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~~April 1, ~~2017~~2018

[ ] 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ü Accelerated filer ___ Non-accelerated filer ___

Smaller reporting company ___ Emerging growth company ___

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No ü

~~298,582,883~~297,033,427 shares of the registrant’s common stock, $1 par value per share, were outstanding on ~~October~~April 1, ~~2017.~~2018.

INDEX




PART I -	FINANCIAL INFORMATION	PAGE
Item 1 -	Unaudited Consolidated Financial Statements
	Consolidated ~~Statements~~Statement of Earnings ~~(Three Months)~~	3
	Consolidated ~~Statements~~Statement of ~~Earnings (Nine Months)~~Comprehensive Income	4
	Consolidated ~~Statements of Comprehensive Income (Three and Nine Months)~~Balance Sheet	5
	Consolidated ~~Balance Sheets~~Statement of Cash Flows	6
	Consolidated ~~Statements of Cash Flows~~	7
	~~Consolidated Statements~~Statement of Shareholders’ Equity	87
	Notes to Unaudited Consolidated Financial Statements	98
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4029
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	5341
Item 4 -	Controls and Procedures	5441
	FORWARD-LOOKING STATEMENTS	5441
PART II -	OTHER INFORMATION	5442
Item 1 -	Legal Proceedings	5442
Item 1A -	Risk Factors	5442
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	5443
Item 6 -	Exhibits	5543
	SIGNATURES	5645

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF EARNINGS (UNAUDITED)


	Three Months Ended						Three Months Ended
(Dollars in millions, except per-share amounts)	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Revenue:
Products	$	4,718		$	4,749		$	4,576		$	4,467
Services	2,862			2,908			2,959			2,974
	7,580			7,657			7,535			7,441
Operating costs and expenses:
Products	3,634			3,750			3,546			3,438
Services	2,384			2,421			2,444			2,485
General and administrative (G&A)	510			471			537			472
	6,528			6,642			6,527			6,395
Operating earnings	1,052			1,015			1,008			1,046
Interest, net	(27		)	(23		)	(27		)	(25		)
Other, net	2			2			(21		)	(11		)
Earnings from continuing operations before income tax	1,027			994
Earnings before income tax							960			1,010
Provision for income tax, net	263			263			161			247
Earnings from continuing operations	764			731
Discontinued operations, net of tax benefit of $46 in 2016	—			(84		)
Net earnings	$	764		$	647		$	799		$	763

Earnings per share
Basic:
Continuing operations	$	2.56		$	2.40
Discontinued operations	—			(0.27		)
Net earnings	$	2.56		$	2.13
Diluted:
Continuing operations	$	2.52		$	2.36
Discontinued operations	—			(0.27		)
Net earnings	$	2.52		$	2.09
Basic							$	2.70		$	2.53
Diluted							$	2.65		$	2.48

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

CONSOLIDATED ~~STATEMENTS OF EARNINGS (UNAUDITED)~~

Nine Months Ended
(Dollars in millions, except per-share amounts) October 1, 2017 October 2, 2016
Revenue:
Products $ 13,851
$ 14,274
Services 8,845
8,633
22,696
22,907
Operating costs and expenses:
Products 10,664
11,274
Services 7,393
7,250
G&A 1,496
1,417
19,553
19,941
Operating earnings 3,143
2,966
Interest, net (76 ) (68 )
Other, net 2
13
Earnings from continuing operations before income tax 3,069
2,911
Provision for income tax, net 793
812
Earnings from continuing operations 2,276
2,099
Discontinued operations, net of tax benefit of $46 in 2016 —
(97 )
Net earnings $ 2,276
$ 2,002

Earnings per share
Basic:
Continuing operations $ 7.59
$ 6.86
Discontinued operations —
(0.31 )
Net earnings $ 7.59
$ 6.55
Diluted:
Continuing operations $ 7.45
$ 6.74
Discontinued operations —
(0.31 )
Net earnings $ 7.45
$ 6.43

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

~~CONSOLIDATED STATEMENTS~~STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended					Nine Months Ended					Three Months Ended
(Dollars in millions)	October 1, 2017		October 2, 2016			October 1, 2017		October 2, 2016			April 1, 2018			April 2, 2017
Net earnings	$	764	$	647		$	2,276	$	2,002		$	799		$	763
Gains on cash flow hedges	138		102			286		260
Unrealized gains (losses) on securities	1		(1		)	8		(5		)
(Losses) gains on cash flow hedges											(3		)	13
Unrealized gains on marketable securities											—			5
Foreign currency translation adjustments	128		(42		)	409		85			1			82
Change in retirement plans’ funded status	61		65			193		191			84			69
Other comprehensive income, pretax	328		124			896		531			82			169
Provision for income tax, net	57		49			160		133			15			44
Other comprehensive income, net of tax	271		75			736		398			67			125
Comprehensive income	$	1,035	$	722		$	3,012	$	2,400		$	866		$	888

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

CONSOLIDATED BALANCE ~~SHEETS (UNAUDITED)~~SHEET


							(Unaudited)
(Dollars in millions)	October 1, 2017			December 31, 2016			April 1, 2018			December 31, 2017

ASSETS
Current assets:
Cash and equivalents	$	2,722		$	2,334		$	4,332		$	2,983
Accounts receivable	3,391			3,399			3,769			3,617
Unbilled receivables	5,609			4,212			5,865			5,240
Inventories	5,781			5,817			5,543			5,303
Other current assets	577			772			955			1,185
Total current assets	18,080			16,534			20,464			18,328
Noncurrent assets:
Property, plant and equipment, net	3,461			3,477			3,533			3,517
Intangible assets, net	715			678			702			702
Goodwill	11,918			11,445			11,955			11,914
Other assets	740			1,038			565			585
Total noncurrent assets	16,834			16,638			16,755			16,718
Total assets	$	34,914		$	33,172		$	37,219		$	35,046

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	903		$	900		$	2,498		$	2
Accounts payable	2,718			2,538			2,851			3,207
Customer advances and deposits	6,610			6,827			7,095			6,992
Other current liabilities	2,978			3,185			2,798			2,898
Total current liabilities	13,209			13,450			15,242			13,099
Noncurrent liabilities:
Long-term debt	3,979			2,988			3,981			3,980
Other liabilities	6,162			6,433			6,222			6,532
Commitments and contingencies (see Note M)
Commitments and contingencies (see Note N)
Total noncurrent liabilities	10,141			9,421			10,203			10,512
Shareholders’ equity:
Common stock	482			482			482			482
Surplus	2,841			2,819			2,820			2,872
Retained earnings	26,058			24,543			27,605			26,444
Treasury stock	(15,166		)	(14,156		)	(15,742		)	(15,543		)
Accumulated other comprehensive loss	(2,651		)	(3,387		)	(3,391		)	(2,820		)
Total shareholders’ equity	11,564			10,301			11,774			11,435
Total liabilities and shareholders’ equity	$	34,914		$	33,172		$	37,219		$	35,046

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

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF CASH FLOWS (UNAUDITED)


	Nine Months Ended						Three Months Ended
(Dollars in millions)	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Cash flows from operating activities - continuing operations:
Net earnings	$	2,276		$	2,002		$	799		$	763
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of property, plant and equipment	269			270			89			92
Amortization of intangible assets	57			70			20			19
Equity-based compensation expense	75			76			29			23
Deferred income tax provision	155			148			4			45
Discontinued operations, net of tax	—			97
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	26			21			(150		)	(84		)
Unbilled receivables	(1,361		)	(907		)	(608		)	(338		)
Inventories	57			(206		)	(236		)	2
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	167			305			(358		)	(72		)
Customer advances and deposits	(296		)	(554		)	(149		)	(95		)
Income taxes payable	223			(14		)	167			202
Other current liabilities							(128		)	(76		)
Other, net	233			64			25			52
Net cash provided by operating activities	1,881			1,372
Net cash (used) provided by operating activities							(496		)	533
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(364		)	(56		)
Capital expenditures	(273		)	(244		)	(104		)	(62		)
Other, net	53			18			(1		)	(23		)
Net cash used by investing activities	(584		)	(282		)	(105		)	(85		)
Cash flows from financing activities:
Proceeds from commercial paper, net							2,494			—
Purchases of common stock	(1,172		)	(1,514		)	(267		)	(354		)
Proceeds from fixed-rate notes	985			992
Dividends paid	(735		)	(678		)	(250		)	(230		)
Repayment of fixed-rate notes	—			(500		)
Other, net	41			172			(25		)	(22		)
Net cash used by financing activities	(881		)	(1,528		)
Net cash provided (used) by financing activities							1,952			(606		)
Net cash used by discontinued operations	(28		)	(44		)	(2		)	(8		)
Net increase (decrease) in cash and equivalents	388			(482		)	1,349			(166		)
Cash and equivalents at beginning of period	2,334			2,785			2,983			2,334
Cash and equivalents at end of period	$	2,722		$	2,303		$	4,332		$	2,168
Supplemental cash flow information:
Cash payments for:
Income taxes	$	398		$	677
Interest	$	66		$	58
Income tax refunds, net							$	4		$	4
Interest payments							$	21		$	20

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

CONSOLIDATED ~~STATEMENTS~~STATEMENT 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		)
December 31, 2017																	$	482	$	2,872		$	26,444		$	(15,543	)	$	(2,820	)	$	11,435
Cumulative-effect adjustments (see Note A)																	—		—			638			—			(638		)	—
Net earnings	—		—		2,276			—			—			2,276			—		—			799			—			—			799
Cash dividends declared	—		—		(758		)	—			—			(758		)	—		—			(276		)	—			—			(276		)
Equity-based awards	—		22		—			127			—			149			—		(52		)	—			58			—			6
Shares purchased	—		—		—			(1,137		)	—			(1,137		)	—		—			—			(257		)	—			(257		)
Other comprehensive income	—		—		—			—			736			736			—		—			—			—			67			67
October 1, 2017	$	482	$	2,841	$	26,058		$	(15,166	)	$	(2,651	)	$	11,564
April 1, 2018																	$	482	$	2,820		$	27,605		$	(15,742	)	$	(3,391	)	$	11,774

December 31, 2015	$	482	$	2,730	$	22,903		$	(12,392	)	$	(3,283	)	$	10,440
December 31, 2016																	$	482	$	2,819		$	24,543		$	(14,156	)	$	(3,387	)	$	10,301
Cumulative-effect adjustment*																	—		—			(3		)	—			—			(3		)
Net earnings	—		—		2,002			—			—			2,002			—		—			763			—			—			763
Cash dividends declared	—		—		(701		)	—			—			(701		)	—		—			(254		)	—			—			(254		)
Equity-based awards	—		59		—			206			—			265			—		(57		)	—			63			—			6
Shares purchased	—		—		—			(1,538		)	—			(1,538		)	—		—			—			(355		)	—			(355		)
Other comprehensive income	—		—		—			—			398			398			—		—			—			—			125			125
October 2, 2016	$	482	$	2,789	$	24,204		$	(13,724	)	$	(2,885	)	$	10,866
April 2, 2017																	$	482	$	2,762		$	25,049		$	(14,448	)	$	(3,262	)	$	10,583

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

* Reflects the cumulative effect of Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which we adopted on January 1, 2017.

NOTES TO 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 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 periods~~three-month period ended ~~October~~April 1, ~~2017,~~2018, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2018.

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~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016.~~2017.

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, ~~2016.~~

~~Discontinued Operations.~~ 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 our Bath, Maine, shipyard. As we progressed through the shipbuilding process, we determined that the cost associated with this settlement was greater than anticipated. Therefore, in the third quarter of 2016, we recognized an ~~$84~~ ~~loss, net of tax, to adjust the previously-recognized settlement value.~~

~~In 2015, we completed the sale of our axle business in the Combat Systems group. In the first nine months of 2016, we recognized a final adjustment of $13 to the loss on the sale of the business.~~2017.

Accounting Standards Updates. On January 1, ~~2017,~~2018, we adopted the following accounting standards issued by the Financial Accounting Standards Board (FASB) ~~that have impacted our prior-period financial statements:~~:

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

~~Accounting Standards Update (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 the following:~~

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Specific to our business, ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income. The ASU eliminates the available-for-sale classification for equity investments that recognized changes in fair value as a component of other comprehensive income. We ~~intend to adopt~~adopted the standard on a modified retrospective basis ~~with~~on January 1, 2018, and recognized the cumulative effect as a ~~cumulative-effect adjustment~~$24 increase to ~~the Consolidated Balance Sheet~~retained earnings on the ~~effective~~ date of ~~January 1, 2018. We do not expect the adoption of the ASU to have a material effect on our results of operations, financial condition or cash flows.~~

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. We intend to adopt the standard on the effective date of January 1, 2019, using the modified retrospective method of adoption. We are currently evaluating our population of leased assets in order to assess the impact of the ASU on our lease portfolio, and designing and implementing new processes and controls. Until this effort is completed, we cannot determine the effect of the ASU on our results of operations, financial condition or cash flows.

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. We ~~intend to adopt~~adopted the standard retrospectively on ~~the effective date of~~ January 1, 2018. ~~We do not expect the~~

The adoption of the ASU todid not have ~~a material~~an effect on our cash ~~flows.~~flows for the three-month period ended April 2, 2017.

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. We ~~expect~~adopted the standard ~~to increase our 2016 and 2017~~retrospectively on January 1, 2018. Our restated operating earnings ~~by $10 and $45, respectively,~~increased $11 for the three-month period ended April 2, 2017, due to the reclassification of the non-service cost components of net benefit cost, and ~~to decrease~~ other income decreased by the same ~~amounts,~~amount, with no impact to net earnings.

