 2017 and 2018, respectively. The book-to-bill ratio (orders divided by revenue) was nearly one-to-one for Gulfstream aircraft in the second quarter of 2017. However, the Aerospace group's backlog declined slightly due to the mix of aircraft deliveries.

Beyond total backlog, estimated potential contract value in the Aerospace group was $1.9 billion on July 2, 2017 and April 2, 2017. Estimated potential contract value represents primarily options to purchase new aircraft and long-term aircraft services agreements.

DEFENSE GROUPS

The total backlog in our three defense groups 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 Congress and funded by the customer, as well as commitments by international customers that are approved and funded similarly by their governments. We have included in total backlog firm contracts at the amounts that we believe we are likely to receive funding, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.

Estimated potential contract value in our defense groups includes work awarded on unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options associated with existing firm contracts. Contract options in our defense business represent agreements to perform additional work under existing contracts at the election 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. ~~In the Aerospace group, estimated potential contract value represents primarily options to purchase new aircraft and long-term agreements with fleet customers.~~

~~The following table details the backlog and the estimated potential contract value of each business group at the end of the third and second quarters of 2016:~~

Funded Unfunded Total Backlog Estimated Potential Contract Value Total Estimated Contract Value
October 2, 2016
Aerospace $ 11,415
$ 108
$ 11,523
$ 2,158
$ 13,681
Combat Systems 17,659
436
18,095
4,469
22,564
Information Systems and Technology 7,143
2,057
9,200
14,444
23,644
Marine Systems 15,152
8,001
23,153
4,172
27,325
Total $ 51,369
$ 10,602
$ 61,971
$ 25,243
$ 87,214

July 3, 2016
Aerospace $ 11,629
$ 126
$ 11,755
$ 2,221
$ 13,976
Combat Systems 18,032
478
18,510
4,812
23,322
Information Systems and Technology 7,508
2,292
9,800
14,560
24,360
Marine Systems 15,908
7,260
23,168
4,237
27,405
Total $ 53,077
$ 10,156
$ 63,233
$ 25,830
$ 89,063

~~AEROSPACE~~

The group ended the third quarter of 2016 with backlog of $11.5 billion compared with $11.8 billion at the end of the second quarter. We received orders for Gulfstream aircraft across our product portfolio, and orders were up compared with the first and second quarters of 2016, as well as the third quarter of

~~2015. The unit-based book-to-bill ratio (orders divided by deliveries) in the Aerospace group exceeded one-to-one. However, backlog declined slightly due to aircraft mix.~~

~~DEFENSE GROUPS~~

The total backlog in our three defense groups 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 Congress and funded by the customer, as well as commitments by international customers that are similarly approved and funded by their governments. We have included in total backlog firm contracts at the amounts that we believe we are likely to receive funding, but there is no guarantee that future budgets and appropriations will provide the funding necessary for a given program.

Total backlog in our defense groups was ~~$50.4 billion on October 2, 2016, down slightly from $51.5~~$46.3 billion on July ~~3, 2016. Combat Systems backlog decreased slightly as the group performs~~2, 2017, down 3% from $47.8 billion on ~~significant multi-year contracts.~~April 2, 2017. The book-to-bill ratio ~~(orders divided by revenue)~~ in our ~~Marine Systems group was one-to-one in the third quarter of 2016 driven by several significant contract awards during the quarter. In the~~ Information Systems and Technology group exceeded one-to-one in the second quarter of 2017, resulting in backlog growth of approximately $175. Combat Systems and Marine Systems backlog decreased ~~somewhat following growth in~~as the ~~first and second quarters of 2016.~~groups continued to perform on significant multi-year contracts. Estimated potential contract value was ~~$23.1 billion on October 2, 2016, compared with $23.6~~$22.5 billion on July ~~3, 2016.~~2, 2017, compared with $22.7 billion on April 2, 2017. Each of our defense groups received notable contract awards during the ~~third~~second quarter of ~~2016.~~2017.

Combat Systems awards included the following:

$~~170 from~~110 to provide munitions to a customer in the ~~U.S. Army for the production of Hydra-70 rockets.~~

~~$165 from the Army to produce various calibers of ammunition and ordnance.~~

~~$145 from the Swiss government to produce Piranha armored vehicles equipped with mortar systems.~~

~~$100 from the Army for Abrams M1A2 System Enhancement Program (SEP) components and associated program management.~~Middle East.

