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 ~~July 1, 2018~~March 31, 2019

[ ] 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ü No ___

Indicate by check mark 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

~~296,281,432~~288,871,990 shares of the registrant’s common stock, $1 par value per share, were outstanding on ~~July 1, 2018.~~March 31, 2019.

INDEX




PART I -	FINANCIAL INFORMATION	PAGE
Item 1 -	Unaudited Consolidated Financial Statements
	Consolidated Statement of Earnings ~~(Three Months)~~	3
	Consolidated Statement of ~~Earnings (Six Months)~~Comprehensive Income	4
	~~Consolidated Statement of Comprehensive Income (Three and Six Months)~~	5
	Consolidated Balance Sheet	65
	Consolidated Statement of Cash Flows	76
	Consolidated 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	3832
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	5344
Item 4 -	Controls and Procedures	5344
	FORWARD-LOOKING STATEMENTS	5344
PART II -	OTHER INFORMATION	5445
Item 1 -	Legal Proceedings	5445
Item 1A -	Risk Factors	5445
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	5446
Item 6 -	Exhibits	5446
	SIGNATURES	5647

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

Three Months Ended
(Dollars in millions, except per-share amounts) July 1, 2018 July 2, 2017
Revenue:
Products $ 4,754
$ 4,666
Services 4,432
3,009
9,186
7,675
Operating costs and expenses:
Products (3,702 ) (3,597 )
Services (3,807 ) (2,517 )
General and administrative (G&A) (589 ) (494 )
(8,098 ) (6,608 )
Operating earnings 1,088
1,067
Interest, net (103 ) (24 )
Other, net (15 ) (11 )
Earnings before income tax 970
1,032
Provision for income tax, net (184 ) (283 )
Net earnings $ 786
$ 749

Earnings per share
Basic $ 2.65
$ 2.50
Diluted $ 2.62
$ 2.45

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

~~CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)~~


	Six Months Ended						Three Months Ended
(Dollars in millions, except per-share amounts)	July 1, 2018			July 2, 2017			March 31, 2019			April 1, 2018
Revenue:
Products	$	9,330		$	9,133		$	5,251		$	4,576
Services	7,391			5,983			4,010			2,959
	16,721			15,116			9,261			7,535
Operating costs and expenses:
Products	(7,248		)	(7,035		)	(4,235		)	(3,546		)
Services	(6,251		)	(5,002		)	(3,398		)	(2,444		)
G&A	(1,126		)	(966		)
General and administrative (G&A)							(614		)	(537		)
	(14,625		)	(13,003		)	(8,247		)	(6,527		)
Operating earnings	2,096			2,113			1,014			1,008
Interest, net	(130		)	(49		)	(117		)	(27		)
Other, net	(36		)	(22		)	18			(21		)
Earnings before income tax	1,930			2,042			915			960
Provision for income tax, net	(345		)	(530		)	(170		)	(161		)
Net earnings	$	1,585		$	1,512		$	745		$	799

Earnings per share
Basic	$	5.35		$	5.03		$	2.59		$	2.70
Diluted	$	5.27		$	4.94		$	2.56		$	2.65

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended						Six Months Ended						Three Months Ended
(Dollars in millions)	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			March 31, 2019			April 1, 2018
Net earnings	$	786		$	749		$	1,585		$	1,512		$	745		$	799
(Losses) gains on cash flow hedges	(18		)	135			(21		)	148
Unrealized gains on marketable securities	—			2			—			7
Gains (losses) on cash flow hedges													17			(3		)
Foreign currency translation adjustments	(216		)	199			(215		)	281			31			1
Change in retirement plans’ funded status	79			63			163			132			63			84
Other comprehensive (loss) income, pretax	(155		)	399			(73		)	568
Other comprehensive income, pretax													111			82
Provision for income tax, net	(12		)	(59		)	(27		)	(103		)	(16		)	(15		)
Other comprehensive (loss) income, net of tax	(167		)	340			(100		)	465
Other comprehensive income, net of tax													95			67
Comprehensive income	$	619		$	1,089		$	1,485		$	1,977		$	840		$	866

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

CONSOLIDATED BALANCE SHEET


	(Unaudited)						(Unaudited)
(Dollars in millions)	July 1, 2018			December 31, 2017			March 31, 2019			December 31, 2018

ASSETS
Current assets:
Cash and equivalents	$	1,862		$	2,983		$	673		$	963
Accounts receivable	3,874			3,617			3,718			3,759
Unbilled receivables	7,125			5,240			7,367			6,576
Inventories	5,890			5,303			6,185			5,977
Other current assets	1,076			1,185			924			914
Total current assets	19,827			18,328			18,867			18,189
Noncurrent assets:
Property, plant and equipment, net	4,179			3,517			4,054			3,978
Intangible assets, net	2,738			702			2,518			2,585
Goodwill	19,738			11,914			19,668			19,594
Other assets	670			585			2,359			1,062
Total noncurrent assets	27,325			16,718			28,599			27,219
Total assets	$	47,152		$	35,046		$	47,466		$	45,408

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	2,881		$	2		$	2,097		$	973
Accounts payable	3,032			3,207			3,008			3,179
Customer advances and deposits	7,219			6,992			6,695			7,270
Other current liabilities	3,441			2,898			3,582			3,317
Total current liabilities	16,573			13,099			15,382			14,739
Noncurrent liabilities:
Long-term debt	11,397			3,980			11,451			11,444
Other liabilities	7,188			6,532			8,399			7,493
Commitments and contingencies (see Note M)
Total noncurrent liabilities	18,585			10,512			19,850			18,937
Shareholders’ equity:
Common stock	482			482			482			482
Surplus	2,865			2,872			2,937			2,946
Retained earnings	28,115			26,444			29,781			29,326
Treasury stock	(15,910		)	(15,543		)	(17,283		)	(17,244		)
Accumulated other comprehensive loss	(3,558		)	(2,820		)	(3,683		)	(3,778		)
Total shareholders’ equity	11,994			11,435			12,234			11,732
Total liabilities and shareholders’ equity	$	47,152		$	35,046		$	47,466		$	45,408

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	Six Months Ended						Three Months Ended
(Dollars in millions)	July 1, 2018			July 2, 2017			March 31, 2019			April 1, 2018
Cash flows from operating activities - continuing operations:
Net earnings	$	1,585		$	1,512		$	745		$	799
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation of property, plant and equipment	223			182			114			89
Amortization of intangible assets	104			38
Amortization of intangible and finance lease right-of-use assets							91			20
Equity-based compensation expense	71			52			40			29
Deferred income tax provision	(6		)	93			(10		)	4
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	344			(291		)	49			(150		)
Unbilled receivables	(1,030		)	(815		)	(873		)	(608		)
Inventories	(542		)	(14		)	(210		)	(236		)
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	(324		)	82			(167		)	(358		)
Customer advances and deposits	(159		)	(29		)	(623		)	(149		)
Other, net	25			200			49			64
Net cash provided by operating activities	291			1,010
Net cash used by operating activities							(795		)	(496		)
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(10,039		)	(89		)
Capital expenditures	(279		)	(153		)	(181		)	(104		)
Other, net	74			47			(6		)	(1		)
Net cash used by investing activities	(10,244		)	(195		)	(187		)	(105		)
Cash flows from financing activities:
Proceeds from fixed-rate notes	6,461			—
Proceeds from commercial paper, net	2,786			(1		)	1,010			2,494
Proceeds from floating-rate notes	1,000			—
Dividends paid	(526		)	(483		)	(268		)	(250		)
Repayment of CSRA accounts receivable purchase agreement	(450		)	—
Purchases of common stock	(436		)	(901		)	(133		)	(267		)
Other, net	3			109			88			(25		)
Net cash provided (used) by financing activities	8,838			(1,276		)
Net cash provided by financing activities							697			1,952
Net cash used by discontinued operations	(6		)	(17		)	(5		)	(2		)
Net decrease in cash and equivalents	(1,121		)	(478		)
Net (decrease) increase in cash and equivalents							(290		)	1,349
Cash and equivalents at beginning of period	2,983			2,334			963			2,983
Cash and equivalents at end of period	$	1,862		$	1,856		$	673		$	4,332
Supplemental cash flow information:
Income tax payments, net	$	155		$	328
Income tax (payments) refunds, net							$	(37	)	$	4
Interest payments	$	95		$	46		$	(48	)	$	(21	)

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

CONSOLIDATED 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, 2017	$	482	$	2,872		$	26,444		$	(15,543	)	$	(2,820	)	$	11,435
Cumulative-effect adjustments (see Note A)	—		—			638			—			(638		)	—
December 31, 2018																		$	482	$	2,946		$	29,326		$	(17,244	)	$	(3,778	)	$	11,732
Net earnings	—		—			1,585			—			—			1,585			—		—			745			—			—			745
Cash dividends declared	—		—			(552		)	—			—			(552		)	—		—			(290		)	—			—			(290		)
Equity-based awards	—		(7		)	—			69			—			62			—		(9		)	—			47			—			38
Shares purchased	—		—			—			(436		)	—			(436		)	—		—			—			(86		)	—			(86		)
Other comprehensive loss	—		—			—			—			(100		)	(100		)
July 1, 2018	$	482	$	2,865		$	28,115		$	(15,910	)	$	(3,558	)	$	11,994
Other comprehensive income																		—		—			—			—			95			95
March 31, 2019																		$	482	$	2,937		$	29,781		$	(17,283	)	$	(3,683	)	$	12,234

December 31, 2016	$	482	$	2,819		$	24,543		$	(14,156	)	$	(3,387	)	$	10,301
December 31, 2017																		$	482	$	2,872		$	26,444		$	(15,543	)	$	(2,820	)	$	11,435
Cumulative-effect adjustment*	—		—			(3		)	—			—			(3		)	—		—			638			—			(638		)	—
Net earnings	—		—			1,512			—			—			1,512			—		—			799			—			—			799
Cash dividends declared	—		—			(506		)	—			—			(506		)	—		—			(276		)	—			—			(276		)
Equity-based awards	—		(23		)	—			99			—			76			—		(52		)	—			58			—			6
Shares purchased	—		—			—			(893		)	—			(893		)	—		—			—			(257		)	—			(257		)
Other comprehensive income	—		—			—			—			465			465			—		—			—			—			67			67
July 2, 2017	$	482	$	2,796		$	25,546		$	(14,950	)	$	(2,922	)	$	10,952
April 1, 2018																		$	482	$	2,820		$	27,605		$	(15,742	)	$	(3,391	)	$	11,774

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,~~2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2018-02, Income ~~Taxes~~Statement - Reporting Comprehensive Income (Topic ~~740)~~220): ~~Intra-Entity Transfers~~Reclassification of ~~Assets~~Certain Tax Effects from Accumulated Other ~~Than Inventory,~~Comprehensive Income, which we adopted on January 1, ~~2017.~~2018.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

~~Organization.~~ General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; information technology (IT) services; C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions; and shipbuilding and ship repair.