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows the reclassification from accumulated other comprehensive income to retained earnings ~~in either period. The ASU also allows only~~of stranded tax effects resulting from the ~~service cost component of net benefit cost to be eligible for~~

~~capitalization. We do not expect this area~~implementation of the ~~ASU to have a material effect~~Tax Cuts and Jobs Act (tax reform) enacted on ~~our results of operations, financial condition or cash flows.~~December 22, 2017. We ~~intend to adopt~~adopted the standard on January 1, 2018, and recognized a $614 increase to retained earnings on the ~~effective~~ date of ~~January 1, 2018.~~adoption.

~~ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to simplify hedge~~For a discussion of other accounting standards that have been issued by ~~better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies~~ the ~~application of the hedge accounting guidance. ASU 2017-12 is~~FASB but are not yet effective, on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustmentrefer to the ~~Consolidated Balance Sheet as of the beginning of~~Accounting Standards Updates section in our Annual Report on Form 10-K for the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. We have not yet determined the effect of the ASU on our results of operations, financial condition or cash flows, nor have we selected a transition date.ended December 31, 2017.

B. SUBSEQUENT EVENTS

On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA) for $41.25 per share in cash. The aggregate amount of consideration paid, including amounts to repay CSRA’s due and payable debt and cash out outstanding stock options and restricted stock units of CSRA, was approximately $9.7 billion. This amount was funded by a combination of available cash on hand, a borrowing of $7.5 billion under the 364-day credit facility further described in Note J and proceeds from commercial paper issuances. In addition, approximately $450 was paid to satisfy obligations under CSRA’s accounts receivable purchase agreement.

CSRA is now part of General Dynamics Information Technology (GDIT) in our Information Systems and Technology group. The combination of GDIT and CSRA creates a premier provider of high-tech IT solutions to the government IT market.

The disclosures required by Accounting Standards Codification (ASC) Topic 805 are not included in this Form 10-Q because the initial accounting for the business combination is incomplete.

Additionally, on April 11, 2018, we announced that we had entered into a binding agreement to acquire Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, for $250. The transaction is subject to customary closing conditions, and is expected to be completed in the second quarter of 2018.

C. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS

Acquisitions and Divestitures. In the first quarter of 2018, we acquired a provider of specialized transmitters and receivers in our Information Systems and Technology group. In 2017, we acquired four businesses for an aggregate of $399: a fixed-base operation (FBO) in our Aerospace group; and a manufacturer of electronics and communications products, a provider of mission-critical support services, and a manufacturer of signal distribution products in our Information Systems and Technology group. As the purchase prices of these

acquisitions were not material for the three-month periods ended April 1, 2018, and April 2, 2017, they are included in other investing activities, net, in the unaudited Consolidated Statement of Cash Flows.

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

In the first quarter of 2018, we completed the sale of a commercial health products business in our Information Systems and Technology group. The proceeds from the sale are included in other investing activities, net, in the unaudited Consolidated Statement of Cash Flows.

Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:



	Aerospace		Combat Systems			Information Systems and Technology			Marine Systems		Total Goodwill
December 31, 2017 (a)	$	2,638	$	2,677		$	6,302		$	297	$	11,914
Acquisitions/divestitures (b)	—		—			16			—		16
Other (c)	40		(14		)	(1		)	—		25
April 1, 2018 (a)	$	2,678	$	2,663		$	6,317		$	297	$	11,955

(a)Goodwill 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 and an allocation of goodwill associated with the sale of the commercial health products business discussed above.

(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
	April 1, 2018							December 31, 2017
Contract and program intangible assets (b)	$	1,665	$	(1,318	)	$	347	$	1,684	$	(1,320	)	$	364
Trade names and trademarks	477		(168		)	309		465		(160		)	305
Technology and software	154		(109		)	45		137		(105		)	32
Other intangible assets	155		(154		)	1		155		(154		)	1
Total intangible assets	$	2,451	$	(1,749	)	$	702	$	2,441	$	(1,739	)	$	702


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


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

Amortization expense was $20 and $19 for the three-month periods ended April 1, 2018, and April 2, 2017, respectively.

D. REVENUE

The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with ~~Customers, which we adopted on January 1, 2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements.~~Customers.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise

to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in ~~the~~ contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 73% and 70% of our revenue for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~72% and 71% of our revenue for the three- and nine-month periods ended October~~April 2, ~~2016,~~2017, respectively. Substantially all of our revenue in the defense groups is recognized over time because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a point in time accounted for 27% and 30% of our revenue for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~28% and 29% of our revenue for the three- and nine-month periods ended October~~April 2, ~~2016,~~2017, 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 obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On ~~October~~April 1, ~~2017,~~2018, we had ~~$63.9~~$62.1 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately ~~50%~~60% of our remaining performance obligations as revenue by 2019, an additional 25% by 2021 and the balance thereafter. On December 31, 2017, we had $63.2 billion of remaining performance obligations, and on December 31, 2017, we expected to recognize approximately 40% of these remaining performance obligations as revenue in 2018, an additional ~~30%~~40% by 2020 and the balance thereafter.

Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred,

the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the ~~quarter~~period it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:


	Three Months Ended				Nine Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
Three Months Ended									April 1, 2018		April 2, 2017
Revenue	$	94	$	94	$	256	$	217	$	115	$	72
Operating earnings	103		52		274		169		97		50
Diluted earnings per share	$	0.22	$	0.11	$	0.58	$	0.35	$	0.25	$	0.11

No adjustment on any one contract was material to ~~our~~the unaudited Consolidated Financial Statements for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017, and October~~2018, or April 2, ~~2016.~~2017.

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

Revenue by major ~~product line~~products and services was as follows:


	Three Months Ended				Nine Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
Three Months Ended									April 1, 2018		April 2, 2017
Aircraft manufacturing, outfitting and completions	$	1,562	$	1,482	$	4,791	$	4,700	$	1,366	$	1,629
Aircraft services	422		406		1,302		1,211		451		435
Pre-owned aircraft	11		37		54		79		8		10
Total Aerospace	1,995		1,925		6,147		5,990		1,825		2,074
Wheeled combat vehicles	623		587		1,749		1,695
Wheeled combat and tactical vehicles									625		560
Weapons systems, armament and munitions	412		363		1,167		1,059		383		346
Tanks and tracked vehicles	315		218		840		648		331		247
Engineering and other services	150		159		445		467		101		134
Total Combat Systems	1,500		1,327		4,201		3,869		1,440		1,287
C4ISR* solutions	1,086		1,254		3,226		3,559		1,098		1,088
Information technology (IT) services	1,068		1,076		3,178		3,314		1,138		1,058
Total Information Systems and Technology	2,154		2,330		6,404		6,873		2,236		2,146
Nuclear-powered submarines	1,248		1,357		3,794		4,022		1,296		1,204
Surface combatants	256		250		757		805		265		247
Auxiliary and commercial ships	129		190		427		491		218		143
Repair and other services	298		278		966		857		255		340
Total Marine Systems	1,931		2,075		5,944		6,175		2,034		1,934
Total revenue	$	7,580	$	7,657	$	22,696	$	22,907	$	7,535	$	7,441

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

Revenue by contract type was as follows:

Three Months Ended October 1, 2017 Aerospace Combat Systems Information Systems and Technology Marine Systems
Total
Revenue
Fixed-price $ 1,835
$ 1,258
$ 971
$ 1,131
$ 5,195
Cost-reimbursement —
233
989
797
2,019
Time-and-materials 160
9
194
3
366
Total revenue $ 1,995
$ 1,500
$ 2,154
$ 1,931
$ 7,580
Three Months Ended October 2, 2016
Fixed-price $ 1,773
$ 1,102
$ 1,094
$ 1,241
$ 5,210
Cost-reimbursement —
215
1,033
832
2,080
Time-and-materials 152
10
203
2
367
Total revenue $ 1,925
$ 1,327
$ 2,330
$ 2,075
$ 7,657


Nine Months Ended October 1, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Three Months Ended April 1, 2018											Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	5,650	$	3,538	$	2,793	$	3,514	$	15,495	$	1,668	$	1,253	$	1,007	$	1,305	$	5,233
Cost-reimbursement	—		636		3,017		2,422		6,075		—		179		1,017		728		1,924
Time-and-materials	497		27		594		8		1,126		157		8		212		1		378
Total revenue	$	6,147	$	4,201	$	6,404	$	5,944	$	22,696	$	1,825	$	1,440	$	2,236	$	2,034	$	7,535
Nine Months Ended October 2, 2016
Three Months Ended April 2, 2017
Fixed-price	$	5,547	$	3,207	$	3,181	$	3,785	$	15,720	$	1,902	$	1,073	$	930	$	1,130	$	5,035
Cost-reimbursement	—		638		3,076		2,384		6,098		—		207		1,010		801		2,018
Time-and-materials	443		24		616		6		1,089		172		7		206		3		388
Total revenue	$	5,990	$	3,869	$	6,873	$	6,175	$	22,907	$	2,074	$	1,287	$	2,146	$	1,934	$	7,441

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour ~~costs~~rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.

Revenue by customer was as follows:

Three Months Ended October 1, 2017 Aerospace Combat Systems Information Systems and Technology Marine Systems
Total
Revenue
U.S. government:
Department of Defense (DoD) $ 40
$ 639
$ 1,207
$ 1,878
$ 3,764
Non-DoD —
22
679
1
702
Foreign Military Sales (FMS) 8
93
17
42
160
Total U.S. government 48
754
1,903
1,921
4,626
U.S. commercial 958
63
78
6
1,105
Non-U.S. government 63
668
136
2
869
Non-U.S. commercial 926
15
37
2
980
Total revenue $ 1,995
$ 1,500
$ 2,154
$ 1,931
$ 7,580
Three Months Ended October 2, 2016
U.S. government:
DoD $ 77
$ 561
$ 1,398
$ 1,895
$ 3,931
Non-DoD —
34
653
2
689
FMS 2
83
10
59
154
Total U.S. government 79
678
2,061
1,956
4,774
U.S. commercial 767
48
100
111
1,026
Non-U.S. government 171
586
135
8
900
Non-U.S. commercial 908
15
34
—
957
Total revenue $ 1,925
$ 1,327
$ 2,330
$ 2,075
$ 7,657


Nine Months Ended October 1, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Three Months Ended April 1, 2018											Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)											$	41	$	607	$	1,175	$	1,950	$	3,773
Non-DoD											—		1		755		—		756
Foreign Military Sales (FMS)											16		69		15		29		129
Total U.S. government											57		677		1,945		1,979		4,658
U.S. commercial											842		58		67		53		1,020
Non-U.S. government											10		697		173		2		882
Non-U.S. commercial											916		8		51		—		975
Total revenue											$	1,825	$	1,440	$	2,236	$	2,034	$	7,535
Three Months Ended April 2, 2017
U.S. government:
DoD	$	112	$	1,862	$	3,519	$	5,731	$	11,224	$	40	$	609	$	1,142	$	1,837	$	3,628
Non-DoD	—		71		2,007		1		2,079		—		2		698		—		700
FMS	26		284		50		140		500		9		108		12		58		187
Total U.S. government	138		2,217		5,576		5,872		13,803		49		719		1,852		1,895		4,515
U.S. commercial	2,771		166		261		56		3,254		936		61		89		33		1,119
Non-U.S. government	132		1,764		467		10		2,373		5		502		176		4		687
Non-U.S. commercial	3,106		54		100		6		3,266		1,084		5		29		2		1,120
Total revenue	$	6,147	$	4,201	$	6,404	$	5,944	$	22,696	$	2,074	$	1,287	$	2,146	$	1,934	$	7,441
Nine Months Ended October 2, 2016
U.S. government:
DoD	$	187	$	1,574	$	3,902	$	5,727	$	11,390
Non-DoD	—		79		2,047		5		2,131
FMS	92		238		34		135		499
Total U.S. government	279		1,891		5,983		5,867		14,020
U.S. commercial	2,586		167		285		288		3,326
Non-U.S. government	486		1,736		476		20		2,718
Non-U.S. commercial	2,639		75		129		—		2,843
Total revenue	$	5,990	$	3,869	$	6,873	$	6,175	$	22,907

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense groups, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace group, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the ~~nine-month~~three-month period ended ~~October~~April 1, ~~2017,~~2018, were not materially impacted by any other factors.

Revenue recognized ~~for~~in the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016,~~2017, that was included in the contract liability balance at the beginning of each year was ~~$982 and $3.9~~$1.5 billion and ~~$911 and $3.7~~$1.7 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.

~~C. ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS~~

~~Acquisitions.~~ In the first nine months of 2017, we acquired three businesses for an aggregate of $364: a fixed-base-operations (FBO) facility in our Aerospace group, and a manufacturer of electronics and communications products and a provider of mission-critical support services and technology solutions 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 for an aggregate of $56.~~

~~Goodwill.~~ ~~The changes in the carrying amount of goodwill by reporting unit for the~~ ~~nine-month period ended October 1, 2017, were as follows:~~

Aerospace Combat Systems Information Systems and Technology Marine Systems
Total
Goodwill
December 31, 2016 (a) $ 2,537
$ 2,598
$ 6,013
$ 297
$ 11,445
Acquisitions (b) 32
—
244
—
276
Other (c) 88
87
22
—
197
October 1, 2017 (a) $ 2,657
$ 2,685
$ 6,279
$ 297
$ 11,918

~~(a)Goodwill on December 31, 2016, and October 1, 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
October 1, 2017 December 31, 2016
Contract and program intangible assets (b) $ 1,679
$ (1,300 ) $ 379
$ 1,633
$ (1,281 ) $ 352
Trade names and trademarks 469
(158 ) 311
446
(139 ) 307
Technology and software 130
(106 ) 24
121
(102 ) 19
Other intangible assets 155
(154 ) 1
154
(154 ) —
Total intangible assets $ 2,433
$ (1,718 ) $ 715
$ 2,354
$ (1,676 ) $ 678


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


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

~~Amortization expense was $19 and $57 for the three- and nine-month periods ended October 1, 2017, and $20 and $70 for the three- and nine-month periods ended October 2, 2016.~~

D.E. EARNINGS PER SHARE

We compute basic earnings per share (EPS) using net earnings for the period and the weighted average number of common shares outstanding during the period. Basic weighted average shares outstanding have decreased in ~~2017~~2018 and ~~2016~~2017 due to share repurchases. See Note KL for further discussion of our share repurchases. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs).