$75 to provide munitions to the ~~government of Israel.~~U.S. Air Force and U.S. Army.

$5545 from the Army in support of the Stryker wheeled combat vehicle program, including the production of vehicles with a 30-millimeter cannon.

$40 to produce gun systems for the F-35 Joint Strike Fighter.

$30 to continue the conversion of M1A2 tanks to the M1A2S configuration for the Kingdom of Saudi Arabia and for engineering and logistics support services for the U.S. Army's Abrams ~~technical support and engineering services.~~family of vehicles.

Information Systems and Technology awards included the following:

$~~105~~165 from the ~~U.S. Air Force~~Centers for ~~the Battlefield Information Collection and Exploitation System (BICES) program to provide intelligence information sharing and support to coalition operations.~~Medicare & Medicaid Services for contact center services.

$90125 from the Army for ruggedized computing equipment under the ~~Common Hardware Systems-4 (CHS-4)~~ CHS-4 program.

$75105 from the U.S. Navy for ~~missile guidance systems.~~combat and seaframe control systems on an Independence-variant Littoral Combat Ship (LCS). Options for the systems on three additional ships added $270 to the group's estimated potential contract value.

$6560 to provide support for live and virtual operations under the Warfighter Field Operations Customer Support (FOCUS) program.

$50 to provide engineering, manufacturing and development in support of the Navy's Air and Missile Defense Radar (AMDR) program.

$40 from the Navy to provide training and training-related program support services for the Center for Surface Combat Systems (CSCS). This contract has a potential value of approximately $245 over five years.

$40 from the U.S. Coast Guard to provide system sustainment support for the Rescue 21 program.

$35 from the Army ~~for system~~to provide continued software support and engineering ~~and program management~~ for the ~~Warfighter Information Network-Tactical (WIN-T)~~ WIN-T Increment 2 program.

~~A contract~~

$35 from the U.S. ~~Census Bureau~~Geological Survey to ~~provide contact-center systems~~perform hardware and ~~operations support~~software upgrades for the ~~2020 Census Questionnaire Assistance program, a key component of the 2020 Decennial Census. The contract has a value of $430 over five years.~~

Landsat 8 satellite program.

Marine Systems awards included the following:

$~~300~~565 from the Navy for ~~lead-yard services, development studies~~design work on the Columbia-class submarine program and ~~design efforts for Virginia-class submarines.~~Advanced Nuclear Plant Studies (ANPS) in support of the program.

$~~235~~110 from the Navy to procure long-lead materials for two Virginia-class submarines under Block V of the program.

$105 from the Navy for maintenance, modernization and repair work on the USS Makin Island, an LHD-class amphibious assault ship.

$55 for initial design and construction work for the second ship in the TAO-205 next-generation fleet oiler program.

$45 from the Navy to provide ~~design, engineering, material~~maintenance, modernization and ~~logistics support and research and development activities~~repair services for ~~active U.S submarines.~~submarines located at Naval Submarine Base New London in Connecticut.

$~~215~~35 from the Navy ~~to provide in-service support of systems and components on the USS Jimmy Carter (SSN23).~~

~~$205 from the Navy to perform non-nuclear planning and maintenance work on five aircraft carriers.~~

~~The design and construction of~~for on-board repair parts for two ~~liquefied natural gas (LNG)-capable containerships for Matson Navigation Company, Inc. Construction~~Virginia-class submarines under Block IV of the ~~first containership will begin in early 2018, with deliveries in 2019 and 2020, respectively.~~program.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We ended the ~~third~~second quarter of ~~2016~~2017 with a cash balance of ~~$2.3~~$1.9 billion, down ~~$482~~$478 from the end of ~~2015.~~2016. Our net debt position, defined as cash and equivalents and marketable securities less debt, was $2.1 billion at the end of the second quarter of 2017 compared with $1.6 billion at the end of ~~the third quarter of 2016 compared with $614 at the end of 2015.~~2016. The following is a discussion of our major operating, investing and financing activities, as classified on the unaudited Consolidated ~~Statements~~Statement of Cash Flows, in the first ~~nine~~six months of ~~2016~~2017 and ~~2015~~2016.