On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA). See Note B for further discussion of the acquisition. For segment reporting purposes, concurrent with the acquisition, our Information Systems and Technology operating segment was reorganized into the Information Technology and Mission Systems segments. Our company now has five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We collectively refer to Combat Systems, Information Technology, Mission Systems and Marine Systems as our defense segments. Prior-period segment information has been restated for this change.

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 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 six-month periods~~three-month period ended ~~July 1, 2018,~~March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019.

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 six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, ~~2018, and July 2, 2017.~~2018.

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, ~~2017.~~

2018.

Accounting Standards Updates. OnEffective January 1, ~~2018,~~2019, we adopted Accounting Standards Codification (ASC) Topic 842, Leases. ASC Topic 842 requires the ~~following accounting standards issued by~~recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. As we elected the cumulative-effect adoption method, prior-period information has not been restated.

The standard provided several optional practical expedients for use in transition. We elected to use what the Financial Accounting Standards Board (FASB): has deemed the “package of practical expedients,” which allowed us not to reassess our previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. We did not elect the practical expedient pertaining to the use of hindsight.

~~ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement~~The most significant effects 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 adopted the standard on ~~a modified retrospective basis~~our Consolidated Financial Statements are (1) the recognition of new right-of-use assets and lease liabilities on our Consolidated Balance Sheet for our operating leases, and (2) significant new disclosures about our leasing activities (see Note N). On January 1, ~~2018,~~2019, we recognized operating lease liabilities and ~~recognized~~right-of-use assets of $1.4 billion based on the ~~cumulative effect as~~present

value of the remaining lease payments over the lease term. The adoption did not result in a ~~$24 increase~~cumulative-effect adjustment to retained ~~earnings on the date of adoption.~~

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. We adopted theearnings. The new standard ~~retrospectively on January 1, 2018. The adoption of the ASU~~ did not have ~~an effect~~a material impact on our results of operations or cash ~~flows for the six-month period ended July 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 Consolidated Statement of Earnings. We adopted the standard retrospectively on January 1, 2018. Our restated operating earnings increased $11 and $22 for the three- and six-month periods ended July 2, 2017, respectively, due to the reclassification of the non-service cost components of net benefit cost, and other income decreased by the same amount, with no impact to net earnings.

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act (tax reform) enacted on December 22, 2017. We adopted the standard on January 1, 2018, and recognized a $614 increase to retained earnings on the date of adoption.flows.

For a discussion of other accounting standards that have been issued by the FASB but are not yet effective, refer to the Accounting Standards Updates section in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. These standards are not expected to have a material impact on our results of operations or cash flows.

B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS

CSRA Acquisition

On April 3, 2018, we acquired 100% of the outstanding shares of CSRA Inc. (CSRA) for $41.25 per share in ~~cash.~~cash plus the assumption of outstanding net debt. CSRA ~~has been combined with General Dynamics Information Technology (GDIT) to create~~is a ~~premier~~ provider of IT solutions to the defense, intelligence and federal civilian ~~markets. Except where otherwise noted~~markets and is included in ~~the Notes to Unaudited Consolidated Financial Statements, changes in balances and activity were generally driven by the CSRA acquisition.~~

our Information Technology segment.

Purchase Price and Fair Value of Net Assets Acquired. The cash purchase price totaled $9.7 billion and consisted of the following:



CSRA shares outstanding (in millions)	165.4
Cash consideration per CSRA share	$	41.25
Cash paid to purchase outstanding CSRA shares	$	6,825
Cash paid to extinguish CSRA debt	2,846
Cash settlement of outstanding CSRA stock options and restricted stock units	78
Total purchase price	$	9,749

The following table summarizes the ~~preliminary~~ allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the acquisition date, with the excess recorded as goodwill:


Cash and equivalents	$	45		$	45
Accounts receivable	156			155
Unbilled receivables	807			420
Other current assets	190			303
Property, plant and equipment, net	685			326
Intangible assets, net	2,069			2,066
Goodwill	7,807			7,931
Other noncurrent assets	19			369
Total assets	$	11,778		$	11,615
Account payable	$	(135	)	$	(135	)
Customer advances and deposits	(151		)	(151		)
Current capital lease obligation	(51		)
Current lease obligation				(51		)
Other current liabilities	(542		)	(434		)
Noncurrent capital lease obligation	(207		)
Noncurrent lease obligation				(207		)
Noncurrent deferred tax liability	(421		)	(356		)
Other noncurrent liabilities	(522		)	(532		)
Total liabilities	$	(2,029	)	$	(1,866	)
Net assets acquired	$	9,749		$	9,749

During the quarter, we obtained additional information that resulted in adjustments to the estimated fair values that were not material.

We are in the process of valuing the net tangible and intangible assets acquired and liabilities assumed, and our estimate of these values were still preliminary on July 1, 2018. Therefore, these provisional amounts are subject to change as we complete the valuations throughout the measurement period, which will extend throughout 2018.

~~The~~have valued $2.1 billion of ~~estimated~~ acquired intangible assets, which consists of acquired backlog and probable follow-on work and associated customer relationships (contract and program intangible assets), with a weighted-average life of 17 years. The intangible assets ~~will be~~are being amortized using an accelerated method, which approximates the pattern of how the economic benefit is expected to be used. Under this method, approximately 50% of the aggregate value of the intangible assets will be amortized within six ~~years. We expect to record amortization expense associated with these intangible assets over~~years of the ~~next five years as follows:~~

2018 (9 months post-acquisition) $ 188
2019 204
2020 195
2021 154
2022 136
acquisition date.

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of CSRA. Approximately $490 of this goodwill is ~~considered pre-acquisition goodwill and is, therefore,~~ deductible for income tax purposes over its remaining tax life.

CSRA’s operating results have been included with our reported results since the acquisition date. Excluding the amortization of intangible assets and acquisition financing, $1.3 billion of revenue, $134 of operating earnings and $147 of pretax earnings from CSRA were included in our unaudited Consolidated Statement of Earnings for the three- and six-month periods ended July 1, 2018. In connection with the acquisition, we have recognized approximately $75 of one-time, acquisition-related costs, reported in operating costs and expenses and other income (expense) in the unaudited Consolidated Statement of Earnings.

~~Pro Forma Information.~~ ~~The following pro forma information presents our consolidated revenue and net earnings as if the acquisition of CSRA and the related financing transactions had occurred on January 1, 2017:~~

Three Months Ended Six Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
Revenue $ 9,186
$ 8,853
$ 18,023
$ 17,497
Net earnings 804
756
1,534
1,489
Diluted earnings per share $ 2.68
$ 2.48
$ 5.10
$ 4.86

The pro forma information was prepared by combining our reported historical results with the historical results of CSRA for the pre-acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:

~~The impact of acquisition financing.~~

The removal of certain CSRA operations we are required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. While the operation is classified as held for sale, it has not yet been sold as of July 1, 2018.

~~The removal of CSRA’s historical pre-acquisition intangible asset amortization expense and debt-related interest expense.~~

~~The impact of intangible asset amortization expense assuming our current estimate of fair value was applied on January 1, 2017.~~

~~The payment of acquisition-related costs assuming they were incurred on January 1, 2017.~~

The pro forma information is based on the preliminary amounts allocated to the estimated fair value of net assets acquired and may be revised as the provisional amounts change. The pro forma information does not reflect the realization of expected cost savings or synergies from the acquisition, and does not reflect what our combined results of operations would have been had the acquisition occurred on January 1, 2017.

Other Acquisitions and Divestitures

In the first three months of 2019, we completed the acquisition of a business in each of our Aerospace and Missions Systems segments. In 2018, we acquired five businesses in addition to the acquisition of CSRA ~~we acquired two businesses in the first six months of 2018~~ for ~~an aggregate of $335:~~approximately $400: Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, and two fixed-base operation (FBO) businesses in our Aerospace ~~segment,~~segment; a maintenance and service provider for the German Army and other international customers in our Combat Systems segment; and a provider of specialized transmitters and receivers in our Mission Systems segment. ~~In 2017, we acquired four businesses~~As the purchase prices of these acquisitions were not material for ~~an aggregate~~the three-month periods ended March 31, 2019, and April 1, 2018, they are included in other investing activities, net, in the unaudited Consolidated Statement of $399: a fixed-base operation (FBO) in our Aerospace segment; a provider of mission-critical support services in our Information Technology segment; and a manufacturer of electronics and communications products and a manufacturer of signal distribution products in our Mission Systems segment.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.

InWe did not have any divestitures in the first ~~six~~three months of 2019. In 2018, we completed the sale of a commercial health products business during the first quarter and the sale of a public-facing contact-center business during the fourth quarter in our Information Technology segment. ~~The~~As the proceeds from the sale of the commercial health products business were not material for the three-month period ended April 1, 2018, they 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 Information Technology Mission Systems Marine Systems
Total
Goodwill
December 31, 2017 (a) $ 2,638
$ 2,677
$ 6,302
$ —
$ —
$ 297
$ 11,914
Acquisitions/
divestitures (b) —
—
16
—
—
—
16
Other (c) 40
(14 ) (1 ) —
—
—
25
April 1, 2018 (a) 2,678
2,663
6,317
—
—
297
11,955
Change in reporting
unit composition (d)
—
—
(6,317 ) 2,076
4,241
—
—
Acquisitions/
divestitures (b)
149
—
—
7,752
1
—
7,902
Other (c) (71 ) (36 ) —
—
(12 ) —
(119 )
July 1, 2018 (e) $ 2,756
$ 2,627
$ —
$ 9,828
$ 4,230
$ 297
$ 19,738



	Aerospace			Combat Systems			Information Technology		Mission Systems		Marine Systems		Total Goodwill
December 31, 2018 (a)	$	2,813		$	2,633		$	9,622	$	4,229	$	297	$	19,594
Acquisitions (b)	3			(1		)	72		6		—		80
Other (c)	(20		)	9			1		4		—		(6		)
March 31, 2019 (a)	$	2,796		$	2,641		$	9,695	$	4,239	$	297	$	19,668

(a)~~Goodwill in the Information Systems and Technology reporting unit is net of $1.9 billion of accumulated impairment losses.~~

~~(b)~~Includes adjustments during the purchase price allocation period. Activity in the first quarter of 2018 also includes 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.~~

~~(d)~~Concurrent with the acquisition of CSRA, we reorganized our Information Systems and Technology operating segment into the Information Technology and Mission Systems segments. See Note A for further discussion of the segment reorganization. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization.