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


	Three Months Ended		Nine Months Ended
	October 1, 2017	October 2, 2016	October 1, 2017	October 2, 2016
Three Months Ended					April 1, 2018	April 2, 2017
Basic weighted average shares outstanding	298,145	303,938	299,902	305,445	296,399	301,771
Dilutive effect of stock options and restricted stock/RSUs*	5,606	5,790	5,599	5,679	4,705	5,511
Diluted weighted average shares outstanding	303,751	309,728	305,501	311,124	301,104	307,282

* Excludes outstanding options to purchase shares of common stock that had exercise prices in excess of the average market price of our common stock during the period and, therefore, the effect of including these options would be antidilutive. These options totaled ~~1,850~~517 and ~~1,449~~681 for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~4,622 and 4,080 for the three- and nine-month periods ended October~~April 2, ~~2016,~~2017, respectively.

E.F. 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~~April 1, ~~2017,~~2018, or December 31, ~~2016.~~2017.

Our financial instruments include cash and equivalents, ~~and other investments,~~ accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable ~~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~~April 1, ~~2017,~~2018, and December 31, ~~2016,~~2017, and the basis for determining their fair values:


	Carrying Value			Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2) (b)			Carrying Value			Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial Assets (Liabilities) ~~(a)~~	October 1, 2017											April 1, 2018
Available-for-sale securities	$	174		$	174		$	60	$	114
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents												$	6		$	6		$	2	$	4		$	—
Available-for-sale debt securities												130			130			—		130			—
Equity securities												54			54			54		—			—
Other investments												4			4			—		—			4
Cash flow hedges	(168		)	(168		)	—		(168		)	(107		)	(107		)	—		(107		)	—
Measured at amortized cost:
Short- and long-term debt principal	(4,935		)	(4,889		)	—		(4,889		)	(6,532		)	(6,356		)	—		(6,356		)	—

	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~~



	December 31, 2017
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents	$	20		$	20		$	15	$	5		$	—
Available-for-sale debt securities	117			117			—		117			—
Equity securities	54			54			54		—			—
Other investments	4			4			—		—			4
Cash flow hedges	(105		)	(105		)	—		(105		)	—
Measured at amortized cost:
Short- and long-term debt principal	(4,032		)	(3,974		)	—		(3,974		)	—

Our Level ~~3 financial instruments on~~ ~~October~~ 1 ~~2017, or~~ ~~December 31, 2016~~.

~~(b)Determined~~assets include investments in publicly traded equity securities valued using quoted prices from the market exchanges. The fair value of our Level 2 assets and liabilities is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets ~~and liabilities.~~include direct private equity investments that are measured using inputs unobservable to a marketplace participant.

F.G. INCOME TAXES

Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. Tax reform was enacted on December 22, 2017, and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduced the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. We recorded the effect of the change in tax law in the fourth quarter of 2017.

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


	October 1, 2017			December 31, 2016			April 1, 2018			December 31, 2017
Deferred tax asset	$	263		$	564		$	60		$	75
Deferred tax liability	(212		)	(183		)	(249		)	(244		)
Net deferred tax asset	$	51		$	381
Net deferred tax liability							$	(189	)	$	(169	)

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~~50% chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense. The total amount of these tax liabilities on ~~October~~April 1, ~~2017,~~2018, was not material to our results of operations, financial condition or cash flows.

We participate in the Internal Revenue Service (IRS) Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2016. 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~~April 1, ~~2017, is~~2018, was not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

G.H. UNBILLED RECEIVABLES

Unbilled receivables represent revenue recognized on long-term contracts (contract costs and estimated profits) less associated advances and progress billings. These amounts will be billed in accordance with the agreed-upon contractual terms or upon achievement of contractual milestones. Unbilled receivables consisted of the following:


	October 1, 2017			December 31, 2016			April 1, 2018			December 31, 2017
Unbilled revenue	$	28,923		$	25,543		$	22,928		$	21,845
Advances and progress billings	(23,314		)	(21,331		)	(17,063		)	(16,605		)
Net unbilled receivables	$	5,609		$	4,212		$	5,865		$	5,240

The increase in net unbilled receivables during the ~~nine-month~~three-month period ended ~~October~~April 1, ~~2017, is~~2018, was due ~~in part~~primarily to the timing of billings on a large ~~contract for a Middle Eastern customer~~international vehicle contracts in our Combat Systems group.

H.I. INVENTORIES

The majority of our inventories are for business-jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value.

Inventories consisted of the following:

October 1, 2017 December 31, 2016
Work in process $ 3,884
$ 3,643
Raw materials 1,359
1,429
Finished goods 32
24
Pre-owned aircraft —
22
Other contract costs 506
699
Total inventories $ 5,781
$ 5,817

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.



	April 1, 2018		December 31, 2017
Work in process	$	4,138	$	3,872
Raw materials	1,328		1,357
Finished goods	52		51
Pre-owned aircraft	25		23
Total inventories	$	5,543	$	5,303

J. DEBT

Debt consisted of the following:


		October 1, 2017		December 31, 2016			April 1, 2018		December 31, 2017
Fixed-rate notes due:	Interest rate:					Interest rate:
November 2017	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		500		1.875%	500		500
November 2024	2.375%	500		—		2.375%	500		500
August 2026	2.125%	500		500		2.125%	500		500
November 2027	2.625%	500		—		2.625%	500		500
November 2042	3.600%	500		500		3.600%	500		500
Commercial paper						2.097%	2,500		—
Other	Various	35		24		Various	32		32
Total debt principal		4,935		3,924			6,532		4,032
Less unamortized debt issuance costs and discounts		53		36			53		50
Total debt		4,882		3,888			6,479		3,982
Less current portion		903		900			2,498		2
Long-term debt		$	3,979	$	2,988		$	3,981	$	3,980

In the first quarter of 2018, we renewed and increased to $2 billion our$1 billion multi-year committed bank credit facility, which was scheduled to expire in July 2018. The new credit facility expires in March 2023. We have an additional $1 billion multi-year committed bank credit facility that expires in November 2020. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates.

Also in the first quarter of 2018, we entered into a $7.5 billion, 364-day committed bank credit facility that expires in March 2019. We financed the acquisition of CSRA, in part, by borrowing $7.5 billion under this facility subsequent to the end of the quarter. We intend to issue debt securities in the future to repay in whole or in part the borrowings under this facility. The proceeds from these issuances will automatically reduce the bank’s commitments under this facility to an amount not less than $2 billion. Following this reduction, our three credit facilities will total $5 billion. Our credit facilities are used for general corporate purposes and working capital needs and support our commercial paper issuances. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries.

On April 1, 2018, $2.5 billion of commercial paper had been issued and remained outstanding with a dollar-weighted average interest rate of 2.097% and original maturities of less than 90 days.

Our fixed-rate notes are fully and unconditionally guaranteed by several of our 100%-owned subsidiaries. See Note PQ 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.

~~In the third quarter of 2017, we issued $1 billion of fixed-rate notes. The proceeds will be used to repay $900 of fixed-rate notes maturing in November of 2017 and for general corporate purposes.~~

On October 1, 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. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. Our bank credit facilities are guaranteed by several of our 100%-owned subsidiaries. We also have an effective shelf registration on file with the SEC that allows us to access the debt markets.

Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on ~~October~~April 1, ~~2017.~~

2018.

K. OTHER LIABILITIES

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


	October 1, 2017		December 31, 2016		April 1, 2018		December 31, 2017

Salaries and wages	$	795	$	693	$	665	$	786
Fair value of cash flow hedges	239		521
Workers’ compensation	340		337		320		320
Retirement benefits	294		303		292		295
Fair value of cash flow hedges					201		180
Other (a)	1,310		1,331		1,320		1,317
Total other current liabilities	$	2,978	$	3,185	$	2,798	$	2,898

Retirement benefits	$	4,211	$	4,393	$	4,359	$	4,408
Customer deposits on commercial contracts	636		719		555		814
Deferred income taxes	212		183		249		244
Other (b)	1,103		1,138		1,059		1,066
Total other liabilities	$	6,162	$	6,433	$	6,222	$	6,532

(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’ compensation liabilities and liabilities of discontinued operations.

K.L. 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~~three-month period ended ~~October~~April 1, ~~2017,~~2018, we repurchased ~~5.9~~1.2 million of our outstanding shares for ~~$1.1 billion.~~$257. On ~~October~~April 1, ~~2017, 9.5~~2018, 6.4 million shares remained authorized by our board of directors for repurchase, approximately ~~3 percent~~2% of our total shares outstanding. We repurchased ~~11.2~~1.9 million shares for ~~$1.5 billion~~$355 in the ~~nine~~three-month period ended ~~October~~April 2, ~~2016.~~2017.

Dividends per Share. Dividends declared per share were ~~$0.84~~$0.93 and ~~$2.52~~$0.84 for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017~~2018, and ~~$0.76 and $2.28 for the three- and nine-month periods ended October~~April 2, ~~2016,~~2017, respectively. Cash dividends paid were ~~$252~~$250 and ~~$735~~$230 for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~$231 and $678 for the three- and nine-month periods ended October~~April 2, ~~2016~~2017, 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 Marketable Securities			Foreign Currency Translation Adjustments		Changes in Retirement Plans’ Funded Status			AOCL
December 31, 2016	$	(345	)	$	14	$	69	$	(3,125	)	$	(3,387	)
December 31, 2017														$	(94	)	$	19		$	402	$	(3,147	)	$	(2,820	)
Cumulative effect adjustments (see Note A)														(4		)	(19		)	—		(615		)	(638		)
Other comprehensive income, pretax	286			8		409		193			896			(3		)	—			1		84			82
Provision for income tax, net	73			2		15		70			160			(1		)	—			—		16			15
Other comprehensive income, net of tax	213			6		394		123			736			(2		)	—			1		68			67
October 1, 2017	$	(132	)	$	20	$	463	$	(3,002	)	$	(2,651	)
April 1, 2018														$	(100	)	$	—		$	403	$	(3,694	)	$	(3,391	)


December 31, 2015	$	(487	)	$	20		$	181	$	(2,997	)	$	(3,283	)
December 31, 2016															$	(345	)	$	14	$	69	$	(3,125	)	$	(3,387	)
Other comprehensive income, pretax	260			(5		)	85		191			531			13			5		82		69			169
Provision for income tax, net	65			(2		)	1		69			133			4			1		15		24			44
Other comprehensive income, net of tax	195			(3		)	84		122			398			9			4		67		45			125
October 2, 2016	$	(292	)	$	17		$	265	$	(2,875	)	$	(2,885	)
April 2, 2017															$	(336	)	$	18	$	136	$	(3,080	)	$	(3,262	)

~~Amounts~~Current-period amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and consisted of pretax recognized net actuarial losses of ~~$255~~$95 and ~~$249~~$85 for the ~~nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016,~~2017, respectively. This was offset partially by pretax amortization of prior service credit of ~~$53~~$12 and ~~$56~~$18 for the ~~nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016,~~2017, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note NO for additional details.

L.M. 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 ~~$5.2~~$4.3 billion in notional forward exchange contracts outstanding on ~~October~~April 1, ~~2017,~~2018, and ~~$6.3 billion on~~ December 31, ~~2016.~~2017. We do not use derivative financial instruments for trading or speculative purposes. We recognize derivative financial instruments on the Consolidated Balance Sheet at fair value. See Note EF 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 dollar-weighted 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 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~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016.~~2017. Net gains and losses reclassified to earnings from OCL were not material to our results of operations for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016,~~2017, 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~~April 1, ~~2017,~~2018, or December 31, ~~2016.~~2017.

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 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~~April 1, ~~2017,~~2018, we held ~~$2.7~~$4.3 billion in cash and equivalents, but held no marketable ~~securities.~~securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified supplemental executive retirement plans. On April 1, 2018, and December 31, 2017, these marketable securities totaled $190 and $191, respectively, and were reflected at fair value on the unaudited Consolidated Balance Sheet in other current and noncurrent assets.

Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international businesses’ functional currency (generally the respective local currency) to U.S. dollars at 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’ results into U.S. dollars. The impact of translating our non-U.S. operations’ revenue into U.S. dollars was not material to our results of operations for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016.~~2017. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the ~~nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016.~~2017.

M.N. 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. Also in 2016, the Suspending and Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and has been engaged in discussions with the U.S. government. Given the current status of these matters, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on our results of operations, financial condition and cash flows.

Additionally, various other claims and 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 ~~upon~~on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.

Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance

carriers totaling approximately ~~$1.2~~$1.4 billion on ~~October~~April 1, ~~2017.~~2018. In addition, from time to time and in the ordinary course of business, we contractually guarantee the ~~payments~~payment or performance 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 generally structured to establish the fair market value of the trade-in aircraft at a date generally 45 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction.