OPERATING ACTIVITIES

We generated cash from operating activities of ~~$1.4~~$1 billion in the first ~~nine~~six months of ~~2016~~2017 compared with ~~$2.3 billion~~$873 in the same period in ~~2015.~~2016. The primary driver of cash flows in both periods was net earnings. Cash flows in ~~the first nine months of 2016~~both periods were affected negatively by growth in operating working capital in our Combat Systems group due to the ~~utilization~~timing of ~~significant customer deposits related to~~billings on a large contract for a Middle Eastern customer, ~~in our Combat Systems group~~ and ~~growth in operating working capital~~ in our Aerospace group ~~from the build-up of inventory~~ related to the new G500 and G600 aircraft ~~programs that are expected to enter into service in 2018 and 2019, respectively.~~programs.

INVESTING ACTIVITIES

Cash used byfor investing activities was ~~$282~~$195 in the first ~~nine~~six months of ~~2016~~2017 compared with ~~cash provided by investing activities of~~ $~~418~~185 in the same period in ~~2015~~2016. Our investing activities include cash paid for capital expenditures and business ~~acquisitions,~~acquisitions; purchases, sales and maturities of marketable ~~securities,~~securities; and proceeds from asset sales. The primary use of cash for investing activities in both periods was capital expenditures. We expect capital expenditures of approximately ~~2 percent~~2% of revenue in ~~2016. Cash provided by investing activities in 2015 included proceeds from divestitures and $500 of proceeds from maturing marketable securities.~~2017.

FINANCING ACTIVITIES

Cash used for financing activities was ~~$1.5~~$1.3 billion in the first ~~nine~~six months of ~~2016~~2017 compared with ~~$3.7~~$1.5 billion in the same period in ~~2015~~2016. Our financing activities include repurchases of common stock, payment of dividends and debt repayments. Net cash from financing activities also ~~include~~includes proceeds received from debt issuances and employee stock option exercises.

On March 1, 2017, our board of directors authorized management to repurchase up to 10 million additional shares of the company's outstanding stock. In the first ~~nine~~six months of ~~2016,~~2017, we repurchased approximately ~~11.2~~4.6 million of our outstanding shares for ~~$1.5 billion. As some of these shares had not settled on October~~$893. On July 2, ~~2016, the associated $23 cash outflow will be reported in the fourth quarter. On October 2, 2016, 8.4~~2017, 10.8 million shares remained authorized by our board of directors for repurchase, approximately ~~3 percent~~4% of our total shares outstanding. We repurchased ~~19.3~~8.9 million shares for ~~a total of $2.7~~$1.2 billion in the first ~~nine~~six months of ~~2015.~~2016.

On March ~~2, 2016,~~1, 2017, our board of directors declared an increased quarterly dividend of ~~$0.76~~$0.84 per share, the ~~19th~~20th consecutive annual increase. ~~The~~Previously, the board had ~~previously~~ increased the quarterly dividend to ~~$0.69~~

$0.76 per share in March ~~2015.~~2016. Cash dividends paid were ~~$678~~$483 in the first ~~nine~~six months of ~~2016~~2017 compared with ~~$655~~$447 in the same period in ~~2015.~~2016.

InFixed-rate notes of $900 mature in November of 2017. As we approach the ~~third quarter of 2016, we repaid $500 of fixed-rate notes on their~~ maturity date of this debt, we will determine whether to repay these notes with cash on ~~hand. We also issued $1 billion of fixed-rate notes for general corporate purposes. In~~hand or refinance the ~~first nine months~~ ~~of 2015, we repaid $500 of fixed-rate notes on their scheduled maturity date with the proceeds from the maturing marketable securities discussed in Investing Activities.~~obligation. See Note HI to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including scheduled debt maturities and interest rates.

We had no commercial paper outstanding on ~~October~~July 2, ~~2016.~~2017. We have $2 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 credit rating agencies to support our commercial paper issuances. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

NON-GAAP FINANCIAL 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 unaudited Consolidated Statement of Cash Flows:


Nine Months Ended	October 2, 2016			October 4, 2015
Six Months Ended							July 2, 2017			July 3, 2016
Net cash provided by operating activities	$	1,372		$	2,270		$	1,010		$	873
Capital expenditures	(244		)	(360		)	(153		)	(134		)
Free cash flow from operations	$	1,128		$	1,910		$	857		$	739
Cash flows as a percentage of earnings from continuing operations:
Net cash provided by operating activities	61		%	103		%	67		%	64		%
Free cash flow from operations	50		%	87		%	57		%	54		%

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.