~~(e)~~Goodwill in the Information Technology and Mission Systems reporting units is net of ~~$632~~$536 and $1.3 billion of accumulated impairment losses, respectively.

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

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

Intangible Assets

Intangible assets consisted of the following:


	Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount
	July 1, 2018							December 31, 2017							March 31, 2019							December 31, 2018
Contract and program intangible assets (b)	$	3,793	$	(1,394	)	$	2,399	$	1,684	$	(1,320	)	$	364	$	3,771	$	(1,589	)	$	2,182	$	3,771	$	(1,531	)	$	2,240
Trade names and trademarks	458		(166		)	292		465		(160		)	305		463		(180		)	283		469		(177		)	292
Technology and software	158		(112		)	46		137		(105		)	32		171		(120		)	51		165		(116		)	49
Other intangible assets	155		(154		)	1		155		(154		)	1		159		(157		)	2		159		(155		)	4
Total intangible assets	$	4,564	$	(1,826	)	$	2,738	$	2,441	$	(1,739	)	$	702	$	4,564	$	(2,046	)	$	2,518	$	4,564	$	(1,979	)	$	2,585


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


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

Amortization expense for intangible assets was ~~$84~~$70 and ~~$104~~$20 for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, ~~2018, and $19 and $38 for the three- and six-month periods ended July 2, 2017.~~2018.

C. REVENUE

The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation within that contract and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

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

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for ~~78%~~75% and ~~75%~~73% of our revenue for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and 71% and 70% of our revenue for the three- and six-month periods ended July 2, 2017,~~ respectively. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a point in time accounted for ~~22%~~25% and ~~25%~~27% of our revenue for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and 29% and 30% of our revenue for the three- and six-month periods ended July 2, 2017,~~ respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On ~~July 1, 2018,~~March 31, 2019, we had ~~$66.3~~$69.2 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately ~~60%~~65% of our remaining performance obligations as revenue by year-end ~~2019,~~2020, an additional 25% by year-end ~~2021~~2022 and the balance thereafter. On December 31, ~~2017,~~2018, we had ~~$63.2~~$67.9 billion of remaining performance obligations, ~~and on December 31, 2017,~~at which time we expected to recognize approximately ~~40%~~45% of these remaining performance obligations as revenue in ~~2018,~~2019, an additional ~~40%~~35% by year-end ~~2020~~2021 and the balance thereafter.

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

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

The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

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

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



Three Months Ended	March 31, 2019		April 1, 2018
Revenue	$	96	$	115
Operating earnings	68		97
Diluted earnings per share	$	0.18	$	0.25

Three Months Ended Six Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
Revenue $ 91
$ 90
$ 206
$ 162
Operating earnings 83
121
180
171
Diluted earnings per share $ 0.22
$ 0.26
$ 0.47
$ 0.36

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, or April 1, ~~2018, or July 2, 2017.~~2018.

Revenue by Category. Our portfolio of products and services consists of ~~over 10,000~~approximately 11,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

Revenue by major products and services was as follows:


	Three Months Ended				Six Months Ended
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Three Months Ended									March 31, 2019		April 1, 2018
Aircraft manufacturing and completions	$	1,362	$	1,600	$	2,728	$	3,229	$	1,691	$	1,366
Aircraft services	531		445		982		880		507		451
Pre-owned aircraft	2		33		10		43		42		8
Total Aerospace	1,895		2,078		3,720		4,152		2,240		1,825
Wheeled combat and tactical vehicles	644		566		1,269		1,126
Military vehicles									1,134		956
Weapons systems, armament and munitions	443		409		826		755		401		383
Tanks and tracked vehicles	346		278		677		525
Engineering and other services	101		161		202		295		101		101
Total Combat Systems	1,534		1,414		2,974		2,701		1,636		1,440
Information technology services	2,442		1,052		3,580		2,110		2,169		1,138
Total Information Technology	2,442		1,052		3,580		2,110		2,169		1,138
Platform systems and sensors	383		393		774		783
Intelligence, surveillance and reconnaissance systems	372		333		749		662
Communication systems	392		326		722		695
C4ISR* solutions									1,158		1,098
Total Mission Systems	1,147		1,052		2,245		2,140		1,158		1,098
Nuclear-powered submarines	1,438		1,342		2,734		2,546		1,377		1,296
Surface combatants	276		254		541		501
Auxiliary and commercial ships	197		155		415		298
Surface ships									446		483
Repair and other services	257		328		512		668		235		255
Total Marine Systems	2,168		2,079		4,202		4,013		2,058		2,034
Total revenue	$	9,186	$	7,675	$	16,721	$	15,116	$	9,261	$	7,535

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

Revenue by contract type was as follows:


Three Months Ended July 1, 2018	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Three Months Ended March 31, 2019													Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	1,696	$	1,330	$	1,059	$	658	$	1,372	$	6,115	$	2,040	$	1,416	$	921	$	651	$	1,416	$	6,444
Cost-reimbursement	—		197		930		451		795		2,373		—		211		841		463		640		2,155
Time-and-materials	199		7		453		38		1		698		200		9		407		44		2		662
Total revenue	$	1,895	$	1,534	$	2,442	$	1,147	$	2,168	$	9,186	2,240		1,636		2,169		1,158		2,058		9,261
Three Months Ended July 2, 2017
Three Months Ended April 1, 2018
Fixed-price	$	1,913	$	1,207	$	339	$	553	$	1,253	$	5,265	$	1,668	$	1,253	$	387	$	620	$	1,305	$	5,233
Cost-reimbursement	—		196		555		463		824		2,038		—		179		577		440		728		1,924
Time-and-materials	165		11		158		36		2		372		157		8		174		38		1		378
Total revenue	$	2,078	$	1,414	$	1,052	$	1,052	$	2,079	$	7,675	1,825		1,440		1,138		1,098		2,034		7,535

Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined

Six Months Ended July 1, 2018 Aerospace Combat Systems Information Technology Mission Systems Marine Systems
Total
Revenue
Fixed-price $ 3,364
$ 2,583
$ 1,446
$ 1,278
$ 2,677
$ 11,348
Cost-reimbursement —
376
1,507
891
1,523
4,297
Time-and-materials 356
15
627
76
2
1,076
Total revenue $ 3,720
$ 2,974
$ 3,580
$ 2,245
$ 4,202
$ 16,721
Six Months Ended July 2, 2017
Fixed-price $ 3,815
$ 2,280
$ 690
$ 1,132
$ 2,383
$ 10,300
Cost-reimbursement —
403
1,108
920
1,625
4,056
Time-and-materials 337
18
312
88
5
760
Total revenue $ 4,152
$ 2,701
$ 2,110
$ 2,140
$ 4,013
$ 15,116

by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.

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

Revenue by customer was as follows:

Three Months Ended July 1, 2018 Aerospace Combat Systems Information Technology Mission Systems Marine Systems
Total
Revenue
U.S. government:
Department of Defense (DoD) $ 89
$ 660
$ 1,052
$ 764
$ 2,032
$ 4,597
Non-DoD —
3
1,311
130
1
1,445
Foreign Military Sales (FMS) 19
83
7
14
39
162
Total U.S. government 108
746
2,370
908
2,072
6,204
U.S. commercial 917
58
41
36
91
1,143
Non-U.S. government 143
712
31
161
4
1,051
Non-U.S. commercial 727
18
—
42
1
788
Total revenue $ 1,895
$ 1,534
$ 2,442
$ 1,147
$ 2,168
$ 9,186
Three Months Ended July 2, 2017
U.S. government:
DoD $ 32
$ 660
$ 424
$ 678
$ 2,016
$ 3,810
Non-DoD —
1
551
147
—
699
FMS 9
83
6
15
40
153
Total U.S. government 41
744
981
840
2,056
4,662
U.S. commercial 877
42
65
26
17
1,027
Non-U.S. government 64
594
6
154
4
822
Non-U.S. commercial 1,096
34
—
32
2
1,164
Total revenue $ 2,078
$ 1,414
$ 1,052
$ 1,052
$ 2,079
$ 7,675


Six Months Ended July 1, 2018	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Three Months Ended March 31, 2019													Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)													$	123	$	793	$	950	$	784	$	1,975	$	4,625
Non-DoD													—		3		1,166		135		—		1,304
Foreign Military Sales (FMS)													15		79		5		9		44		152
Total U.S. government													138		875		2,121		928		2,019		6,081
U.S. commercial													1,329		50		40		35		36		1,490
Non-U.S. government													59		701		8		166		2		936
Non-U.S. commercial													714		10		—		29		1		754
Total revenue													2,240		1,636		2,169		1,158		2,058		9,261
Three Months Ended April 1, 2018
U.S. government:
DoD	$	130	$	1,267	$	1,485	$	1,506	$	3,982	$	8,370	$	41	$	607	$	433	$	742	$	1,950	$	3,773
Non-DoD	—		4		1,948		248		1		2,201		—		1		637		118		—		756
FMS	35		152		15		21		68		291		16		69		8		7		29		129
Total U.S. government	165		1,423		3,448		1,775		4,051		10,862		57		677		1,078		867		1,979		4,658
U.S. commercial	1,759		116		81		63		144		2,163		842		58		40		27		53		1,020
Non-U.S. government	153		1,409		51		333		6		1,952		10		697		20		172		2		901
Non-U.S. commercial	1,643		26		—		74		1		1,744		916		8		—		32		—		956
Total revenue	$	3,720	$	2,974	$	3,580	$	2,245	$	4,202	$	16,721	$	1,825	$	1,440	$	1,138	$	1,098	$	2,034	$	7,535
Six Months Ended July 2, 2017
U.S. government:
DoD	$	72	$	1,269	$	845	$	1,399	$	3,853	$	7,438
Non-DoD	—		3		1,118		278		—		1,399
FMS	18		191		11		22		98		340
Total U.S. government	90		1,463		1,974		1,699		3,951		9,177
U.S. commercial	1,813		103		126		54		50		2,146
Non-U.S. government	69		1,096		10		329		8		1,512
Non-U.S. commercial	2,180		39		—		58		4		2,281
Total revenue	$	4,152	$	2,701	$	2,110	$	2,140	$	4,013	$	15,116

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the ~~six-month~~

three-month period ended ~~July 1, 2018,~~March 31, 2019, were not materially impacted by any other factors except for the ~~acquisition of CSRA~~delays in payment on an international wheeled armored vehicle contract in our Combat Systems segment as further ~~described~~discussed in Note B.G.

Revenue recognized for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and July 2, 2017,~~ that was included in the contract liability balance at the beginning of each year was ~~$1.1~~$1.7 billion and ~~$2.6 billion, and $1.2 billion and $2.9~~$1.5 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.