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~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016,~~2017, were as follows:


Nine Months Ended	October 1, 2017			October 2, 2016
Three Months Ended							April 1, 2018			April 2, 2017
Beginning balance	$	474		$	434		$	467		$	474
Warranty expense	94			95			29			38
Payments	(74		)	(72		)	(25		)	(24		)
Adjustments	(28		)	(14		)	(3		)	—
Ending balance	$	466		$	443		$	468		$	488

N.O. 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~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~October~~April 2, ~~2016,~~2017, consisted of the following:


	Pension Benefits						Other Post-retirement Benefits						Pension Benefits						Other Post-retirement Benefits
Three Months Ended	October 1, 2017			October 2, 2016			October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017			April 1, 2018			April 2, 2017
Service cost	$	42		$	44		$	3		$	3		$	46		$	42		$	3		$	3
Interest cost	113			114			8			8			114			113			8			8
Expected return on plan assets	(169		)	(178		)	(8		)	(8		)	(179		)	(169		)	(9		)	(8		)
Recognized net actuarial loss (gain)	86			84			(1		)	(1		)	96			86			(1		)	(1		)
Amortization of prior service credit	(17		)	(17		)	(1		)	(2		)	(11		)	(17		)	(1		)	(1		)
Net periodic benefit cost	$	55		$	47		$	1		$	—		$	66		$	55		$	—		$	1
Nine Months Ended
Service cost	$	126		$	132		$	9		$	8
Interest cost	339			342			25			25
Expected return on plan assets	(508		)	(534		)	(25		)	(24		)
Recognized net actuarial loss (gain)	258			252			(3		)	(3		)
Amortization of prior service credit	(50		)	(51		)	(3		)	(5		)
Net periodic benefit cost	$	165		$	141		$	3		$	1

~~In 2017, we decreased~~As discussed in Note A, the ~~expected long-term rate~~service cost component of ~~return on assets~~net periodic benefit cost is reported separately from the other components of net periodic benefit cost in ~~our primary U.S. government and commercial pension plans by 75 basis points following an assessment of the historical and expected long-term returns of our various asset classes.~~accordance with ASU 2017-07.

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 other contract costs in ~~inventory~~other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. ~~See Note H for discussion of our other contract costs.~~ For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have similarly deferred recognition of these excess earnings ~~classifying these deferrals against the plan assets~~ on the Consolidated Balance Sheet.

It is our policy to fund our defined-benefit retirement plans in a manner that optimizes the tax deductibility and contract recovery of contributions considered within our capital deployment framework. Therefore, we may make discretionary contributions in addition to the required contributions determined in accordance with IRS regulations. In addition to our required contributions of approximately $315 in 2018, as we deploy additional cash resulting from the recent tax reform, we intend to make discretionary contributions, resulting in total pension plan contributions of approximately $550 in 2018.

O.P. 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						Revenue				Operating Earnings
Three Months Ended	October 1, 2017		October 2, 2016		October 1, 2017			October 2, 2016			April 1, 2018		April 2, 2017		April 1, 2018		April 2, 2017
Aerospace	$	1,995	$	1,925	$	385		$	377		$	1,825	$	2,074	$	346	$	439
Combat Systems	1,500		1,327		247			209			1,440		1,287		224		205
Information Systems and Technology	2,154		2,330		253			239			2,236		2,146		247		236
Marine Systems	1,931		2,075		179			197			2,034		1,934		184		161
Corporate*	—		—		(12		)	(7		)
Corporate											—		—		7		5
Total	$	7,580	$	7,657	$	1,052		$	1,015		$	7,535	$	7,441	$	1,008	$	1,046
Nine Months Ended
Aerospace	$	6,147	$	5,990	$	1,253		$	1,133
Combat Systems	4,201		3,869		677			601
Information Systems and Technology	6,404		6,873		729			710
Marine Systems	5,944		6,175		518			553
Corporate*	—		—		(34		)	(31		)
Total	$	22,696	$	22,907	$	3,143		$	2,966

*ASU 2017-07 requires the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) to be reported in other income (expense) in the income statement. In our three defense groups, pension and other post-retirement benefit costs are allocable contract costs. For these groups, we report the offset for the non-service cost components in Corporate operating ~~results consist primarily of stock~~results. Stock option ~~expense.~~

expense is also reported in Corporate operating results.

P.Q. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

CONDENSED CONSOLIDATING ~~STATEMENTS~~STATEMENT OF EARNINGS (UNAUDITED)

Three Months Ended October 1, 2017 Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue $ —
$ 6,556
$ 1,024
$ —
$ 7,580
Cost of sales (3 ) 5,217
804
—
6,018
G&A 15
420
75
—
510
Operating earnings (12 ) 919
145
—
1,052
Interest, net (24 ) —
(3 ) —
(27 )
Other, net 2
—
—
—
2
Earnings before income tax (34 ) 919
142
—
1,027
Provision for income tax, net (26 ) 283
6
—
263
Equity in net earnings of subsidiaries 772
—
—
(772 ) —
Net earnings $ 764
$ 636
$ 136
$ (772 ) $ 764
Comprehensive income $ 1,035
$ 648
$ 371
$ (1,019 ) $ 1,035
Three Months Ended October 2, 2016
Revenue $ —
$ 6,716
$ 941
$ —
$ 7,657
Cost of sales (1 ) 5,455
717
—
6,171
G&A 10
381
80
—
471
Operating earnings (9 ) 880
144
—
1,015
Interest, net (23 ) (1 ) 1
—
(23 )
Other, net 1
(4 ) 5
—
2
Earnings before income tax (31 ) 875
150
—
994
Provision for income tax, net (42 ) 290
15
—
263
Discontinued operations, net of tax (84 ) —
—
—
(84 )
Equity in net earnings of subsidiaries 720
—
—
(720 ) —
Net earnings $ 647
$ 585
$ 135
$ (720 ) $ 647
Comprehensive income $ 722
$ 578
$ 168
$ (746 ) $ 722

~~CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)~~


Nine Months Ended October 1, 2017	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Three Months Ended April 1, 2018																Parent			Guarantors on a Combined Basis		Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Revenue	$	—		$	19,832		$	2,864		$	—		$	22,696		$	—		$	6,484	$	1,051		$	—		$	7,535
Cost of sales	(6		)	15,858			2,205			—			18,057			(19		)	5,202		807			—			5,990
G&A	39			1,230			227			—			1,496			13			436		88			—			537
Operating earnings	(33		)	2,744			432			—			3,143			6			846		156			—			1,008
Interest, net	(71		)	—			(5		)	—			(76		)	(26		)	—		(1		)	—			(27		)
Other, net	2			—			—			—			2			(24		)	1		2			—			(21		)
Earnings before income tax	(102		)	2,744			427			—			3,069			(44		)	847		157			—			960
Provision for income tax, net	(119		)	877			35			—			793			(42		)	165		38			—			161
Equity in net earnings of subsidiaries	2,259			—			—			(2,259		)	—			801			—		—			(801		)	—
Net earnings	$	2,276		$	1,867		$	392		$	(2,259	)	$	2,276		$	799		$	682	$	119		$	(801	)	$	799
Comprehensive income	$	3,012		$	1,907		$	1,005		$	(2,912	)	$	3,012		$	866		$	685	$	137		$	(822	)	$	866
Nine Months Ended October 2, 2016
Three Months Ended April 2, 2017
Revenue	$	—		$	20,123		$	2,784		$	—		$	22,907		$	—		$	6,544	$	897		$	—		$	7,441
Cost of sales	1			16,360			2,163			—			18,524			(17		)	5,252		688			—			5,923
G&A	30			1,162			225			—			1,417			10			386		76			—			472
Operating earnings	(31		)	2,601			396			—			2,966			7			906		133			—			1,046
Interest, net	(69		)	(1		)	2			—			(68		)	(24		)	—		(1		)	—			(25		)
Other, net	11			(3		)	5			—			13			(15		)	3		1			—			(11		)
Earnings before income tax	(89		)	2,597			403			—			2,911			(32		)	909		133			—			1,010
Provision for income tax, net	(93		)	839			66			—			812			(67		)	293		21			—			247
Discontinued operations, net of tax	(97		)	—			—			—			(97		)
Equity in net earnings of subsidiaries	2,095			—			—			(2,095		)	—			728			—		—			(728		)	—
Net earnings	$	2,002		$	1,758		$	337		$	(2,095	)	$	2,002		$	763		$	616	$	112		$	(728	)	$	763
Comprehensive income	$	2,400		$	1,746		$	637		$	(2,383	)	$	2,400		$	888		$	617	$	207		$	(824	)	$	888

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)


October 1, 2017	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
April 1, 2018																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	1,571		$	—		$	1,151		$	—		$	2,722		$	3,787		$	—		$	545		$	—		$	4,332
Accounts receivable	—			1,027			2,364			—			3,391			—			1,215			2,554			—			3,769
Unbilled receivables	—			2,677			2,932			—			5,609			—			2,757			3,108			—			5,865
Inventories	198			5,494			89			—			5,781			—			5,441			102			—			5,543
Other current assets	133			182			262			—			577			113			453			389			—			955
Total current assets	1,902			9,380			6,798			—			18,080			3,900			9,866			6,698			—			20,464
Noncurrent assets:
Property, plant and equipment (PP&E)	220			6,659			1,232			—			8,111			228			6,857			1,250			—			8,335
Accumulated depreciation of PP&E	(73		)	(3,796		)	(781		)	—			(4,650		)	(77		)	(3,940		)	(785		)	—			(4,802		)
Intangible assets, net	—			292			423			—			715			—			285			417			—			702
Goodwill	—			8,293			3,625			—			11,918			—			8,336			3,619			—			11,955
Other assets	371			226			143			—			740			188			229			148			—			565
Investment in subsidiaries	44,207			—			—			(44,207		)	—			45,799			—			—			(45,799		)	—
Total noncurrent assets	44,725			11,674			4,642			(44,207		)	16,834			46,138			11,767			4,649			(45,799		)	16,755
Total assets	$	46,627		$	21,054		$	11,440		$	(44,207	)	$	34,914		$	50,038		$	21,633		$	11,347		$	(45,799	)	$	37,219

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	900		$	2		$	1		$	—		$	903		$	2,496		$	—		$	2		$	—		$	2,498
Customer advances and deposits	—			3,730			2,880			—			6,610			—			4,273			2,822			—			7,095
Other current liabilities	563			3,509			1,624			—			5,696			559			3,417			1,673			—			5,649
Total current liabilities	1,463			7,241			4,505			—			13,209			3,055			7,690			4,497			—			15,242
Noncurrent liabilities:
Long-term debt	3,949			21			9			—			3,979			3,952			20			9			—			3,981
Other liabilities	2,279			3,254			629			—			6,162			2,399			3,234			589			—			6,222
Total noncurrent liabilities	6,228			3,275			638			—			10,141			6,351			3,254			598			—			10,203
Intercompany	27,372			(27,238		)	(134		)	—			—			28,858			(28,093		)	(765		)	—			—
Shareholders’ equity:
Common stock	482			6			2,126			(2,132		)	482			482			6			2,126			(2,132		)	482
Other shareholders’ equity	11,082			37,770			4,305			(42,075		)	11,082			11,292			38,776			4,891			(43,667		)	11,292
Total shareholders’ equity	11,564			37,776			6,431			(44,207		)	11,564			11,774			38,782			7,017			(45,799		)	11,774
Total liabilities and shareholders’ equity	$	46,627		$	21,054		$	11,440		$	(44,207	)	$	34,914		$	50,038		$	21,633		$	11,347		$	(45,799	)	$	37,219

CONDENSED CONSOLIDATING BALANCE SHEET ~~(UNAUDITED)~~


December 31, 2016	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
December 31, 2017																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	1,254		$	—		$	1,080		$	—		$	2,334		$	1,930		$	—		$	1,053		$	—		$	2,983
Accounts receivable	—			1,155			2,244			—			3,399			—			1,259			2,358			—			3,617
Unbilled receivables	—			2,235			1,977			—			4,212			—			2,547			2,693			—			5,240
Inventories	304			5,417			96			—			5,817			—			5,216			87			—			5,303
Other current assets	330			204			238			—			772			351			461			373			—			1,185
Total current assets	1,888			9,011			5,635			—			16,534			2,281			9,483			6,564			—			18,328
Noncurrent assets:
PP&E	197			6,586			1,146			—			7,929			221			6,779			1,237			—			8,237
Accumulated depreciation of PP&E	(67		)	(3,653		)	(732		)	—			(4,452		)	(75		)	(3,869		)	(776		)	—			(4,720		)
Intangible assets, net	—			265			413			—			678			—			287			415			—			702
Goodwill	—			8,050			3,395			—			11,445			—			8,320			3,594			—			11,914
Other assets	640			232			166			—			1,038			199			232			154			—			585
Investment in subsidiaries	41,956			—			—			(41,956		)	—			44,887			—			—			(44,887		)	—
Total noncurrent assets	42,726			11,480			4,388			(41,956		)	16,638			45,232			11,749			4,624			(44,887		)	16,718
Total assets	$	44,614		$	20,491		$	10,023		$	(41,956	)	$	33,172		$	47,513		$	21,232		$	11,188		$	(44,887	)	$	35,046

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	898		$	2		$	—		$	—		$	900		$	—		$	1		$	1		$	—		$	2
Customer advances and deposits	—			4,339			2,488			—			6,827			—			4,180			2,812			—			6,992
Other current liabilities	564			3,465			1,694			—			5,723			561			3,758			1,786			—			6,105
Total current liabilities	1,462			7,806			4,182			—			13,450			561			7,939			4,599			—			13,099
Noncurrent liabilities:
Long-term debt	2,966			22			—			—			2,988			3,950			21			9			—			3,980
Other liabilities	3,520			2,330			583			—			6,433			2,451			3,473			608			—			6,532
Total noncurrent liabilities	6,486			2,352			583			—			9,421			6,401			3,494			617			—			10,512
Intercompany	26,365			(25,827		)	(538		)	—			—			29,116			(28,494		)	(622		)	—			—
Shareholders’ equity:
Common stock	482			6			2,354			(2,360		)	482			482			6			2,126			(2,132		)	482
Other shareholders’ equity	9,819			36,154			3,442			(39,596		)	9,819			10,953			38,287			4,468			(42,755		)	10,953
Total shareholders’ equity	10,301			36,160			5,796			(41,956		)	10,301			11,435			38,293			6,594			(44,887		)	11,435
Total liabilities and shareholders’ equity	$	44,614		$	20,491		$	10,023		$	(41,956	)	$	33,172		$	47,513		$	21,232		$	11,188		$	(44,887	)	$	35,046