ADDITIONAL FINANCIAL INFORMATION

ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES

For a discussion of environmental matters and other contingencies, see Note LM to the unaudited Consolidated Financial Statements in Part I, Item 1. WeExcept as otherwise noted in Note M, we do not expect our aggregate liability with respect to these matters to have a material impact on our results of operations, financial condition or cash flows.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited 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 period.

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. We review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the ~~reallocation~~cumulative catch-up method. Under ~~the reallocation~~this method, the impact of anthe adjustment ~~in estimate~~on profit recorded to date on a contract is recognized ~~prospectively over~~in the ~~remaining contract term.~~period the adjustment is identified. The ~~net~~aggregate impact of adjustments in contract estimates onincreased our operating earnings (and ~~on a~~ diluted ~~per-share basis) totaled favorable adjustments of $44~~earnings per share) by $121 ($~~0.09)~~0.26) and ~~$231~~$171 ($~~0.48)~~0.36) for the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~$44~~$59 ($~~0.09)~~0.12) and ~~$152~~$117 ($~~0.30)~~0.24) for the three- and ~~nine-month~~six-month periods ended ~~October 4, 2015,~~July 3, 2016, respectively. No adjustment on any one contract was material to our unaudited Consolidated Financial Statements infor the three- and ~~nine-month~~six-month periods ended ~~October~~July 2, ~~2016,~~2017, and ~~October 4, 2015.~~

In the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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 ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09, are intended to promote a more consistent interpretation and application of the principles outlined in the standard. The FASB has also issued two exposure drafts with technical corrections and updates intended to clarify ASU 2014-09. The exposure drafts are not expected to have a significant impact on the application of ASU 2014-09 and are anticipated to be issued as final ASUs prior to December 31,July 3, 2016.

adjustments in contract estimates may be larger and likely more variable from period to period, particularly on our contracts of greater value and longer performance period (for example, in our Marine Systems group), and may introduce an element of variability to our operating results that we have not experienced using the reallocation method. Despite this variability, a contract’s cash flows and overall profitability at completion are the same under the cumulative catch-up method versus our current method of prospectively recognizing adjustments in estimate. Anticipated losses on contracts will continue to be recognized in the quarter they are identified.

We have assessed our 2015 operating results under ASU 2014-09. In our three defense groups, the assessment under ASU 2014-09 did not have a material impact on our results of operations. Our defense groups’ revenue and operating margin for 2015 were essentially unchanged. In our Aerospace group, the assessment under ASU 2014-09 increased revenue and operating margin by 4 percent and 40 basis points, respectively, as compared to 2015 operating results under existing GAAP. The increase in revenue and operating margin compared to as-reported 2015 operating results is due to the relationship between green and outfitted aircraft deliveries and the timing and mix of those aircraft deliveries. Because we delivered more outfitted aircraft than green aircraft in 2015, revenue and operating earnings were higher in 2015 under ASU 2014-09 versus under existing GAAP.

On our Consolidated Balance Sheet, long-term contracts will continue to be reported in a net asset (contracts in process) or liability (customer advances and deposits) position on a contract-by-contract basis at the end of each reporting period. Business-jet components in our Aerospace group will be reported in inventory until control of the aircraft transfers to the customer. The assessment of our December 31, 2015, Consolidated Balance Sheet under ASU 2014-09 resulted in some reclassifications among financial statement accounts, but these reclassifications did not materially change the total amount of net assets as of December 31, 2015.

Once we adopt ASU 2014-09, we do not anticipate that our internal control framework will materially change, but rather that existing internal controls will be modified and augmented, as necessary, to consider our new revenue recognition policy effective January 1, 2017. As we implement the new standard, we have developed internal controls to ensure that we adequately evaluate our portfolio of contracts under the five-step model and accurately restate our prior-period operating results under ASU 2014-09.