D. EARNINGS PER SHARE

We compute basic earnings per share (EPS) using net earnings for the period and the weighted average number of common shares outstanding during the period. Basic weighted average shares outstanding have decreased in ~~2018~~2019 and ~~2017~~2018 due to share repurchases. See Note K 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 Six Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
Basic weighted average shares
    outstanding
296,153
299,790
296,276
300,780
Dilutive effect of stock options and
    restricted stock/RSUs*
3,986
5,560
4,318
5,560
Diluted weighted average shares
    outstanding
300,139
305,350
300,594
306,340



Three Months Ended	March 31, 2019	April 1, 2018
Basic weighted average shares outstanding	287,917	296,399
Dilutive effect of stock options and restricted stock/RSUs*	2,974	4,705
Diluted weighted average shares outstanding	290,891	301,104

* 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 ~~3,511~~3,975 and ~~2,851~~517 for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and 1,846 and 1,251 for the three- and six-month periods ended July 2, 2017,~~ respectively.

E. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:

Level 1 - quoted prices in active markets for identical assets or liabilities;

Level 2 - inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly; and

Level 3 - unobservable inputs significant to the fair value measurement.

We did not have any significant non-financial assets or liabilities measured at fair value on ~~July 1, 2018,~~March 31, 2019, or December 31, ~~2017.~~2018.

Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable on the unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on ~~July 1, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, and the basis for determining their fair values:


	Carrying Value			Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		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)	July 1, 2018													March 31, 2019
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents	$	8		$	8		$	2	$	6		$	—	$	6		$	6		$	—	$	6		$	—
Available-for-sale debt securities	127			127			—		127			—		143			143			—		143			—
Equity securities	52			52			52		—			—		50			50			50		—			—
Other investments	4			4			—		—			4		4			4			—		—			4
Cash flow hedges	(151		)	(151		)	—		(151		)	—		(61		)	(61		)	—		(61		)	—
Measured at amortized cost:
Short- and long-term debt principal	(14,400		)	(14,194		)	—		(14,194		)	—		(13,646		)	(13,704		)	—		(13,704		)	—


	December 31, 2017													December 31, 2018
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents	$	20		$	20		$	15	$	5		$	—	$	29		$	29		$	23	$	6		$	—
Available-for-sale debt securities	117			117			—		117			—		121			121			—		121			—
Equity securities	54			54			54		—			—		52			52			52		—			—
Other investments	4			4			—		—			4		4			4			—		—			4
Cash flow hedges	(105		)	(105		)	—		(105		)	—		(69		)	(69		)	—		(69		)	—
Measured at amortized cost:
Short- and long-term debt principal	(4,032		)	(3,974		)	—		(3,974		)	—		(12,518		)	(12,346		)	—		(12,346		)	—

Our Level 1 assets include investments in publicly traded equity securities valued using quoted prices from the market exchanges. The fair value of our Level 2 assets and liabilities is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets include direct private equity investments that are measured using inputs unobservable to a marketplace participant.

F. INCOME TAXES

~~Income Tax Provision.~~ We calculate our provision for federal, state and international income taxes based on current tax law. U.S. federal tax reform was enacted on December 22, 2017, and has several key provisions impacting 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 Liability. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax liability consisted of the following:


	July 1, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Deferred tax asset	$	36		$	75		$	39		$	38
Deferred tax liability	(594		)	(244		)	(544		)	(577		)
Net deferred tax liability	$	(558	)	$	(169	)	$	(505	)	$	(539	)

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% 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 ~~July 1, 2018,~~March 31, 2019, 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.~~2017. We do not expect the resolution of tax matters for open years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.

Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on ~~July 1, 2018,~~March 31, 2019, 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. 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.~~terms. Unbilled receivables consisted of the following:


	July 1, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Unbilled revenue	$	24,610		$	21,845		$	30,497		$	27,908
Advances and progress billings	(17,485		)	(16,605		)	(23,130		)	(21,332		)
Net unbilled receivables	$	7,125		$	5,240		$	7,367		$	6,576

~~Excluding the acquisition of CSRA, the~~The increase in net unbilled receivables during the ~~six-month~~three-month period ended ~~July 1, 2018,~~March 31, 2019, was due primarily to ~~the timing of billings on large~~an international wheeled armored vehicle ~~contracts~~contract in our Combat Systems segment. At March 31, 2019 the net unbilled receivable related to this contract was $2.2 billion. Our contract is with the Canadian government, who is selling the vehicles to an international customer. We have experienced delays in payment under the contract. We continue to meet our obligations under the contract and are entitled to payment for work performed. Therefore, we expect to collect the full amount currently outstanding.

H. INVENTORIES

The majority of our inventories are for business-jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and 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:


	July 1, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Work in process	$	4,385	$	3,872	$	4,510	$	4,357
Raw materials	1,381		1,357		1,535		1,504
Finished goods	49		51		45		33
Pre-owned aircraft	75		23		95		83
Total inventories	$	5,890	$	5,303	$	6,185	$	5,977

The increase in total inventories during the ~~six-month~~three-month period ended ~~July 1, 2018,~~March 31, 2019, was due primarily to the ramp-up in production of the new ~~G500 and~~ G600 aircraft ~~programs~~ in our Aerospace ~~segment.~~segment, for which we are anticipating FAA type certification and entry into service in 2019.

I. DEBT

Debt consisted of the following:

July 1, 2018 December 31, 2017
Fixed-rate notes due: Interest rate:
May 2020 2.875% $ 2,000
$ —
May 2021 3.000% 2,000
—
July 2021 3.875% 500
500
November 2022 2.250% 1,000
1,000
May 2023 3.375% 750
—
August 2023 1.875% 500
500
November 2024 2.375% 500
500
May 2025 3.500% 750
—
August 2026 2.125% 500
500
November 2027 2.625% 500
500
May 2028 3.750% 1,000
—
November 2042 3.600% 500
500
Floating-rate notes due:
May 2020 3-month LIBOR + 0.29% 500
—
May 2021 3-month LIBOR + 0.38% 500
—
Commercial paper 2.137% 2,796
—
Other Various 104
32
Total debt principal 14,400
4,032
Less unamortized debt issuance costs
and discounts
122
50
Total debt 14,278
3,982
Less current portion 2,881
2
Long-term debt $ 11,397
$ 3,980

In April 2018, we borrowed $7.5 billion under a short-term credit facility to finance, in part, the acquisition of CSRA. In May 2018, we issued $7.5 billion of fixed- and floating-rate notes to repay the borrowings under this facility. W~~e entered into interest rate swap contracts that exchange the floating interest rates on the $500 notes due in May 2020 and May 2021 for fixed rates. The result of the interest rate swap~~

contracts is effective interest rates on the floating-rate notes that are the same as the rates on the fixed-rate notes due in May 2020 and May 2021. See Note L for further discussion of our derivative financial instruments.



		March 31, 2019		December 31, 2018
Fixed-rate notes due:	Interest rate:
May 2020	2.875%	$	2,000	$	2,000
May 2021	3.000%	2,000		2,000
July 2021	3.875%	500		500
November 2022	2.250%	1,000		1,000
May 2023	3.375%	750		750
August 2023	1.875%	500		500
November 2024	2.375%	500		500
May 2025	3.500%	750		750
August 2026	2.125%	500		500
November 2027	2.625%	500		500
May 2028	3.750%	1,000		1,000
November 2042	3.600%	500		500
Floating-rate notes due:
May 2020	3-month LIBOR + 0.29%	500		500
May 2021	3-month LIBOR + 0.38%	500		500
Commercial paper	2.516%	1,865		850
Other	Various	281		168
Total debt principal		13,646		12,518
Less unamortized debt issuance costs and discounts		98		101
Total debt		13,548		12,417
Less current portion		2,097		973
Long-term debt		$	11,451	$	11,444

Our fixed- and floating-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 fixed-rate notes prior to their maturity in whole or in part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.

~~The aggregate amounts of scheduled principal maturities of our debt in the remainder of 2018 and in subsequent years are as follows:~~

2018 $ 2,887
2019 2
2020 2,502
2021 3,002
2022 1,002
Thereafter 5,005
Total debt principal $ 14,400

On ~~July 1, 2018,~~March 31, 2019, we had ~~$2.8~~$1.9 billion of commercial paper outstanding with a dollar-weighted average interest rate of ~~2.137%~~2.516%. We have $5$5 billionin committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. These credit facilities include a$2 $2 billion364-day facility expiring in March ~~2019~~,2020, a $1 billion multi-year facility expiring in November 2020 and a $2 billion multi-year facility expiring in March ~~2023~~.2023. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on ~~July 1, 2018.~~March 31, 2019.

J. OTHER LIABILITIES

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


	July 1, 2018		December 31, 2017		March 31, 2019		December 31, 2018

Salaries and wages	$	892	$	786	$	811	$	952
Retirement benefits					267		272
Operating lease liabilities					255		—
Workers’ compensation	319		320		248		244
Retirement benefits	299		295
Fair value of cash flow hedges	221		180		102		141
Other (a)	1,710		1,317		1,899		1,708
Total other current liabilities	$	3,441	$	2,898	$	3,582	$	3,317

Retirement benefits	$	4,561	$	4,408	$	4,334	$	4,422
Operating lease liabilities					1,129		—
Customer deposits on commercial contracts	587		814		678		726
Deferred income taxes	594		244		544		577
Other (b)	1,446		1,066		1,714		1,768
Total other liabilities	$	7,188	$	6,532	$	8,399	$	7,493

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

(b)Consists primarily of ~~capital lease obligations,~~ warranty reserves, workers’ compensation liabilities, finance lease liabilities and liabilities of discontinued operations.

K. SHAREHOLDERS’ EQUITY

Share Repurchases. Our board of directors from time to time authorizes management’s repurchase of outstanding shares of our common stock on the open market. On ~~March 1, 2017,~~December 5, 2018, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the ~~six-month~~three-month period ended ~~July 1, 2018,~~March 31, 2019, we repurchased ~~2.1~~0.5 million of our outstanding shares for ~~$436.~~$86. On ~~July 1, 2018, 5.5~~March 31, 2019, 7 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased ~~4.6~~1.2 million shares for ~~$893~~$257 in the ~~six~~three-month period ended ~~July 2, 2017.~~April 1, 2018.