CONDENSED CONSOLIDATING ~~STATEMENTS~~STATEMENT OF CASH FLOWS (UNAUDITED)


Nine Months Ended October 1, 2017	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Net cash provided by operating activities*	$	145		$	1,502		$	234		$	—	$	1,881
Three Months Ended April 1, 2018															Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Net cash (used) provided by operating activities*															$	80		$	105		$	(681	)	$	—	$	(496	)
Cash flows from investing activities:
Business acquisitions, net of cash acquired	—			(315		)	(49		)	—		(364		)
Capital expenditures	(23		)	(205		)	(45		)	—		(273		)	(7		)	(86		)	(11		)	—		(104		)
Other, net	5			50			(2		)	—		53			1			(2		)	—			—		(1		)
Net cash used by investing activities	(18		)	(470		)	(96		)	—		(584		)	(6		)	(88		)	(11		)	—		(105		)
Cash flows from financing activities:
Proceeds from commercial paper, net															2,494			—			—			—		2,494
Purchases of common stock	(1,172		)	—			—			—		(1,172		)	(267		)	—			—			—		(267		)
Proceeds from fixed-rate notes	985			—			—			—		985
Dividends paid	(735		)	—			—			—		(735		)	(250		)	—			—			—		(250		)
Other, net	43			(2		)	—			—		41			(25		)	—			—			—		(25		)
Net cash used by financing activities	(879		)	(2		)	—			—		(881		)
Net cash provided by financing activities															1,952			—			—			—		1,952
Net cash used by discontinued operations	(28		)	—			—			—		(28		)	(2		)	—			—			—		(2		)
Cash sweep/funding by parent	1,097			(1,030		)	(67		)	—		—			(167		)	(17		)	184			—		—
Net increase in cash and equivalents	317			—			71			—		388			1,857			—			(508		)	—		1,349
Cash and equivalents at beginning of period	1,254			—			1,080			—		2,334			1,930			—			1,053			—		2,983
Cash and equivalents at end of period	$	1,571		$	—		$	1,151		$	—	$	2,722		$	3,787		$	—		$	545		$	—	$	4,332
Nine Months Ended October 2, 2016
Three Months Ended April 2, 2017
Net cash provided by operating activities*	$	98		$	1,161		$	113		$	—	$	1,372		$	(10	)	$	443		$	100		$	—	$	533
Cash flows from investing activities:
Capital expenditures	(5		)	(208		)	(31		)	—		(244		)	(3		)	(42		)	(17		)	—		(62		)
Other, net	3			(3		)	(38		)	—		(38		)	—			28			(51		)	—		(23		)
Net cash used by investing activities	(2		)	(211		)	(69		)	—		(282		)	(3		)	(14		)	(68		)	—		(85		)
Cash flows from financing activities:
Purchases of common stock	(1,514		)	—			—			—		(1,514		)	(354		)	—			—			—		(354		)
Proceeds from fixed-rate notes	992			—			—			—		992
Dividends paid	(678		)	—			—			—		(678		)	(230		)	—			—			—		(230		)
Repayment of fixed-rate notes	(500		)	—			—			—		(500		)
Other, net	173			(1		)	—			—		172			(21		)	(1		)	—			—		(22		)
Net cash used by financing activities	(1,527		)	(1		)	—			—		(1,528		)	(605		)	(1		)	—			—		(606		)
Net cash used by discontinued operations	(44		)	—			—			—		(44		)	(8		)	—			—			—		(8		)
Cash sweep/funding by parent	820			(949		)	129			—		—			423			(428		)	5			—		—
Net decrease in cash and equivalents	(655		)	—			173			—		(482		)	(203		)	—			37			—		(166		)
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		$	1,051		$	—		$	1,117		$	—	$	2,168

* Continuing operations only.

~~Q. PRIOR-PERIOD FINANCIAL STATEMENTS~~

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

~~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 upon delivery and acceptance of 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 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
October 2, 2016 ASC ASU October 2, 2016
(Dollars in millions, except per-share amounts) As Reported Topic 606 2015-17 As Adjusted
Revenue:
Products $ 4,844
$ (95 ) $ —
$ 4,749
Services 2,887
21
—
2,908
7,731
(74 ) —
7,657
Operating costs and expenses:

Products 3,757
(7 ) —
3,750
Services 2,434
(13 ) —
2,421
G&A 471
—
—
471
6,662
(20 ) —
6,642
Operating earnings 1,069
(54 ) —
1,015
Interest, net (23 ) —
—
(23 )
Other, net 2
—
—
2
Earnings from continuing operations before
income tax
1,048
(54 ) —
994
Provision for income tax, net 281
(18 ) —
263
Earnings from continuing operations 767
(36 ) —
731
Discontinued operations, net of tax benefit of $46 (84 ) —
—
(84 )
Net earnings $ 683
$ (36 ) $ —
$ 647

Earnings per share

Basic:
Continuing operations $ 2.52
$ (0.12 ) $ —
$ 2.40
Discontinued operations (0.27 ) —
—
(0.27 )
Net earnings $ 2.25
$ (0.12 ) $ —
$ 2.13
Diluted:
Continuing operations $ 2.48
$ (0.12 ) $ —
$ 2.36
Discontinued operations (0.27 ) —
—
(0.27 )
Net earnings $ 2.21

$ (0.12 ) $ —
$ 2.09

~~CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)~~

Nine Months Ended Effect of the Adoption of Nine Months Ended
October 2, 2016 ASC ASU October 2, 2016
(Dollars in millions, except per-share amounts) As Reported Topic 606 2015-17 As Adjusted
Revenue:
Products $ 14,556
$ (282 ) $ —
$ 14,274
Services 8,564
69
—
8,633
23,120

(213 ) —
22,907
Operating costs and expenses:

Products 11,287
(13 ) —
11,274
Services 7,224
26
—
7,250
G&A 1,417
—
—
1,417
19,928
13
—
19,941
Operating earnings 3,192

(226 )
—
2,966
Interest, net (68 ) —
—
(68 )
Other, net 13
—
—
13
Earnings from continuing operations before
income tax
3,137
(226 ) —
2,911
Provision for income tax, net 882
(70 ) —
812
Earnings from continuing operations 2,255

(156 )
—
2,099
Discontinued operations, net of tax benefit of $46 (97 ) —
—
(97 )
Net earnings $ 2,158

$ (156 )
$ —
$ 2,002

Earnings per share
Basic:
Continuing operations $ 7.38
$ (0.52 ) $ —
$ 6.86
Discontinued operations (0.31 ) —
—
(0.31 )
Net earnings $ 7.07

$ (0.52 )
$ —
$ 6.55
Diluted:
Continuing operations $ 7.25
$ (0.51 ) $ —
$ 6.74
Discontinued operations (0.31 ) —
—
(0.31 )
Net earnings $ 6.94

$ (0.51 )
$ —
$ 6.43

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)~~

Three Months Ended Effect of the Adoption of Three Months Ended
October 2, 2016 ASC ASU October 2, 2016
(Dollars in millions) As Reported Topic 606 2015-17 As Adjusted
Net earnings $ 683
$ (36 ) $ —
$ 647
Gains on cash flow hedges 102
—
—
102
Unrealized losses on securities (1 ) —
—
(1 )
Foreign currency translation adjustments (43 ) 1
—
(42 )
Change in retirement plans’ funded status 65
—
—
65
Other comprehensive income, pretax 123
1
—
124
Provision for income tax, net 49
—
—
49
Other comprehensive income, net of tax 74
1
—
75
Comprehensive income $ 757
$ (35 ) $ —
$ 722

Nine Months Ended Effect of the Adoption of Nine Months Ended
October 2, 2016 ASC ASU October 2, 2016
(Dollars in millions) As Reported Topic 606 2015-17 As Adjusted
Net earnings $ 2,158
$ (156 ) $ —
$ 2,002
Gains on cash flow hedges 260
—
—
260
Unrealized losses on securities (5 ) —
—
(5 )
Foreign currency translation adjustments 82
3
—
85
Change in retirement plans’ funded status 191
—
—
191
Other comprehensive income, pretax 528
3
—
531
Provision for income tax, net 133
—
—
133
Other comprehensive income, net of tax 395
3
—
398
Comprehensive income $ 2,553
$ (153 ) $ —
$ 2,400

~~CONSOLIDATED BALANCE SHEET (UNAUDITED)~~

Effect of the Adoption of
December 31, 2016 ASC ASU December 31, 2016
(Dollars in millions) As Reported 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 represents the impact to current deferred taxes of adopting ASC Topic 606.

~~CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)~~

Nine Months Ended Effect of the Adoption of Nine Months Ended
October 2, 2016 ASC ASU October 2, 2016
(Dollars in millions) As Reported Topic 606 2015-17 As Adjusted
Cash flows from operating activities -
    continuing operations:

Net earnings $ 2,158
$ (156 ) $ —
$ 2,002
Adjustments to reconcile net earnings to net cash provided
    by operating activities:

Depreciation of property, plant and equipment 272
(2 ) —
270
Amortization of intangible assets 70
—
—
70
Equity-based compensation expense 76
—
—
76
Deferred income tax provision 218
(70 ) —
148
Discontinued operations, net of tax 97
—
—
97
(Increase) decrease in assets, net of effects of
    business acquisitions:

Accounts receivable (52 ) 73
—
21
Unbilled receivables (957 ) 50
—
(907 )
Inventories (288 ) 82
—
(206 )
Increase (decrease) in liabilities, net of effects of
    business acquisitions:

Accounts payable 305
—
—
305
Customer advances and deposits (574 ) 20
—
(554 )
Income taxes payable (14 ) —
—
(14 )
Other, net 61
3
—
64
Net cash provided by operating activities 1,372
—
—
1,372
Cash flows from investing activities:

Capital expenditures (244 ) —
—
(244 )
Business acquisitions, net of cash acquired (56 ) —
—
(56 )
Other, net 18
—
—
18
Net cash used by investing activities (282 ) —
—
(282 )
Cash flows from financing activities:

Purchases of common stock (1,514 ) —
—
(1,514 )
Proceeds from fixed-rate notes 992
—
—
992
Dividends paid (678 ) —
—
(678 )
Repayment of fixed-rate notes (500 ) —
—
(500 )
Other, net 172
—
—
172
Net cash used by financing activities (1,528 ) —
—
(1,528 )
Net cash used by discontinued operations (44 ) —
—
(44 )
Net decrease in cash and equivalents (482 ) —
—
(482 )
Cash and equivalents at beginning of period 2,785
—
—
2,785
Cash and equivalents at end of period $ 2,303
$ —
$ —
$ 2,303

~~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
Nine months ended October 2, 2016 - as
    reported
—
59
1,457
(1,332 ) 395
579
Effect of the adoption of ASC Topic 606 —
—
(156 ) —
3
(153 )
Effect of the adoption of ASU 2015-17 —
—
—
—
—
—
October 2, 2016 - as adjusted $ 482
$ 2,789
$ 24,204
$ (13,724 ) $ (2,885 ) $ 10,866

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; and shipbuilding and ship repair.

~~We operate through~~Our company is organized into 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 ~~2016~~2017 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

~~DEFENSE BUSINESS ENVIRONMENT~~ACQUISITION OF CSRA

~~With approximately 60%~~On April 3, 2018, we completed our acquisition of ~~our revenue from the U.S. government, our financial performance is impacted by U.S. government spending levels, particularly defense spending. Prior~~CSRA Inc. (CSRA) for $41.25 per share in cash. See Note B to the ~~U.S. government’s new fiscal year (FY) that began on October~~unaudited Consolidated Financial Statements in Part I, Item 1, ~~2017,~~for further discussion of the ~~Congress had not passed~~acquisition. CSRA is now part of General Dynamics Information Technology (GDIT) in our Information Systems and Technology group. The combination of GDIT and CSRA creates a premier provider of high-tech IT solutions to the FYgovernment IT market.

As a result of the CSRA acquisition and the associated impacts (e.g., acquisition financing), we anticipate the following adjustments to our 2018 ~~defense appropriations bill. On September 8, 2017,~~outlook:

CSRA is expected to add approximately $3.6 billion of revenue in 2018 to the Information Systems and Technology group’s revenue.

After a ~~continuing resolution (CR), which funds government agencies at FY 2017 spending levels, was approved through December 8, 2017. We do not anticipate that~~one-time charge of approximately $80 in the ~~CR will have a material impact on~~second quarter of 2018 associated with the costs to complete the acquisition, we expect the acquisition to be break even to slightly accretive to our ~~results~~diluted earnings per share in the second half of ~~operations, financial condition or cash flows.~~2018.

RESULTS OF OPERATIONS

INTRODUCTION

An understanding of our accounting practices is ~~important to evaluate~~necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our business groups. We account for revenue in accordance with ~~ASC~~Accounting Standards Codification (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 have been restated.~~Customers.

In the Aerospace group, we record revenue on contracts for new aircraft when ~~control is transferred to~~ the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. Revenue associated with the group’s completions of other original equipment

manufacturers’ (OEMs) aircraft and the group’s services businesses 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, progress on aircraft completions and the level of aircraft service activity during the period.