Other significant estimates include those related to goodwill and 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 these~~These 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 our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented. For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016. For a discussion of new accounting standards that have been issued by the FASB but are not yet effective, see Note A to the unaudited Consolidated Financial Statements in Part I, Item 1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

ITEM 4. 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 July 2, 2017, (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on ~~October~~July 2, ~~2016,~~2017, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~October~~July 2, ~~2016,~~2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q 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 Item 1A of our Annual Report on Form 10-K. These factors include:

general U.S. and international political and economic conditions;

decreases in U.S. government defense spending or changing priorities within the defense budget;

termination or restructuring of government contracts due to unilateral government action;

differences in anticipated and actual program performance, including the ability to perform under long-term, fixed-price contracts within estimated costs, and performance issues with key suppliers and subcontractors;

expected recovery on contract claims and requests for equitable adjustment;

changing customer demand or preferences for business aircraft, including the effects of economic conditions on the business-aircraft market;

potential for changing prices for energy and raw materials; and

the status or outcome of legal and/or regulatory proceedings.

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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information relating to legal proceedings, see Note LM to the unaudited Consolidated Financial Statements in Part I, Item 1.

ITEM 1A. RISK FACTORS

There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about our ~~third-quarter repurchases~~second-quarter purchases 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* Maximum Number of Shares That May Yet Be Purchased Under the Program*
Pursuant to Share Buyback Program
7/4/16-7/31/16 90,277
$ 138.87
90,277
10,600,054
8/1/16-8/28/16 1,010,000
150.67
1,010,000
9,590,054
8/29/16-10/2/16 1,200,000
152.93
1,200,000
8,390,054
Total 2,300,277
$ 151.38

* On March 2, 2016, the board of directors authorized management to repurchase 10 million additional shares of common stock.



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
4/3/17-4/30/17	855,000	$	189.33	855,000	12,653,754
5/1/17-5/28/17	808,058	196.22		808,058	11,845,696
5/29/17-7/2/17	1,080,000	201.16		1,080,000	10,765,696
	2,743,058	$	196.02

We did not make any unregistered sales of equity securities in the ~~third quarter.~~second quarter of 2017.

ITEM 6. EXHIBITS

~~4.1~~10.1*

~~First Supplemental Indenture, dated as of August 12, 2016, among~~

General Dynamics Corporation ~~the Guarantors named therein~~Amended and ~~The Bank of New York Mellon, as Trustee~~Restated 2012 Equity Compensation Plan (incorporated herein by reference from the company's ~~current report~~registration statement on Form ~~8-K,~~S-8 (No. 333-217656), filed with the Securities and Exchange Commission ~~August 12, 2016)~~May 4, 2017)


10.2*	Form of Non-Statutory Stock Option 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)**


10.3*	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)**


10.4*	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)**


10.5*	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)**


31.1	Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002*


31.2	Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002*


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 20022002*


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 20022002*


101	Interactive Data File**

* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 6 of Form 10-Q.

** Filed or furnished herewith.

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 hereunto duly authorized.



	GENERAL DYNAMICS CORPORATION
	by
		~~Kimberly~~William A. ~~Kuryea~~Moss
		Vice President and Controller
		(Authorized Officer and Chief Accounting Officer)
Dated: ~~October~~July 26, ~~2016~~2017

4855



	October 2, 2016			December 31, 2015
Current deferred tax asset	$	8		$	3
Current deferred tax liability	(1,048		)	(829		)
Noncurrent deferred tax asset	1,152			1,272
Noncurrent deferred tax liability	(88		)	(75		)
Net deferred tax asset	$	24		$	371



	October 2, 2016			December 31, 2015
Contract costs and estimated profits	$	26,633		$	20,742
Other contract costs	811			965
	27,444			21,707
Advances and progress payments	(22,231		)	(17,350		)
Total contracts in process	$	5,213		$	4,357



December 31, 2014	$	(173	)	$	22		$	541		$	(3,322	)	$	(2,932	)
Other comprehensive loss, pretax	(331		)	(4		)	(230		)	287			(278		)
Benefit for income tax, net	(115		)	(1		)	(6		)	97			(25		)
Other comprehensive loss, net of tax	(216		)	(3		)	(224		)	190			(253		)
October 4, 2015	$	(389	)	$	19		$	317		$	(3,132	)	$	(3,185	)