Dividends per Share. Our board of directors declared dividends of ~~$0.93~~$1.02 and ~~$1.86~~$0.93 per share for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019 and April 1, 2018, ~~and $0.84 and $1.68 per share for the three- and six-month periods ended July 2, 2017,~~ respectively. We paid cash dividends of ~~$276~~$268 and ~~$526~~$250 for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and $253 and $483 for the three- and six-month periods ended July 2, 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 Marketable Securities Foreign Currency Translation Adjustments Changes in Retirement Plans’ Funded Status AOCL
December 31, 2017 $ (94 ) $ 19
$ 402
$ (3,147 ) $ (2,820 )
Cumulative effect adjustments (see Note A) (4 ) (19 ) —
(615 ) (638 )
Other comprehensive income, pretax (21 ) —
(215 ) 163
(73 )
Provision for income tax, net 7
—
—
(34 ) (27 )
Other comprehensive loss, net of tax (14 ) —
(215 ) 129
(100 )
July 1, 2018 $ (112 ) $ —
$ 187
$ (3,633 ) $ (3,558 )



	Losses on Cash Flow Hedges			Unrealized Gains on Marketable Securities		Foreign Currency Translation Adjustments		Changes in Retirement Plans’ Funded Status			AOCL
December 31, 2018	$	(71	)	$	—	$	102	$	(3,809	)	$	(3,778	)
Other comprehensive income, pretax	17			—		31		63			111
Provision for income tax, net	(2		)	—		—		(14		)	(16		)
Other comprehensive income, net of tax	15			—		31		49			95
March 31, 2019	$	(56	)	$	—	$	133	$	(3,760	)	$	(3,683	)


December 31, 2016	$	(345	)	$	14		$	69		$	(3,125	)	$	(3,387	)
December 31, 2017																$	(94	)	$	19		$	402	$	(3,147	)	$	(2,820	)
Cumulative effect adjustments*																(4		)	(19		)	—		(615		)	(638		)
Other comprehensive income, pretax	148			7			281			132			568			(3		)	—			1		84			82
Provision for income tax, net	(39		)	(2		)	(15		)	(47		)	(103		)	1			—			—		(16		)	(15		)
Other comprehensive income, net of tax	109			5			266			85			465			(2		)	—			1		68			67
July 2, 2017	$	(236	)	$	19		$	335		$	(3,040	)	$	(2,922	)
April 1, 2018																$	(100	)	$	—		$	403	$	(3,694	)	$	(3,391	)

* Reflects the cumulative effect of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which we adopted on January 1, 2018.

Current-period amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and consisted of pretax recognized net actuarial losses of ~~$187~~$68 and ~~$170~~$95 for the ~~six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and July 2, 2017,~~ respectively. This was offset partially by pretax amortization of prior service credit of ~~$24~~$5 and ~~$35~~$12 for the ~~six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and July 2, 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. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivative financial instruments for trading or speculative purposes.

Foreign Currency Risk. Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale contracts, designed to offset and minimize our risk. The dollar-weighted two-year average maturity of these instruments generally matches the duration of the activities that are at risk.

Interest Rate Risk. Our financial instruments subject to interest rate risk include variable-rate commercial paper and ~~fixed-rate~~fixed- and floating-rate long-term debt obligations. ~~However, the risk associated with these instruments is not material. Our floating-rate long-term debt obligations are also subject to interest rate risk. However, as described in Note I, we~~We entered into derivative financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest risk. The interest rate risk associated with our financial instruments is not material.

Commodity Price Risk. We are subject to rising labor and commodity price risk, primarily on long-term, fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from these risks. Some of the protective terms included in our contracts are considered derivative financial instruments but are not accounted for separately, because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.

Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On ~~July 1, 2018,~~March 31, 2019, we held ~~$1.9 billion~~$673 in cash and equivalents, but held no marketable securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified supplemental executive retirement plans. On ~~July 1, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, these marketable securities totaled ~~$187~~$199 and ~~$191,~~$202, respectively, and were reflected at fair value on the unaudited Consolidated Balance Sheet in other current and noncurrent assets. See Note E for additional details.

Hedging Activities. We had ~~$6 billion in~~ notional forward exchange and interest rate swap contracts outstanding ~~on July 1, 2018,~~of $4.6 billion and ~~$4.3~~$5.8 billion on March 31, 2019, and December 31, ~~2017.~~2018, respectively. These derivative financial instruments are cash flow hedges, and are ~~reported~~reflected at fair value on the Consolidated Balance Sheet ~~at fair value.~~in other current assets and liabilities. See Note E for additional details.

Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in ~~other comprehensive loss (OCL)~~AOCL until the underlying transaction is reflected in earnings. ~~Gains~~Alternatively, gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in earnings. All gains and losses from derivative financial instruments recognized in the Consolidated Statement of Earnings are presented in the same line item as the underlying transaction, either operating costs and expenses or interest expense. ~~The~~

Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting generally offset losses and gains on the assets and liabilities being hedged. Gains and losses resulting from hedge ineffectiveness are recognized in the Consolidated Statement of Earnings for all derivative financial instruments, regardless of designation.

~~Net gains and losses on derivative financial instruments recognized in earnings, including gains and losses related to hedge ineffectiveness,~~ were not material to our results of operations for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, ~~2018, and July 2, 2017.~~2018. Net gains and losses reclassified to earnings from ~~OCL~~AOCL related to qualified hedges also were not material to our results of operations for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and

April 1, 2018, ~~and July 2, 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 ~~July 1, 2018,~~March 31, 2019, or December 31, ~~2017.~~2018.

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

We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations’ results into U.S. dollars. 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 six-month~~three-month periods ended ~~July~~March 31, 2019, or April 1, ~~2018, or July 2, 2017.~~2018. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the ~~six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, ~~2018, and July 2, 2017.~~

2018.

M. COMMITMENTS AND CONTINGENCIES

Litigation

In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter filed under seal in U.S. district court. 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 on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.

Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance carriers totaling approximately ~~$1.5~~$1.3 billion on ~~July 1, 2018.~~March 31, 2019. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance of our subsidiaries arising under certain contracts.

Aircraft Trade-ins. In connection with orders for new aircraft in contract backlog, our Aerospace segment has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are generally structured to establish the fair market value of the trade-in aircraft at a date generally 45 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. ~~Any~~Other trade-in commitments are structured to guarantee a pre-determined trade-in value. These commitments present more risk in the event of an adverse change in market conditions. In either case, any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction. As of March 31, 2019, the estimated change in fair market values from the date of the commitments was not material.

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 ~~six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and July 2, 2017,~~ were as follows:


Six Months Ended	July 1, 2018			July 2, 2017
Three Months Ended							March 31, 2019			April 1, 2018
Beginning balance	$	467		$	474		$	480		$	467
Warranty expense	60			71			27			29
Payments	(54		)	(52		)	(24		)	(25		)
Adjustments	(15		)	(28		)	(1		)	(3		)
Ending balance	$	458		$	465		$	482		$	468

N. LEASES

We determine at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of our leases include options to extend the term of the lease for up to 30 years or to terminate the lease within 1 year. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments. As most of our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate on the commencement date to calculate the present value of future payments.

Our leases commonly include payments that are based on the Consumer Price Index (CPI) or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability. Other variable lease payments, such as usage-based amounts, are excluded from the ROU asset and lease liability, and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease, such as commissions.

In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.

Our leases are for office space, manufacturing facilities, and machinery and equipment. Real estate represents over 75% of our lease obligations.

The components of lease costs were as follows:



Three Months Ended	March 31, 2019
Finance lease cost
Amortization of right-of-use assets	$	21
Interest on lease liabilities	7
Operating lease cost	86
Short-term lease cost	13
Sublease income	(4		)
Total lease costs, net	$	123

Additional information related to leases was as follows:



Three Months Ended	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	88
Operating cash flows from finance leases	7
Financing cash flows from finance leases	16
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	40
Finance leases	6
Weighted-average remaining lease term
Operating leases	11.0 years
Finance leases	5.6 years
Weighted-average discount rate
Operating leases	4		%
Finance leases	9		%

The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on our Consolidated Balance Sheet on March 31, 2019:



Year Ended December 31	Operating Leases		Finance Leases
2019 (excluding the three months ended March 31, 2019)	$	233	$	67
2020	253		81
2021	208		74
2022	161		74
2023	122		29
Thereafter	722		66
Total future lease payments	1,699		391
Less imputed interest	315		81
Present value of future lease payments	1,384		310
Less current portion of lease liabilities	255		66
Long-term lease liabilities	$	1,129	$	244
ROU assets	$	1,315	$	357

Lease liabilities are included on our Consolidated Balance Sheet in current and noncurrent other liabilities, while ROU assets are included in noncurrent other assets.

As of March 31, 2019, we have additional future payments on leases that have not yet commenced of $218. These leases will commence between 2019 and 2020 and have lease terms of 1 to 20 years.

As we have not restated prior-year information for our adoption of ASC Topic 842, the following presents our future minimum lease payments for operating leases and capital leases under ASC Topic 840 on December 31, 2018:



Year Ended December 31	Operating Leases		Capital Leases
2019	$	297	$	92
2020	234		84
2021	196		78
2022	154		79
2023	110		30
Thereafter	698		70
Total future minimum lease payments	$	1,689	433
Less amount representing interest	*		95
Less amount representing executory costs	*		19
Present value of net minimum lease payments	*		319
Less current maturities of capital lease liabilities	*		64
Noncurrent capital lease liabilities	*		$	255

* Not applicable for operating leases.

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 (credit) for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and July 2, 2017,~~ consisted of the following:


	Pension Benefits						Other Post-retirement Benefits						Pension Benefits						Other Post-retirement Benefits
Three Months Ended	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			March 31, 2019			April 1, 2018			March 31, 2019			April 1, 2018
Service cost	$	44		$	42		$	2		$	3		$	28		$	46		$	2		$	3
Interest cost	140			113			8			9			150			114			9			8
Expected return on plan assets	(228		)	(170		)	(10		)	(9		)	(228		)	(179		)	(9		)	(9		)
Recognized net actuarial loss (gain)	93			86			(1		)	(1		)	70			96			(2		)	(1		)
Amortization of prior service credit	(11		)	(16		)	(1		)	(1		)	(4		)	(11		)	(1		)	(1		)
Net periodic benefit cost (credit)	$	38		$	55		$	(2	)	$	1		$	16		$	66		$	(1	)	$	—
Six Months Ended
Service cost	$	90		$	84		$	5		$	6
Interest cost	254			226			16			17
Expected return on plan assets	(407		)	(339		)	(19		)	(17		)
Recognized net actuarial loss (gain)	189			172			(2		)	(2		)
Amortization of prior service credit	(22		)	(33		)	(2		)	(2		)
Net periodic benefit cost (credit)	$	104		$	110		$	(2	)	$	2

~~As discussed~~Beginning in ~~Note A,~~2019, we decreased the ~~service cost component~~expected long-term rates of ~~net periodic~~return on assets in our primary U.S. other post-retirement benefit ~~cost (credit) is reported separately from~~plans by 100 basis points, following an assessment of the ~~other components~~historical and expected long-term returns of ~~net periodic benefit cost (credit) in accordance with ASU 2017-07.~~our various asset classes.

Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense segments. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and other post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent we consider recovery of the cost ~~is considered~~to be probable based on our backlog and probable follow-on contracts,

we defer the excess in other contract costs in other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have similarly deferred recognition of these excess earnings on the Consolidated Balance Sheet.

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, in the first quarter of 2018, we announced our intent to make additional discretionary contributions, resulting in total pension plan contributions of approximately $570 in 2018. The additional contributions were considered significant events in accordance with ASC Topic 715 and, therefore, triggered a remeasurement of the 2018 net periodic defined-benefit pension cost. The remeasured defined-benefit pension cost amount is reflected in the table above. Additionally, the net periodic defined-benefit pension and OPEB cost (credit) amounts in the table above reflect the inclusion of legacy CSRA plans assumed in connection with the acquisition as of the acquisition date.

O.P. SEGMENT INFORMATION

We have five operating segments, Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We organize our segments in accordance with the nature of products and services offered. We measure each segment’s profitability based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our segments.

Summary financial information for each of our segments follows:


	Revenue				Operating Earnings					Revenue from U.S. Government				Revenue				Operating Earnings
Three Months Ended	July 1, 2018		July 2, 2017		July 1, 2018			July 2, 2017		July 1, 2018		July 2, 2017		March 31, 2019		April 1, 2018		March 31, 2019			April 1, 2018
Aerospace	$	1,895	$	2,078	$	386		$	421	$	108	$	41	$	2,240	$	1,825	$	328		$	346
Combat Systems	1,534		1,414		236			225		746		744		1,636		1,440		206			224
Information Technology	2,442		1,052		156			87		2,370		981		2,169		1,138		156			101
Mission Systems	1,147		1,052		153			153		908		840		1,158		1,098		148			146
Marine Systems	2,168		2,079		195			178		2,072		2,056		2,058		2,034		180			184
Corporate	—		—		(38		)	3		—		—		—		—		(4		)	7
Total	$	9,186	$	7,675	$	1,088		$	1,067	$	6,204	$	4,662	$	9,261	$	7,535	$	1,014		$	1,008
Six Months Ended
Aerospace	$	3,720	$	4,152	$	732		$	860	$	165	$	90
Combat Systems	2,974		2,701		460			430		1,423		1,463
Information Technology	3,580		2,110		257			177		3,448		1,974
Mission Systems	2,245		2,140		299			299		1,775		1,699
Marine Systems	4,202		4,013		379			339		4,051		3,951
Corporate	—		—		(31		)	8		—		—
Total	$	16,721	$	15,116	$	2,096		$	2,113	$	10,862	$	9,177

Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. ~~ASU 2017-07 requires~~We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) ~~to be reported~~ in other income (expense) in the Consolidated Statement of Earnings. InAs described in Note O, in our defense segments, pension and other post-retirement benefit costs are ~~allocable~~recoverable contract costs. ~~For these segments, we report the offset for~~Therefore, the non-service cost components are included in ~~Corporate~~the operating ~~results. The second quarter and first six months~~results of ~~2018 also included one-time charges of approximately $45 associated with the costs to complete the CSRA acquisition.~~these segments, but an offset is reported in Corporate.

~~The following is additional summary financial information for each of our segments:~~

Capital Expenditures Depreciation and Amortization
Six Months Ended July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
Aerospace $ 102
$ 50
$ 72
$ 77
Combat Systems 26
31
42
42
Information Technology 21
4
120
15
Mission Systems 26
25
33
29
Marine Systems 81
37
55
51
Corporate 23
6
5
6
Total $ 279
$ 153
$ 327
$ 220

~~Identifiable assets for each of our segments follows:~~

July 1, 2018 December 31, 2017
Aerospace $ 10,990
$ 10,126
Combat Systems 10,110
9,846
Information Technology 14,918
3,021
Mission Systems 6,079
5,856
Marine Systems 2,917
2,906
Corporate* 2,138
3,291
Total $ 47,152
$ 35,046

* Corporate identifiable assets are primarily cash and equivalents.

P.Q. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED)

Three Months Ended July 1, 2018 Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue $ —
$ 6,793
$ 2,393
$ —
$ 9,186
Cost of sales 9
(5,475 ) (2,043 ) ��
(7,509 )
G&A (45 ) (418 ) (126 ) —
(589 )
Operating earnings (36 ) 900
224
—
1,088
Interest, net (94 ) (1 ) (8 ) —
(103 )
Other, net (38 ) 4
19
—
(15 )
Earnings before income tax (168 ) 903
235
—
970
Provision for income tax, net 43
(178 ) (49 ) —
(184 )
Equity in net earnings of subsidiaries 911
—
—
(911 ) —
Net earnings $ 786
$ 725
$ 186
$ (911 ) $ 786
Comprehensive income $ 619
$ 740
$ (41 ) $ (699 ) $ 619
Three Months Ended July 2, 2017
Revenue $ —
$ 6,732
$ 943
$ —
$ 7,675
Cost of sales 14
(5,413 ) (715 ) —
(6,114 )
G&A (12 ) (406 ) (76 ) —
(494 )
Operating earnings 2
913
152
—
1,067
Interest, net (23 ) —
(1 ) —
(24 )
Other, net (15 ) 3
1
—
(11 )
Earnings before income tax (36 ) 916
152
—
1,032
Provision for income tax, net 26
(301 ) (8 ) —
(283 )
Equity in net earnings of subsidiaries 759
—
—
(759 ) —
Net earnings $ 749
$ 615
$ 144
$ (759 ) $ 749
Comprehensive income $ 1,089
$ 642
$ 427
$ (1,069 ) $ 1,089

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


Six Months Ended July 1, 2018	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Three Months Ended March 31, 2019																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Revenue	$	—		$	13,277		$	3,444		$	—		$	16,721		$	—		$	6,945		$	2,316		$	—		$	9,261
Cost of sales	28			(10,677		)	(2,850		)	—			(13,499		)	18			(5,726		)	(1,925		)	—			(7,633		)
G&A	(58		)	(854		)	(214		)	—			(1,126		)	(22		)	(419		)	(173		)	—			(614		)
Operating earnings	(30		)	1,746			380			—			2,096			(4		)	800			218			—			1,014
Interest, net	(120		)	(1		)	(9		)	—			(130		)	(107		)	—			(10		)	—			(117		)
Other, net	(62		)	5			21			—			(36		)	(8		)	4			22			—			18
Earnings before income tax	(212		)	1,750			392			—			1,930			(119		)	804			230			—			915
Provision for income tax, net	85			(343		)	(87		)	—			(345		)	31			(155		)	(46		)	—			(170		)
Equity in net earnings of subsidiaries	1,712			—			—			(1,712		)	—			833			—			—			(833		)	—
Net earnings	$	1,585		$	1,407		$	305		$	(1,712	)	$	1,585		$	745		$	649		$	184		$	(833	)	$	745
Comprehensive income	$	1,485		$	1,425		$	96		$	(1,521	)	$	1,485		$	840		$	652		$	237		$	(889	)	$	840
Six Months Ended July 2, 2017
Three Months Ended April 1, 2018
Revenue	$	—		$	13,276		$	1,840		$	—		$	15,116		$	—		$	6,484		$	1,051		$	—		$	7,535
Cost of sales	31			(10,665		)	(1,403		)	—			(12,037		)	19			(5,202		)	(807		)	—			(5,990		)
G&A	(22		)	(792		)	(152		)	—			(966		)	(13		)	(436		)	(88		)	—			(537		)
Operating earnings	9			1,819			285			—			2,113			6			846			156			—			1,008
Interest, net	(47		)	—			(2		)	—			(49		)	(26		)	—			(1		)	—			(27		)
Other, net	(30		)	6			2			—			(22		)	(24		)	1			2			—			(21		)
Earnings before income tax	(68		)	1,825			285			—			2,042			(44		)	847			157			—			960
Provision for income tax, net	93			(594		)	(29		)	—			(530		)	42			(165		)	(38		)	—			(161		)
Equity in net earnings of subsidiaries	1,487			—			—			(1,487		)	—			801			—			—			(801		)	—
Net earnings	$	1,512		$	1,231		$	256		$	(1,487	)	$	1,512		$	799		$	682		$	119		$	(801	)	$	799
Comprehensive income	$	1,977		$	1,259		$	634		$	(1,893	)	$	1,977		$	866		$	685		$	137		$	(822	)	$	866

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)


July 1, 2018	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
March 31, 2019																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	1,329		$	—		$	533		$	—		$	1,862		$	329		$	—		$	344		$	—		$	673
Accounts receivable	—			1,118			2,756			—			3,874			—			1,253			2,465			—			3,718
Unbilled receivables	—			2,783			4,342			—			7,125			—			2,985			4,382			—			7,367
Inventories	—			5,752			138			—			5,890			—			6,067			118			—			6,185
Other current assets	132			408			536			—			1,076			(43		)	445			522			—			924
Total current assets	1,461			10,061			8,305			—			19,827			286			10,750			7,831			—			18,867
Noncurrent assets:
Property, plant and equipment (PP&E)	240			6,973			1,875			—			9,088			288			7,263			1,594			—			9,145
Accumulated depreciation of PP&E	(79		)	(4,006		)	(824		)	—			(4,909		)	(85		)	(4,138		)	(868		)	—			(5,091		)
Intangible assets, net	—			272			2,466			—			2,738			—			241			2,277			—			2,518
Goodwill	—			8,335			11,403			—			19,738			—			8,036			11,632			—			19,668
Other assets	246			236			188			—			670			207			1,052			1,100			—			2,359
Investment in subsidiaries	56,387			—			—			(56,387		)	—
Net investment in subsidiaries																27,050			—			—			(27,050		)	—
Total noncurrent assets	56,794			11,810			15,108			(56,387		)	27,325			27,460			12,454			15,735			(27,050		)	28,599
Total assets	$	58,255		$	21,871		$	23,413		$	(56,387	)	$	47,152		$	27,746		$	23,204		$	23,566		$	(27,050	)	$	47,466