The majority of the Aerospace group’s operating costs relate to new aircraft production on firm orders and consist of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at 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 large-cabin and 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. Typically, revenue is recognized over time using ~~an input measure (e.g.,~~ costs incurred to date relative to total estimated costs at ~~completion)~~completion to measure ~~progress. Operating~~progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs ~~for the defense groups consist of~~include labor, material, ~~subcontractor,~~ overhead and, when appropriate, G&A ~~costs and are recognized generally as incurred.~~expenses. Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual contracts. Because costs are used as a measure of progress, year-over-year variances in 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 1, 2017			October 2, 2016			Variance					April 1, 2018			April 2, 2017			Variance
Revenue	$	7,580		$	7,657		$	(77	)	(1.0	)%	$	7,535		$	7,441		$	94		1.3	%
Operating costs and expenses	6,528			6,642			(114		)	(1.7	)%	6,527			6,395			132			2.1	%
Operating earnings	1,052			1,015			37			3.6	%	1,008			1,046			(38		)	(3.6	)%
Operating margin	13.9		%	13.3		%						13.4		%	14.1		%
Nine Months Ended	October 1, 2017			October 2, 2016			Variance
Revenue	$	22,696		$	22,907		$	(211	)	(0.9	)%
Operating costs and expenses	19,553			19,941			(388		)	(1.9	)%
Operating earnings	3,143			2,966			177			6.0	%
Operating margin	13.8		%	12.9		%

Our consolidated ~~results for the third quarter of 2017 reflected strong operating performance, with operating earnings over $1 billion and a robust operating margin of 13.9% in the third quarter and 13.8%~~revenue increased in the first ~~nine months~~quarter of ~~2017.~~

~~Revenue~~2018 as revenue growth in each of our defense groups offset a decrease in revenue in our Aerospace group due to fewer aircraft deliveries . The increase in revenue in our defense groups was ~~down in the third quarter and first nine months of 2017~~ driven by ~~lower ship construction~~higher volume from international military vehicles in our ~~Marine~~Combat Systems group, ~~and lower volume across~~IT services in our Information Systems and Technology

~~group. These decreases were offset partially by higher volume across our Combat Systems~~ group and ~~increased revenue from aircraft deliveries and aircraft services~~U.S. Navy ship construction in our ~~Aerospace~~Marine Systems group.

Operating costs and expenses ~~decreased~~increased at a greater rate than revenue in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018, resulting in lower operating earnings and margin ~~growth compared with the prior-year periods. Operating margin expanded 60 basis points in the third quarter driven~~due primarily ~~by strong program performance and favorable contract~~to aircraft delivery mix in our ~~Information~~Aerospace group. This margin decrease was offset partially by margin expansion in our Marine Systems ~~and Technology and Combat Systems groups. In the first nine months of 2017, operating margin expanded 90 basis points due to~~group, reflecting improved operating performance ~~in our Aerospace, Information Systems and Technology, and Combat Systems groups.~~across the group’s shipyards.

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 results. Additional information regarding our business groups can be found in Note OP to the unaudited Consolidated Financial Statements in Part I, Item 1.

AEROSPACE


Three Months Ended	October 1, 2017			October 2, 2016			Variance					April 1, 2018			April 2, 2017			Variance
Revenue	$	1,995		$	1,925		$	70		3.6	%	$	1,825		$	2,074		$	(249	)	(12.0	)%
Operating earnings	385			377			8			2.1	%	346			439			(93		)	(21.2	)%
Operating margin	19.3		%	19.6		%						19.0		%	21.2		%
Gulfstream aircraft deliveries (in units)	30			29			1			3.4	%	26			30			(4		)	(13.3	)%
Nine Months Ended	October 1, 2017			October 2, 2016			Variance
Revenue	$	6,147		$	5,990		$	157		2.6	%
Operating earnings	1,253			1,133			120			10.6	%
Operating margin	20.4		%	18.9		%
Gulfstream aircraft deliveries (in units)	90			93			(3		)	(3.2	)%

Operating Results

The ~~increase~~change in the Aerospace group’s revenue in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 consisted of the following:


	Third Quarter			Nine Months
Aircraft manufacturing, outfitting and completions	$	80		$	91		$	(263	)
Aircraft services	16			91			16
Pre-owned aircraft	(26		)	(25		)	(2		)
Total increase	$	70		$	157
Total decrease							$	(249	)

Aircraft manufacturing, outfitting and completions revenue ~~increased~~decreased due to ~~additional~~fewer deliveries of the ultra-large-cabin G650 ~~and mid-cabin G280~~ aircraft ~~offset partially by fewer G550 and G450 large-cabin~~consistent with our plan. Revenue is expected to increase later this year with initial deliveries of the new G500 aircraft. The increase in aircraft ~~deliveries. Aircraft~~ services revenue ~~increased~~was driven by higher demand for maintenance work.

work and the acquisition of a fixed-base-operations (FBO) facility in 2017. We had one pre-owned aircraft sale in each of the third-quarter periods and four pre-owned aircraft sales in the first nine months of 2017 compared with six in the first nine months of 2016. While we sold the same number of pre-owned aircraft in the third quarter of 2017 compared with the prior-year period, the type of aircraft sold resulted in lower pre-owned aircraft revenue.

The ~~increase~~change in the group’s operating earnings in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 consisted of the following:


	Third Quarter			Nine Months
Aircraft manufacturing, outfitting and completions	$	24		$	144		$	(86	)
Aircraft services	—			(2		)	11
Pre-owned aircraft	4			8
G&A/other expenses	(20		)	(30		)	(18		)
Total increase	$	8		$	120
Total decrease							$	(93	)

Aircraft manufacturing, outfitting and completions earnings were updown due to ~~a favorable mix of large-cabin~~fewer aircraft deliveries and ~~effective~~the mix of aircraft deliveries. Aircraft services operating earnings were particularly strong in the first quarter of 2018 due to favorable cost ~~containment. R&D expenses (included in~~performance and the mix of services. G&A/other expenses ~~above)~~were higher due primarily to increased R&D expenses associated with ongoing product-development ~~efforts were higher in~~efforts. Overall, the ~~third quarter and first nine months of 2017 as the group progresses with the certification of its two newest aircraft models, the G500 and the G600.~~

~~The~~ Aerospace group’s operating margin ~~was down 30~~decreased 220 basis points in the third quarter driven by higher R&D expenses. However, operating margin increased 150 basis points in the first nine months of 2017 compared with the prior-year period as a favorable aircraft delivery mix and strong performance more than offset the impact of higher R&D expenses.

~~Outlook~~

~~We expect the group’s full-year 2017 revenue~~ to be19% consistent with our ~~second-quarter estimate of approximately $8~~plan as we transition to ~~$8.1 billion. Operating margin is expected to be around 19.6%, also in line with our prior outlook.~~the G500 and later the G600 aircraft.

COMBAT SYSTEMS


Three Months Ended	October 1, 2017			October 2, 2016			Variance				April 1, 2018			April 2, 2017			Variance
Revenue	$	1,500		$	1,327		$	173	13.0	%	$	1,440		$	1,287		$	153	11.9	%
Operating earnings	247			209			38		18.2	%	224			205			19		9.3	%
Operating margin	16.5		%	15.7		%					15.6		%	15.9		%
Nine Months Ended	October 1, 2017			October 2, 2016			Variance
Revenue	$	4,201		$	3,869		$	332	8.6	%
Operating earnings	677			601			76		12.6	%
Operating margin	16.1		%	15.5		%

Operating Results

The increase in the Combat Systems group’s revenue in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 consisted of the following:


	Third Quarter		Nine Months
International military vehicles					$	133
Weapons systems and munitions					11
U.S. military vehicles	$	42	$	154	9
Weapons systems and munitions	61		127
International military vehicles	70		51
Total increase	$	173	$	332	$	153

Revenue was up across the Combat Systems group in the third quarter and first nine months of 2017. Revenue from U.S. military vehicles increased due to higher volume on the Army’s Stryker programs. Weapons systems and munitions revenue was up due primarily to increased production of several products, including bombs and Hydra-70 rockets for the U.S. government. Revenue from international military vehicles increased ~~in the third quarter and first nine months of 2017~~ due primarily to the ramp up inof several production ~~on the British~~programs, including U.K. AJAX armoured fighting vehicles, ~~program. In the first nine months of 2017, revenue from international military~~Piranha 5 wheeled armored vehicles ~~also increased due to higher volume on the group’s contract to refurbish and upgrade Abrams main battle tanks~~ for the ~~Kingdom~~Romanian Armed Forces and the upgrade of ~~Morocco and several international~~ light armored ~~vehicle (LAV) programs. These increases were offset partially by lower revenue on a large combat-vehicle contract in~~vehicles (LAVs) for the ~~Middle East as the group transitions from engineering to production.~~Government of Canada.

The Combat Systems group’s operating margin ~~increased 80~~decreased 30 basis points ~~in the third quarter and 60 basis points in the first nine months of 2017~~ driven by ~~improved operating performance across the group’s portfolio.~~

~~Outlook~~

~~We expect the Combat Systems group’s full-year 2017 revenue to be consistent with~~contract mix in our ~~prior outlook of $5.9 billion. Similarly, operating margin remains about 15.6 to 15.7%.~~weapons systems and munitions business.

INFORMATION SYSTEMS AND TECHNOLOGY


Three Months Ended	October 1, 2017			October 2, 2016			Variance					April 1, 2018			April 2, 2017			Variance
Revenue	$	2,154		$	2,330		$	(176	)	(7.6	)%	$	2,236		$	2,146		$	90	4.2	%
Operating earnings	253			239			14			5.9	%	247			236			11		4.7	%
Operating margin	11.7		%	10.3		%						11.0		%	11.0		%
Nine Months Ended	October 1, 2017			October 2, 2016			Variance
Revenue	$	6,404		$	6,873		$	(469	)	(6.8	)%
Operating earnings	729			710			19			2.7	%
Operating margin	11.4		%	10.3		%

Operating Results

The ~~change~~increase in the Information Systems and Technology group’s revenue in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 consisted of the following:


	Third Quarter			Nine Months
IT services							$	80
C4ISR solutions	$	(168	)	$	(333	)	10
IT services	(8		)	(136		)
Total decrease	$	(176	)	$	(469	)
Total increase							$	90

C4ISR solutions revenue decreased in the third quarter and first nine months of 2017 due primarily to lower volume on the Warfighter Information Network-Tactical (WIN-T) mobile communications network and Common Hardware Systems-4 (CHS-4) computing and communications equipment programs. Revenue in our ~~IT services business decreased in 2017 due to lower volume on a U.S. Department of State supply chain management program.~~

Despite the lower revenue, operating earnings increased, and operating margin expanded 140 basis points in the third quarter and 110 basis points in the first nine months of 2017. The margin expansion was driven primarily by strong program performance and favorable contract mix across our portfolio.

~~Outlook~~

~~We expect full-year revenue in the~~ Information Systems and Technology group increased in the first quarter of 2018 due to ~~be essentially flat from 2016.~~an increase in activity following program delays across the group in 2017 and the acquisition of a provider of mission-critical support services in late 2017 in our IT services business. Operating margin ~~is expected to be around 11.3%, both consistent~~in the first quarter of 2018 was steady compared with ~~our second-quarter outlook.~~the prior-year period.

MARINE SYSTEMS


Three Months Ended	October 1, 2017			October 2, 2016			Variance					April 1, 2018			April 2, 2017			Variance
Revenue	$	1,931		$	2,075		$	(144	)	(6.9	)%	$	2,034		$	1,934		$	100	5.2	%
Operating earnings	179			197			(18		)	(9.1	)%	184			161			23		14.3	%
Operating margin	9.3		%	9.5		%						9.0		%	8.3		%
Nine Months Ended	October 1, 2017			October 2, 2016			Variance
Revenue	$	5,944		$	6,175		$	(231	)	(3.7	)%
Operating earnings	518			553			(35		)	(6.3	)%
Operating margin	8.7		%	9.0		%

Operating Results

The ~~change~~increase in the Marine Systems group’s revenue in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 consisted of the following:


	Third Quarter			Nine Months
U.S. Navy ship construction	$	(50	)	$	(241	)	$	146
Commercial ship construction	(105		)	(229		)	18
U.S. Navy ship engineering, repair and other services	11			239			(64		)
Total decrease	$	(144	)	$	(231	)
Total increase							$	100

Revenue from U.S. Navy ship construction ~~decreased driven by lower~~increased due primarily to higher volume on Block ~~III~~IV of the Virginia-class submarine ~~program. This decrease was~~program and the TAO-205 fleet oiler contract. Commercial ship construction revenue increased as work ramped up on a contract for two container ships scheduled for delivery in 2019 and 2020. These increases were offset partially by ~~higher volume on the Navy’s Expeditionary Sea Base (ESB) program. Jones Act commercial ship construction~~lower revenue ~~decreased due to reduced construction activity following the delivery of six ships in 2016 and two ships in the first nine months of 2017. Revenue~~ from U.S. Navy ship engineering, repair and other services ~~increased in 2017 due to additional development work on the Columbia-class submarine program and~~driven by a ~~higher~~lower volume of submarine repair work and the timing of surface ship repair work.

The Marine Systems group’s operating margin ~~decreased 20~~increased 70 basis points inreflecting improved performance across the ~~third quarter and 30 basis points~~group’s shipyards.

CORPORATE

Corporate income totaled $7 in the first ~~nine months~~quarter of ~~2017 due to a shift in contract mix, including the transition from Block III to Block IV of the Virgina-class submarine program.~~

~~Outlook~~

~~We expect the Marine Systems group’s full-year 2017 revenue to remain steady~~2018 compared with ~~2016. Operating margin is expected to be between 8.5 and 8.6%, consistent with our second-quarter outlook.~~

~~CORPORATE~~

~~Corporate costs totaled $12 in the third quarter of 2017 compared with $7 in the third quarter of 2016, and $34~~$5 in the first ~~nine months~~quarter of ~~2017 compared with $31~~2017. As discussed in Note A to the ~~prior-year period. Corporate results consist primarily of stock option expense. We expect 2017~~unaudited Consolidated Financial Statements in Part I, Item 1, Corporate operating costs are impacted by Accounting Standards Update (ASU) 2017-07. ASU 2017-07 requires the non-service cost components of ~~approximately $50.~~pension and other post-retirement benefit cost (e.g., interest cost) to be reported in other income (expense) in the income statement. In our three defense groups, pension and other post-retirement benefit costs are allocable contract costs. For these groups, we report the offset for the non-service cost

components in Corporate operating results. This amount exceeds our stock option expense in the first quarters of 2018 and 2017.