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	2,789		$	1		$	91		$	—		$	2,881		$	1,863		$	—		$	234		$	—		$	2,097
Customer advances and deposits	—			4,395			2,824			—			7,219			—			4,245			2,450			—			6,695
Other current liabilities	581			3,550			2,342			—			6,473			691			4,000			1,899			—			6,590
Total current liabilities	3,370			7,946			5,257			—			16,573			2,554			8,245			4,583			—			15,382
Noncurrent liabilities:
Long-term debt	11,385			5			7			—			11,397			11,405			39			7			—			11,451
Other liabilities	2,293			3,197			1,698			—			7,188			1,553			4,656			2,190			—			8,399
Total noncurrent liabilities	13,678			3,202			1,705			—			18,585			12,958			4,695			2,197			—			19,850
Intercompany	29,213			(28,715		)	(498		)	—			—
Shareholders’ equity:
Common stock	482			6			2,126			(2,132		)	482
Other shareholders’ equity	11,512			39,432			14,823			(54,255		)	11,512
Total shareholders’ equity	11,994			39,438			16,949			(56,387		)	11,994			12,234			10,264			16,786			(27,050		)	12,234
Total liabilities and shareholders’ equity	$	58,255		$	21,871		$	23,413		$	(56,387	)	$	47,152		$	27,746		$	23,204		$	23,566		$	(27,050	)	$	47,466

CONDENSED CONSOLIDATING BALANCE SHEET


December 31, 2017	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
December 31, 2018																Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	1,930		$	—		$	1,053		$	—		$	2,983		$	460		$	—		$	503		$	—		$	963
Accounts receivable	—			1,259			2,358			—			3,617			—			1,171			2,588			—			3,759
Unbilled receivables	—			2,547			2,693			—			5,240			—			2,758			3,818			—			6,576
Inventories	—			5,216			87			—			5,303			—			5,855			122			—			5,977
Other current assets	351			461			373			—			1,185			(45		)	441			518			—			914
Total current assets	2,281			9,483			6,564			—			18,328			415			10,225			7,549			—			18,189
Noncurrent assets:
PP&E	221			6,779			1,237			—			8,237
Property, plant and equipment (PP&E)																273			7,177			1,522			—			8,972
Accumulated depreciation of PP&E	(75		)	(3,869		)	(776		)	—			(4,720		)	(83		)	(4,071		)	(840		)	—			(4,994		)
Intangible assets, net	—			287			415			—			702			—			251			2,334			—			2,585
Goodwill	—			8,320			3,594			—			11,914			—			8,031			11,563			—			19,594
Other assets	199			232			154			—			585			195			274			593			—			1,062
Investment in subsidiaries	44,887			—			—			(44,887		)	—
Net investment in subsidiaries																25,313			—			—			(25,313		)	—
Total noncurrent assets	45,232			11,749			4,624			(44,887		)	16,718			25,698			11,662			15,172			(25,313		)	27,219
Total assets	$	47,513		$	21,232		$	11,188		$	(44,887	)	$	35,046		$	26,113		$	21,887		$	22,721		$	(25,313	)	$	45,408

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	—		$	1		$	1		$	—		$	2		$	850		$	—		$	123		$	—		$	973
Customer advances and deposits	—			4,180			2,812			—			6,992			—			4,541			2,729			—			7,270
Other current liabilities	561			3,758			1,786			—			6,105			552			3,944			2,000			—			6,496
Total current liabilities	561			7,939			4,599			—			13,099			1,402			8,485			4,852			—			14,739
Noncurrent liabilities:
Long-term debt	3,950			21			9			—			3,980			11,398			39			7			—			11,444
Other liabilities	2,451			3,473			608			—			6,532			1,581			4,073			1,839			—			7,493
Total noncurrent liabilities	6,401			3,494			617			—			10,512			12,979			4,112			1,846			—			18,937
Intercompany	29,116			(28,494		)	(622		)	—			—
Shareholders’ equity:
Common stock	482			6			2,126			(2,132		)	482
Other shareholders’ equity	10,953			38,287			4,468			(42,755		)	10,953
Total shareholders’ equity	11,435			38,293			6,594			(44,887		)	11,435			11,732			9,290			16,023			(25,313		)	11,732
Total liabilities and shareholders’ equity	$	47,513		$	21,232		$	11,188		$	(44,887	)	$	35,046		$	26,113		$	21,887		$	22,721		$	(25,313	)	$	45,408

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)


Six Months Ended July 1, 2018	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Net cash provided by operating activities*	$	41		$	468		$	(218	)	$	—	$	291
Three Months Ended March 31, 2019															Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Net cash (used) provided by operating activities*															$	59		$	(167	)	$	(687	)	$	—	$	(795	)
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(9,749		)	(74		)	(216		)	—		(10,039		)
Capital expenditures	(22		)	(215		)	(42		)	—		(279		)	(20		)	(106		)	(55		)	—		(181		)
Other, net	2			72			—			—		74			5			1			(12		)	—		(6		)
Net cash used by investing activities	(9,769		)	(217		)	(258		)	—		(10,244		)	(15		)	(105		)	(67		)	—		(187		)
Cash flows from financing activities:
Proceeds from fixed-rate notes	6,461			—			—			—		6,461
Proceeds from commercial paper, net	2,786			—			—			—		2,786			1,010			—			—			—		1,010
Proceeds from floating-rate notes	1,000			—			—			—		1,000
Dividends paid	(526		)	—			—			—		(526		)	(268		)	—			—			—		(268		)
Repayment of CSRA accounts receivable purchase agreement	—			—			(450		)	—		(450		)
Purchases of common stock	(436		)	—			—			—		(436		)	(133		)	—			—			—		(133		)
Other, net	(45		)	—			48			—		3			(5		)	—			93			—		88
Net cash provided by financing activities	9,240			—			(402		)	—		8,838			604			—			93			—		697
Net cash used by discontinued operations	(6		)	—			—			—		(6		)	(5		)	—			—			—		(5		)
Cash sweep/funding by parent	(107		)	(251		)	358			—		—			(774		)	272			502			—		—
Net decrease in cash and equivalents	(601		)	—			(520		)	—		(1,121		)	(131		)	—			(159		)	—		(290		)
Cash and equivalents at beginning of period	1,930			—			1,053			—		2,983			460			—			503			—		963
Cash and equivalents at end of period	$	1,329		$	—		$	533		$	—	$	1,862		$	329		$	—		$	344		$	—	$	673
Six Months Ended July 2, 2017
Net cash provided by operating activities*	$	214		$	847		$	(51	)	$	—	$	1,010
Three Months Ended April 1, 2018
Net cash (used) provided by operating activities*															$	80		$	105		$	(681	)	$	—	$	(496	)
Cash flows from investing activities:
Capital expenditures	(6		)	(114		)	(33		)	—		(153		)	(7		)	(86		)	(11		)	—		(104		)
Other, net	1			8			(51		)	—		(42		)	1			(2		)	—			—		(1		)
Net cash used by investing activities	(5		)	(106		)	(84		)	—		(195		)	(6		)	(88		)	(11		)	—		(105		)
Cash flows from financing activities:
Proceeds from commercial paper, net															2,494			—			—			—		2,494
Purchases of common stock	(901		)	—			—			—		(901		)	(267		)	—			—			—		(267		)
Dividends paid	(483		)	—			—			—		(483		)	(250		)	—			—			—		(250		)
Other, net	21			(1		)	88			—		108			(25		)	—			—			—		(25		)
Net cash used by financing activities	(1,363		)	(1		)	88			—		(1,276		)
Net cash provided by financing activities															1,952			—			—			—		1,952
Net cash used by discontinued operations	(17		)	—			—			—		(17		)	(2		)	—			—			—		(2		)
Cash sweep/funding by parent	764			(740		)	(24		)	—		—			(167		)	(17		)	184			—		—
Net decrease in cash and equivalents	(407		)	—			(71		)	—		(478		)
Net increase in cash and equivalents															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	$	847		$	—		$	1,009		$	—	$	1,856		$	3,787		$	—		$	545		$	—	$	4,332

* Continuing operations only.

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; C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions; and shipbuilding and ship repair.

On April 3, 2018, we completed our acquisition of CSRA Inc. (CSRA). See Note B to the unaudited Consolidated Financial Statements in Part I, Item 1, for further discussion of the acquisition. CSRA has been combined with General Dynamics Information Technology (GDIT) to create a premier provider of IT solutions to the defense, intelligence and federal civilian markets.

For segment reporting purposes, concurrent with the acquisition of CSRA, our Information Systems and Technology operating segment was reorganized into the Information Technology and Mission Systems segments. Our company now hasWe operate through five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. ~~We collectively refer to Combat Systems, Information Technology, Mission Systems and Marine Systems as our defense segments. Prior-period segment information has been restated for this change.~~

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 ~~2017~~2018 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

RESULTS OF OPERATIONS

INTRODUCTION

An understanding of our accounting practices is necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our operating segments. We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers.

In the Aerospace segment, we record revenue on contracts for new aircraft when 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 segment’s custom completions of ~~other original equipment manufacturers’ (OEMs)~~narrow-body and wide-body aircraft and the segment’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 and type of aircraft ~~service activity~~services performed during the period.

The majority of the Aerospace segment’s operating costs ~~relate~~relates to new aircraft production on firm orders and ~~consist~~consists 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 segment’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 ultra-large-cabin, large-cabin and mid-cabin aircraft deliveries. Additional factors affecting the segment’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 segment.

In the defense segments, 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 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. 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 segments 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. Higher or lower margins can result from a number of factors, including contract type (e.g., fixed-price/cost-reimbursable) and type of work (e.g., development/production).

CONSOLIDATED OVERVIEW


Three Months Ended	July 1, 2018			July 2, 2017			Variance					March 31, 2019			April 1, 2018			Variance
Revenue	$	9,186		$	7,675		$	1,511		19.7	%	$	9,261		$	7,535		$	1,726		22.9	%
Operating costs and expenses	(8,098		)	(6,608		)	(1,490		)	22.5	%	(8,247		)	(6,527		)	(1,720		)	26.4	%
Operating earnings	1,088			1,067			21			2.0	%	1,014			1,008			6			0.6	%
Operating margin	11.8		%	13.9		%						10.9		%	13.4		%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	16,721		$	15,116		$	1,605		10.6	%
Operating costs and expenses	(14,625		)	(13,003		)	(1,622		)	12.5	%
Operating earnings	2,096			2,113			(17		)	(0.8	)%
Operating margin	12.5		%	14.0		%

Our consolidated revenue increased in the ~~second~~first quarter ~~and first six months~~ of ~~2018 as revenue~~2019 driven by growth in ~~each~~all of our ~~defense segments offset a decrease~~segments. The growth in ~~revenue~~our IT segment was driven by the acquisition of CSRA Inc. (CSRA), which we acquired on April 3, 2018. See Note B to the unaudited Consolidated Financial Statements in Part I, Item 1, for further discussion of the acquisition. There were also significant increases in our Aerospace segment due to ~~fewer~~additional aircraft ~~deliveries. The increase in revenue~~deliveries and in our defense segments was due primarily to the CSRA acquisition in our Information Technology segment. Excluding CSRA, revenue increased in our defense segments by 7.1% and 6.8% in the second quarter and first six months of 2018, respectively, compared with the prior-year periods. This increase wasCombat Systems segment due to higher volume from ~~international~~U.S. military ~~vehicles in our Combat Systems segment, U.S. Navy ship construction in our Marine Systems segment and C4ISR solutions in our Mission Systems segment.~~vehicle programs.