OTHER INFORMATION

PRODUCT REVENUE AND OPERATING COSTS


Three Months Ended	October 1, 2017		October 2, 2016		Variance					April 1, 2018		April 2, 2017		Variance
Revenue	$	4,718	$	4,749	$	(31	)	(0.7	)%	$	4,576	$	4,467	$	109	2.4	%
Operating costs	3,634		3,750		(116		)	(3.1	)%	3,546		3,438		108		3.1	%
Nine Months Ended	October 1, 2017		October 2, 2016		Variance
Revenue	$	13,851	$	14,274	$	(423	)	(3.0	)%
Operating costs	10,664		11,274		(610		)	(5.4	)%

The ~~change~~increase in product revenue in the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 consisted of the following:


	Third Quarter			Nine Months
Military vehicle production							$	176
Ship construction	$	(155	)	$	(470	)	167
C4ISR products	(92		)	(249		)
Military vehicle production	106			231
Aircraft manufacturing, outfitting and completions	80			91			(263		)
Other, net	30			(26		)	29
Total decrease	$	(31	)	$	(423	)
Total increase							$	109

Military vehicle production revenue increased due primarily to the ramp up of several international production programs, including U.K. AJAX armoured fighting vehicles, Romanian Piranha 5 wheeled armored vehicles and the upgrade of LAVs for the Government of Canada. Ship construction revenue ~~decreased~~increased due primarily to ~~lower~~higher volume on Block ~~III~~IV of the Virginia-class submarine program, the TAO-205 fleet oiler contract and ~~reduced Jones Act~~ commercial container ship ~~construction volume. Revenue from C4ISR products decreased driven~~construction. These increases were offset partially by lower ~~volume on the WIN-T~~aircraft manufacturing, outfitting and ~~CHS-4 programs. These decreases were offset partially~~

~~by higher~~completions revenue ~~on several military vehicle production programs and additional deliveries of the ultra-large-cabin G650 and mid-cabin G280 aircraft.~~

due to fewer aircraft deliveries. Product operating costs decreased in the third quarter and first nine months of 2017 at a higher rate than revenue declined due primarily to strong operating performance in our Aerospace and Information Systems and Technology groups.

~~SERVICE REVENUE AND OPERATING COSTS~~

Three Months Ended October 1, 2017 October 2, 2016 Variance
Revenue $ 2,862
$ 2,908
$ (46 ) (1.6 )%
Operating costs 2,384
2,421
(37 ) (1.5 )%
Nine Months Ended October 1, 2017 October 2, 2016 Variance
Revenue $ 8,845
$ 8,633
$ 212
2.5 %
Operating costs 7,393
7,250
143
2.0 %

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

Third Quarter Nine Months
Ship engineering, repair and other services $ 11
$ 239
C4ISR services (76 ) (84 )
Other, net 19
57
Total (decrease) increase $ (46 ) $ 212

Service revenue decreased in the third quarter of 2017, but was up in the first nine months of 2017 compared with the prior-year period due primarily to additional development work on the Columbia-class submarine program and a higher volume of submarine repair work. C4ISR services revenue decreased in the third quarter and first nine months of 2017 due to lower volume on several programs, including less development work for the WIN-T program. Service operating costs decreased in the third quarter and increased ~~in the first nine months of 2017~~ consistent with the changes in volume on the programs described above.

SERVICE REVENUE AND OPERATING COSTS



Three Months Ended	April 1, 2018		April 2, 2017		Variance
Revenue	$	2,959	$	2,974	$	(15	)	(0.5	)%
Operating costs	2,444		2,485		(41		)	(1.6	)%

The change in service revenue in the first quarter of 2018 consisted of the following:



Ship engineering, repair and other services	$	(68	)
IT services	70
Other, net	(17		)
Total decrease	$	(15	)

Ship engineering, repair and other services decreased due primarily to a lower volume of submarine repair work and the timing of surface ship repair work. This decrease was offset by higher IT services revenue, including the acquisition of a provider of mission-critical support services in late 2017. Service operating costs decreased at a higher rate than revenue due to strong service operating performance in each of our business groups.

OTHER FINANCIAL INFORMATION

G&A Expenses

As a percentage of revenue, G&A expenses were ~~6.6%~~7.1% in the first ~~nine~~three months of ~~2017~~2018 compared with ~~6.2%~~6.3% in the first ~~nine~~three months of ~~2016. We expect full-year G&A expenses as a percentage of revenue in 2017 to be generally consistent with the first nine months of~~2017.

Interest, Net

Net interest expense was ~~$76~~$27 in the first ~~nine~~three months of ~~2017~~2018 compared with ~~$68~~$25 in the prior-year period. The increase is due primarily to ~~a $500 net increase~~slightly higher interest rates on the $1 billion of fixed-rate notes issued in ~~long-term~~2017 compared with the $900 of fixed-rate notes that matured in 2017. See Note J to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt ~~beginning~~obligations, including interest rates.

Other, Net

Net other expense was $21 in the ~~third quarter~~first three months of ~~2016. We expect full-year 2017 net interest~~2018 compared with $11 in the first three months of 2017. Other expense ~~to be approximately $110.~~represents the non-service cost components of pension and other post-retirement benefit cost and transaction costs associated with the CSRA acquisition.

Provision for Income Tax, Net

Our effective tax rate was ~~25.8%~~16.8% in the first ~~nine~~three months of ~~2017~~2018 compared with ~~27.9%~~24.5% in the prior-year period. The decrease is due primarily to ~~additional~~the reduction of the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018, resulting from the enactment of the Tax Cuts and Jobs Act (tax reform) on December 22, 2017. The effective tax rate in the first three months of 2018 also included the impact of excess tax benefits from equity-based ~~compensation in the first~~

nine months of 2017 associated with stock option exercises and the vesting of restricted stock and restricted stock units and increased international activity. We anticipate our full-year 2017 effective tax rate to be approximately 27%.

~~Discontinued Operations~~

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 our Bath, Maine, shipyard. As we progressed through the shipbuilding process, we determined that the cost associated with this settlement was greater than anticipated. Therefore, in the third quarter of 2016, we recognized an $84 loss, net of tax, to adjust the previously-recognized settlement value.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was ~~$63.9~~$62.1 billion at the end of the ~~third~~first quarter of ~~2017, up 9.2% from $58.6~~2018, compared with $63.2 billion on ~~July 2,~~December 31, 2017. Our total backlog is equal to our remaining performance obligations under contracts that meet the criteria in ASC Topic 606 as discussed in Note BD 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 ~~$89.7~~$87.6 billion on ~~October~~April 1, ~~2017.~~2018.

The following table details the backlog and estimated potential contract value of each business group at the end of the ~~third~~first quarter of 2018 and ~~second quarters~~the fourth quarter of 2017:


	Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Estimated Contract Value		Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Potential Contract Value
	October 1, 2017										April 1, 2018
Aerospace	$	11,729	$	86	$	11,815	$	1,909	$	13,724	$	11,898	$	158	$	12,056	$	1,868	$	13,924
Combat Systems	17,060		494		17,554		4,607		22,161		17,126		378		17,504		3,549		21,053
Information Systems and Technology	7,109		2,413		9,522		14,384		23,906		6,739		2,075		8,814		15,787		24,601
Marine Systems	16,791		8,247		25,038		4,826		29,864		18,310		5,458		23,768		4,271		28,039
Total	$	52,689	$	11,240	$	63,929	$	25,726	$	89,655	$	54,073	$	8,069	$	62,142	$	25,475	$	87,617

	July 2, 2017										December 31, 2017
Aerospace	$	12,116	$	120	$	12,236	$	1,911	$	14,147	$	12,319	$	147	$	12,466	$	1,955	$	14,421
Combat Systems	16,749		281		17,030		4,845		21,875		17,158		458		17,616		3,154		20,770
Information Systems and Technology	6,809		2,085		8,894		14,389		23,283		6,682		2,192		8,874		14,875		23,749
Marine Systems	16,033		4,374		20,407		3,282		23,689		15,872		8,347		24,219		4,809		29,028
Total	$	51,707	$	6,860	$	58,567	$	24,427	$	82,994	$	52,031	$	11,144	$	63,175	$	24,793	$	87,968

AEROSPACE

Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The group ended the ~~third~~first quarter of ~~2017~~2018 with backlog of ~~$11.8~~$12.1 billion compared with ~~$12.2~~$12.5 billion on ~~July 2,~~December 31, 2017.

Orders in the ~~third~~first quarter of ~~2017~~2018 reflected ~~strong~~good demand across our product and services portfolio. We received orders for all models of in-production Gulfstream aircraft, ~~as well as additional~~with particularly strong first-quarter orders for the ultra-large-cabin G650 aircraft. We continue to progress toward anticipated U.S. Federal Aviation Administration (FAA) type certification and entry into service of the new G500 and G600, ~~aircraft,~~for which ~~are expected to enter into service in 2018. The book-to-bill ratio (orders divided by revenue) was nearly one-to-one for Gulfstream aircraft~~we received additional orders in the ~~third~~first quarter of ~~2017.~~2018.

Beyond total backlog, estimated potential contract value in the Aerospace group was $1.9 billion on ~~October~~April 1, ~~2017, and July 2,~~2018, compared with $2 billion on December 31, 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 the U.S. Congress and funded by customers, 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 unfunded portion includes the amounts that we believe are likely to ~~receive funding,~~be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.

Estimated potential contract value in our defense groups includes unexercised options associated with existing firm contracts and 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. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value. ~~We recognize options in backlog when the customer exercises the option and establishes a firm order.~~

Total backlog in our defense groups was ~~$52.1~~$50.1 billion on ~~October~~April 1, ~~2017, up 12.5% from $46.3~~2018, compared with $50.7 billion on ~~July 2, 2017, driven by a $5.1 billion contract awarded by~~December 31, 2017. The decrease was due primarily to the ~~U.S. Navy~~Marine Systems group as the group continued to ~~complete the design and prototype development of the lead Columbia-class submarine. Each of our defense groups~~perform on significant multi-year contracts. The Combat Systems group achieved a book-to-bill ratio ~~exceeding~~(orders divided by revenue) higher than one-to-one in the ~~third~~first quarter of ~~2017.~~2018, driven by a large international armored vehicle order. Estimated potential contract value in our defense groups was ~~$23.8~~$23.6 billion on ~~October~~April 1, ~~2017, compared with $22.5~~2018, up 3.4% from $22.8 billion on ~~July 2,~~December 31, 2017. We received the following significant contract awards during the ~~third~~first quarter of ~~2017:~~2018:

Combat Systems:

$~~310~~445 to produce Piranha 5 wheeled armored vehicles and provide associated support services to the Romanian Armed Forces, part of a larger contract with a total potential value exceeding $1 billion.

$285 from the U.S. Army ~~to design, develop~~for inventory management and ~~integrate multiple~~ engineering ~~changes into~~and support services for the ~~Abrams M1A2 System Enhancement Package Version 3 (SEPv3), creating a SEPv4.~~Stryker wheeled combat-vehicle fleet.

$~~270~~155 from the Army ~~to produce 45 Abrams M1A2 SEPv3 tanks, deliver M1A2 components and provide associated program support.~~

~~$260 from the Army and U.S. Air Force~~ for various calibers of ~~ammunition~~ammunition.

$80 from the Army for technical support and ~~ordnance.~~

engineering and logistics services for the Abrams main battle tank program.

$~~220 from an international customer to produce Piranha 3+ vehicles in five variants and provide associated program support.~~

~~$195~~70 from the Army for the production of ~~Hydra-70 rockets.~~

~~$175 from the Army for~~ Stryker double-V-hull ~~vehicles.~~vehicles in the A1 configuration.

$~~35 from the Army for engineering and logistics support services for the Abrams family of vehicles.~~65 to produce AGM-114R Hellfire munitions.

Information Systems and Technology:

$~~455~~215 from the ~~Centers~~National Aeronautics and Space Administration (NASA) for ~~Medicare & Medicaid Services~~the Space Network Ground Segment Sustainment (SGSS) program to modernize NASA’s ground infrastructure systems for ~~contact center services and cloud hosting support.~~its satellite network.

$~~110~~120 from the U.S. Army for computing and communications equipment under the ~~CHS-4~~ Common Hardware Systems-4 (CHS-4) program.

$95 from the U.S. ~~Department of State~~Air Force for the Battlefield Information Collection and Exploitation System (BICES) program to provide ~~supply chain~~information sharing support to coalition operations.

$60 to provide IT network and technical support services for the U.S. Army Intelligence and Security Command.

$55 from the U.S. Air Force Central Command for communications equipment and associated technical support services in Asia.

$50 from the National Geospatial-Intelligence Agency (NGA) for IT lifecycle management and virtual desktop services.

$8545 to provide vehicle electronic systems and components for ~~work~~Prophet, the Army’s ground-based tactical signals intelligence and electronic warfare system.

$45 from the Army for the lightweight mobile tactical network.

$40 to continue managing the Army’s live training systems.

$30 to provide engineering and integration support for the Canadian Army’s tactical communications network, the Land Command Support System (LCSS).

Marine Systems:

$695 from the U.S. Navy to procure long-lead materials for four Virginia-class submarines under Block V of the program.

$420 from the Navy for construction of the second ship in the John Lewis-class (TAO-205) fleet oiler program.

$100 from the Navy for Advanced Nuclear Plant Studies in support of the ~~Trident II~~Columbia-class submarine ~~weapons system.~~program.

$~~70 to deploy, operate and maintain network infrastructure in support of Joint Service Provider customers.~~

~~$70 from the U.S. Naval Air Warfare Center for design, development and support of shipboard and airborne systems.~~

~~$60 from the Defense Intelligence Agency to provide computer network defense support, information assurance and enterprise communication services.~~

~~$60 from the Army to provide continued software support and engineering for the~~ ~~WIN-T Increment 2 program.~~

~~Marine Systems:~~

~~$5.1 billion~~85 from the Navy ~~to complete the design~~for maintenance and ~~prototype development of the lead Columbia-class submarine. This contract has a potential value of approximately $6.1 billion, which includes our estimate of materials to be provisioned~~modernization work on the ~~contract.~~USS Montpelier, a Los Angeles-class attack submarine.

$~~180 from the Navy to provide research and development and lead-yard services for Virginia-class submarines.~~

~~$85~~40 from the Navy to provide design ~~engineering, material and logistics support, and research~~ and development ~~activities~~and lead yard services for ~~active U.S.~~Virginia-class submarines.

~~$35 from the Navy to produce a large vertical array fixture for Navy submarine acoustic detection efforts. This contract has a potential value of approximately $400.~~

~~$35 from the Navy to maintain Littoral Combat Ships.~~

~~Full funding from the Navy for the planning and construction of two Arleigh Burke-class destroyers, DDG 126 and~~ ~~DDG 127.~~

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We ended the ~~third~~first quarter of ~~2017~~2018 with a cash balance of ~~$2.7~~$4.3 billion, up ~~$388~~$1.3 billion from the end of ~~2016.~~2017. Our net debt position, defined as debt less cash and equivalents and marketable securities, ~~less debt,~~ was ~~$2.2 billion at~~

~~the end of the third quarter of 2017 compared with $1.6~~$2.1 billion at the end of ~~2016.~~the first quarter of 2018 compared with $999 at the end of 2017.

We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy. The following is a discussion of our major operating, investing and financing activities in the first three months of 2018and2017, as classified on the unaudited Consolidated Statement of Cash Flows in ~~the~~ ~~first nine months~~ of ~~2017and2016~~.Part I, Item 1.

OPERATING ACTIVITIES

We used cash for operating activities of $496 in the first three months of 2018 compared with cash generated ~~cash~~ from operating activities of ~~$1.9 billion in the first nine months of 2017 compared with $1.4 billion~~$533 in the same period in ~~2016.~~2017. The primary driver of cash ~~flows~~inflows in both periods was net earnings. ~~Cash~~However, cash flows in ~~both periods~~the first three months of 2018 were affected negatively by growth in operating working capital, particularly the timing of billings and collections on large international vehicle contracts in our Combat Systems ~~group due to the timing of billings on a large contract for a Middle Eastern customer, and~~group. Additionally, in ~~our Aerospace group from~~both periods, cash flows were affected negatively by the build-up of inventory related to the new G500 and G600 aircraft programs and ~~a decrease in~~the liquidation of customer deposits associated with aircraft ~~deliveries.~~deliveries in our Aerospace group.

INVESTING ACTIVITIES

Cash used for investing activities was ~~$584~~$105 in the first ~~nine~~three months of ~~2017~~2018 compared with $~~282~~85 in the same period in ~~2016~~2017. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales. The primary ~~uses~~use of cash for investing activities in both periods ~~were acquisitions and~~was capital expenditures. ~~In 2017, we acquired three businesses for an aggregate of $364, and in 2016, we acquired two businesses for an aggregate of $56.~~ Capital expenditures were ~~$273~~$104 in the first ~~nine~~three months of ~~2017~~2018 compared with ~~$244~~$62 in the same period in ~~2016. We expect capital expenditures between 1% and 2% of revenue~~2017 as we deploy additional cash resulting from the recent tax reform to support the growth in ~~2017.~~our shipyards.

FINANCING ACTIVITIES

Cash provided by financing activities was $2 billion in the first three months of 2018 compared with cash used for financing activities ~~was $881 million in the first nine months~~ of ~~2017~~ ~~compared with $1.5 billion~~$606 in the same period in ~~2016~~2017. Our financing activities include repurchases of common stock, payment of dividends and debt repayments. Net cash from financing activities also includes proceeds received from debt and commercial paper 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~~three months of ~~2017,~~2018, we repurchased approximately ~~5.9~~1.2 million of our outstanding shares for ~~$1.1 billion.~~$257. On ~~October~~April 1, ~~2017, 9.5~~2018, 6.4 million shares remained authorized by our board of directors for repurchase, approximately 3%2% of our total shares outstanding. We repurchased ~~11.2~~1.9 million shares for ~~$1.5 billion~~$355 in the first ~~nine~~three months of ~~2016.~~2017.

On March ~~1, 2017,~~7, 2018, our board of directors declared an increased quarterly dividend of ~~$0.84~~$0.93 per share, the ~~20th~~21st consecutive annual increase. Previously, the board had increased the quarterly dividend to ~~$0.76~~$0.84 per share in March ~~2016.~~2017. Cash dividends paid were ~~$735~~$250 in the first ~~nine~~three months of ~~2017~~2018 compared with ~~$678~~$230 in the same period in ~~2016.~~2017.

In the ~~third~~first quarter of ~~2017,~~2018, we ~~issued~~took several actions in anticipation of the acquisition of CSRA, which was completed on April 3, 2018. We renewed and increased to $2 billion our $1 billion of fixed-rate notes. The proceeds will be used to repay $900 of fixed-rate notes maturing in November of 2017 and for general corporate purposes. In the third quarter of 2016, we repaid $500 of fixed-rate notes on their maturity date with cash on hand and issued $1 billion of fixed-rate notes for general corporate purposes. See Note I 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 1, 2017. We have $2 billion in~~multi-year committed bank credit ~~facilities that remain available, including a~~facility, which was scheduled to expire in July 2018. The new credit facility expires in March 2023. We have an additional $1 billion multi-year committed bank credit facility ~~expiring in July 2018 and a $1 billion facility expiring~~that expires in November 2020. ~~These~~We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. We also entered into a $7.5 billion, 364-day committed bank credit facility that expires in March 2019. We financed the acquisition of CSRA, in part, by borrowing $7.5 billion under this facility subsequent to the end of the quarter. We intend to issue debt securities in the future to repay in whole or in part the borrowings under this facility. The proceeds from these issuances will automatically reduce the bank’s commitments under this facility to an amount not less than $2 billion. Following this reduction, our three credit facilities will total $5 billion. Our credit facilities are used for general corporate purposes and working capital needs and support our commercial paper issuances.

~~needs. We also have an effective shelf registration~~In the first quarter of 2018, we issued $2.5 billion of commercial paper, which remained outstanding on ~~file with the Securities and Exchange Commission that allows us to access the debt markets.~~April 1, 2018.

NON-GAAP FINANCIAL ~~MEASURES~~MEASURE – FREE CASH FLOW

We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations to measure our performance in these areas. While we believe this metric provides useful information, it is not a defined operating measure under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with its use. Our calculation of this metric may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of this metric should not be considered in isolation from, or as a substitute for, other GAAP measures.

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:~~Flows in Part I, Item 1:

Nine Months Ended October 1, 2017 October 2, 2016
Net cash provided by operating activities $ 1,881
$ 1,372
Capital expenditures (273 ) (244 )
Free cash flow from operations $ 1,608
$ 1,128
Cash flows as a percentage of earnings from continuing operations:
Net cash provided by operating activities 83 % 65 %
Free cash flow from operations 71 % 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.



Three Months Ended	April 1, 2018			April 2, 2017
Net cash (used) provided by operating activities	$	(496	)	$	533
Capital expenditures	(104		)	(62		)
Free cash flow from operations	$	(600	)	$	471
Cash flows as a percentage of earnings from continuing operations:
Net cash (used) provided by operating activities	(62		)%	70		%
Free cash flow from operations	(75		)%	62		%

ADDITIONAL FINANCIAL INFORMATION

ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES

For a discussion of environmental matters and other contingencies, see Note MN to the unaudited Consolidated Financial Statements in Part I, Item 1. Except as otherwise noted in Note M,N, 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~~the 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 reporting 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 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. The aggregate impact of adjustments in contract estimates increased our

operating earnings (and diluted earnings per share) by ~~$103~~$97 ($~~0.22)~~0.25) and ~~$274~~$50 ($~~0.58)~~0.11) for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017,~~2018, and ~~$52 ($0.11) and $169 ($0.35) for the three- and nine-month periods ended October~~April 2, ~~2016,~~2017, respectively. No adjustment on any one contract was material to ~~our~~the unaudited Consolidated Financial Statements for the ~~three- and nine-month~~three-month periods ended ~~October~~April 1, ~~2017, and October~~2018, or April 2, ~~2016.~~2017.

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. 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, ~~2016.~~2017. 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, ~~2016.~~2017.

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 ~~October~~April 1, ~~2017,~~2018, (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~~April 1, ~~2017,~~2018, 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~~April 1, ~~2017,~~2018, 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 MN 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, ~~2016~~2017.

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

The following table provides information about our ~~third-quarter~~first-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
7/3/17-7/30/17 100,000
$ 196.12
100,000
10,665,696
7/31/17-8/27/17 823,933
198.76
823,933
9,841,763
8/28/17-10/1/17 308,067
198.24
308,067
9,533,696
1,232,000
$ 198.42



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
1/1/18-1/28/18	425,242	$	207.83	425,242	7,160,168
1/29/18-2/25/18	—	—		—	7,160,168
2/26/18-4/1/18	750,000	224.23		750,000	6,410,168

Shares Delivered or Withheld Pursuant to Restricted Stock Vesting*
1/1/18-1/28/18	321,249	201.99
1/29/18-2/25/18	—	—
2/26/18-4/1/18	110,501	223.93
	1,606,992	$	215.43

* Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the statutory tax withholding due upon vesting of the restricted shares.

We did not make any unregistered sales of equity securities in the ~~third~~first quarter of ~~2017.~~2018.

ITEM 6. EXHIBITS

~~4.1~~2.1

~~Second Supplemental Indenture,~~Agreement and Plan of Merger, dated ~~as of September 14, 2017,~~February 9, 2018, by and among CSRA Inc., General Dynamics Corporation ~~the Guarantors named therein~~ and ~~The Bank of New York Mellon, as Trustee~~Red Hawk Enterprises Corp. (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission on February 12, 2018)*


2.2	Amendment No. 1 to Agreement and Plan of Merger, dated March 20, 2018, by and among CSRA Inc., General Dynamics Corporation and Red Hawk Enterprises Corp. (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission on March 20, 2018)


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


10.1	364-Day Incremental Credit Facility Commitment Letter, dated March 1, 2018, by and among General Dynamics Corporation, JPMorgan Chase Bank, N.A., Wells Fargo Securities, LLC and ~~Exchange~~Wells Fargo Bank, National Association (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission ~~September 14, 2017)~~on March 5, 2018)


10.2	364-Day Credit Agreement, dated as of March 16, 2018, by and among General Dynamics Corporation, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders named therein (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission on March 20, 2018)


10.3	Resignation and Appointment Agreement, dated March 23, 2018, by and among JPMorgan Chase Bank, N.A., as resigning administrative agent, Wells Fargo Bank, National Association, as successor administrative agent, and certain guarantors and lenders named therein (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission on March 27, 2018)


10.4	Amendment No. 1 to the 364-Day Credit Agreement, dated as of March 28, 2018, by and among General Dynamics Corporation and Wells Fargo Bank, National Association, as administrative agent, and the lenders named therein**


31.1	Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**


31.2	Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**


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


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


101	Interactive Data File**

* Filed or furnished herewith.


*	General Dynamics Corporation has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K and agrees to furnish supplementally to the SEC a copy of any omitted schedule or exhibit upon request by the SEC.


**	Filed or furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the ~~registrant~~Registrant has duly caused this report to be signed on its behalf by the undersigned ~~hereunto~~thereunto duly authorized.



	GENERAL DYNAMICS CORPORATION
	by
		William A. Moss
		Vice President and Controller
		(Authorized Officer and Chief Accounting Officer)
Dated: ~~October~~April 25, ~~2017~~2018

5645



Three Months Ended October 1, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	1,835	$	1,258	$	971	$	1,131	$	5,195
Cost-reimbursement	—		233		989		797		2,019
Time-and-materials	160		9		194		3		366
Total revenue	$	1,995	$	1,500	$	2,154	$	1,931	$	7,580
Three Months Ended October 2, 2016
Fixed-price	$	1,773	$	1,102	$	1,094	$	1,241	$	5,210
Cost-reimbursement	—		215		1,033		832		2,080
Time-and-materials	152		10		203		2		367
Total revenue	$	1,925	$	1,327	$	2,330	$	2,075	$	7,657



	Three Months Ended			Effect of the Adoption of					Three Months Ended
	October 2, 2016			ASC			ASU		October 2, 2016
(Dollars in millions, except per-share amounts)	As Reported			Topic 606			2015-17		As Adjusted
Revenue:
Products	$	4,844		$	(95	)	$	—	$	4,749
Services	2,887			21			—		2,908
	7,731			(74		)	—		7,657
Operating costs and expenses:
Products	3,757			(7		)	—		3,750
Services	2,434			(13		)	—		2,421
G&A	471			—			—		471
	6,662			(20		)	—		6,642
Operating earnings	1,069			(54		)	—		1,015
Interest, net	(23		)	—			—		(23		)
Other, net	2			—			—		2
Earnings from continuing operations before income tax	1,048			(54		)	—		994
Provision for income tax, net	281			(18		)	—		263
Earnings from continuing operations	767			(36		)	—		731
Discontinued operations, net of tax benefit of $46	(84		)	—			—		(84		)
Net earnings	$	683		$	(36	)	$	—	$	647

Earnings per share
Basic:
Continuing operations	$	2.52		$	(0.12	)	$	—	$	2.40
Discontinued operations	(0.27		)	—			—		(0.27		)
Net earnings	$	2.25		$	(0.12	)	$	—	$	2.13
Diluted:
Continuing operations	$	2.48		$	(0.12	)	$	—	$	2.36
Discontinued operations	(0.27		)	—			—		(0.27		)
Net earnings	$	2.21		$	(0.12	)	$	—	$	2.09