Operating costs and expenses increased at a greater rate than revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019, resulting in a lower operating margin, due primarily to ~~the CSRA acquisition, including the impact of~~a less favorable aircraft delivery mix in our Aerospace segment and intangible asset amortization expense ~~and one-time transaction-related charges associated with~~from the ~~costs to complete the~~CSRA acquisition. ~~As a result, operating margin was down from 2017.~~

REVIEW OF OPERATING SEGMENTS

Following is a discussion of operating results ~~and outlook~~ for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note OP to the unaudited Consolidated Financial Statements in Part I, Item 1.

AEROSPACE


Three Months Ended	July 1, 2018			July 2, 2017			Variance					March 31, 2019			April 1, 2018			Variance
Revenue	$	1,895		$	2,078		$	(183	)	(8.8	)%	$	2,240		$	1,825		$	415		22.7	%
Operating earnings	386			421			(35		)	(8.3	)%	328			346			(18		)	(5.2	)%
Operating margin	20.4		%	20.3		%						14.6		%	19.0		%
Gulfstream aircraft deliveries (in units)	26			30			(4		)	(13.3	)%	34			26			8			30.8	%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	3,720		$	4,152		$	(432	)	(10.4	)%
Operating earnings	732			860			(128		)	(14.9	)%
Operating margin	19.7		%	20.7		%
Gulfstream aircraft deliveries (in units)	52			60			(8		)	(13.3	)%

Operating Results

The ~~change~~increase in the Aerospace segment’s revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:


	Second Quarter			Six Months
Aircraft manufacturing and completions	$	(238	)	$	(501	)	$	324
Aircraft services	86			102			57
Pre-owned aircraft	(31		)	(33		)	34
Total decrease	$	(183	)	$	(432	)
Total increase							$	415

Aircraft manufacturing and completions revenue ~~decreased~~increased due to ~~fewer~~additional deliveries of the ~~ultra-large-cabin G650 and~~new large-cabin ~~G450 aircraft consistent with our plan as we transition to the production of the new G500 and G600 aircraft. We received type certification from the U.S. Federal Aviation Administration (FAA) for the~~ G500 aircraft, on July 20, 2018. Revenue is expected to increase later this year with initial deliveries of the newly-certified aircraft. Additionally, we continue to progress toward anticipated FAA type certification later this year and entrywhich entered into service in ~~2019~~the third quarter of ~~the new G600 aircraft.~~

2018. The increase in aircraft services revenue was driven by higher demand for maintenance work and the acquisition in the second quarter of 2018 of Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East. We ~~had fewer~~sold four pre-owned aircraft ~~sales~~ in ~~2018~~the first quarter of 2019 compared with one in the prior-year ~~periods as a result of the ongoing strengthening of the pre-owned aircraft market.~~period.

The change in the segment’s operating earnings in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:


	Second Quarter			Six Months
Aircraft manufacturing and completions	$	(105	)	$	(191	)	$	(30	)
Aircraft services	21			32
Pre-owned aircraft	2			2			(2		)
G&A/other expenses	47			29			14
Total decrease	$	(35	)	$	(128	)	$	(18	)

Aircraft manufacturing and completions operating earnings were down due to ~~fewer aircraft deliveries and~~a shift in the mix of Gulfstream aircraft deliveries ~~consistent~~to the G500 and the typical lower margin associated with ~~our production plan. Aircraft services~~initial units of a new aircraft model. The segment’s operating earnings were ~~particularly strong due to favorable cost performance and the mix of services. G&A/other expenses were~~impacted favorably by lower ~~due to reduced~~ R&D ~~expenses as a result of the receipt in the second quarter of 2018 of milestone payments from suppliers under our cost-sharing arrangements.~~

expenses. Overall, the Aerospace segment’s operating margin ~~increased 10~~decreased 440 basis points in the second quarter but decreased 100 basis points in the first six months of 2018 compared with the prior-year periods. The slight increase in the second quarter, driven by the lower R&D costs, was offset by the impact of a less favorable aircraft delivery mix in the first six months of 2018 consistent with our plan as we transition to the G500 and G600 aircraft.

~~2018 Outlook~~

~~We expect the Aerospace segment’s 2018 revenue to be around $8.6 billion. Operating earnings are expected to be approximately $1.5 billion.~~points.

COMBAT SYSTEMS


Three Months Ended	July 1, 2018			July 2, 2017			Variance				March 31, 2019			April 1, 2018			Variance
Revenue	$	1,534		$	1,414		$	120	8.5	%	$	1,636		$	1,440		$	196		13.6	%
Operating earnings	236			225			11		4.9	%	206			224			(18		)	(8.0	)%
Operating margin	15.4		%	15.9		%					12.6		%	15.6		%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	2,974		$	2,701		$	273	10.1	%
Operating earnings	460			430			30		7.0	%
Operating margin	15.5		%	15.9		%

Operating Results

The increase in the Combat Systems segment’s revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:


	Second Quarter		Six Months
U.S. military vehicles					$	105
International military vehicles	$	104	$	232	51
Weapons systems and munitions	11		22		40
U.S. military vehicles	5		19
Total increase	$	120	$	273	$	196

Revenue from U.S. Military vehicles increased due to higher volume on the U.S. Army’s Abrams tank programs, including work to produce Abrams M1A2 System Enhancement Package Version 3 (SEPv3) tanks, and the new Mobile Protected Firepower (MPF) vehicle. Additionally, revenue from international military vehicles increased due to ~~the transition from engineering to production~~higher volume on ~~two significant production programs: AJAX armoured fighting vehicles for the U.K. and combat vehicles for a Middle Eastern customer. Work also ramped up on programs to produce Piranha~~ wheeled armored ~~vehicles for several international customers and to upgrade light armored vehicles (LAVs) for the Government of Canada.~~vehicle programs. Weapons systems and munitions revenue was up due to increased ~~production of~~volume on several products, including ~~bombs and ammunition~~Hydra-70 rockets for the U.S. government.

The Combat Systems segment’s operating margin decreased 50300 basis points ~~in the second quarter and 40 basis points in the first six months of 2018~~ driven by contract mix in our U.S. military vehicles business and ~~weapons systems and munitions businesses.~~

~~2018 Outlook~~

~~We expect~~a settlement relating to a lease at a former operating site outside the ~~Combat Systems segment’s 2018 revenue to be between $6.3 and $6.35 billion. Operating margin is expected to be in the mid-15% range.~~

United States.

INFORMATION TECHNOLOGY


Three Months Ended	July 1, 2018			July 2, 2017			Variance				March 31, 2019			April 1, 2018			Variance
Revenue	$	2,442		$	1,052		$	1,390	132.1	%	$	2,169		$	1,138		$	1,031	90.6	%
Operating earnings	156			87			69		79.3	%	156			101			55		54.5	%
Operating margin	6.4		%	8.3		%					7.2		%	8.9		%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	3,580		$	2,110		$	1,470	69.7	%
Operating earnings	257			177			80		45.2	%
Operating margin	7.2		%	8.4		%

Operating Results

~~The increase in the Information Technology segment’s revenue in the second quarter and first six months of 2018 consisted of the following:~~

Second Quarter Six Months
CSRA acquisition $ 1,294
$ 1,294
Legacy IT services 96
176
Total increase $ 1,390
$ 1,470

The Information Technology segment’s revenue increased ~~due primarily to~~from the CSRA acquisition in the second quarter of 2018. This increase was offset partially by the sale of the segment’s public-facing contact-center business in the fourth quarter of 2018. Operating margin decreased ~~190~~170 basis points ~~in the second quarter and 120 basis points in the first six months of 2018 compared with the prior-year periods~~ due to intangible asset amortization expense from the CSRA acquisition. Excluding the impact of this amortization, operating margin increased 60 basis points ~~in the second quarter and 50 basis points in the first six months of 2018 compared with the prior-year periods~~to 9.5% due to the addition of CSRA’s higher-margin, fixed-price work.

~~2018 Outlook~~

~~We expect the Information Technology segment’s 2018 revenue to be between $8.3 and $8.4 billion with operating margin around 7%, including the acquisition of CSRA.~~

MISSION SYSTEMS


Three Months Ended	July 1, 2018			July 2, 2017			Variance				March 31, 2019			April 1, 2018			Variance
Revenue	$	1,147		$	1,052		$	95	9.0	%	$	1,158		$	1,098		$	60	5.5	%
Operating earnings	153			153			—		—	%	148			146			2		1.4	%
Operating margin	13.3		%	14.5		%					12.8		%	13.3		%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	2,245		$	2,140		$	105	4.9	%
Operating earnings	299			299			—		—	%
Operating margin	13.3		%	14.0		%

Operating Results

The increase in the Mission Systems segment’s revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:

Second Quarter Six Months
Intelligence, surveillance and reconnaissance (ISR) systems $ 39
$ 87
Communication systems 66
27
Platform systems and sensors (10 ) (9 )
Total increase $ 95
$ 105



Ground systems and products	$	65
Naval, air and electronic systems	17
Space, intelligence and cyber systems	(22		)
Total increase	$	60

Revenue ~~from ISR systems increased due to higher volume on several programs~~ in ~~our space and intelligence systems business and increased demand for our family of encryption products. Communication systems revenue grew~~the Mission Systems segment was up due primarily to ~~increased activity on U.S. Army mobile communications networking programs and~~higher demand for computing and communications equipment ~~volume.~~and increased volume on our ground-based satellite communication systems programs in our ground systems and products business.

The Mission ~~Systems’~~Systems segment’s operating margin ~~decreased 120~~was down 50 basis points ~~in the second quarter and 70 basis points in the first six months of 2018 compared with the prior-year periods~~ due to program mix.

~~2018 Outlook~~

~~We expect Mission Systems’ 2018 revenue to be between $4.8 and $4.9 billion with operating margin around 14%.~~

MARINE SYSTEMS


Three Months Ended	July 1, 2018			July 2, 2017			Variance				March 31, 2019			April 1, 2018			Variance
Revenue	$	2,168		$	2,079		$	89	4.3	%	$	2,058		$	2,034		$	24		1.2	%
Operating earnings	195			178			17		9.6	%	180			184			(4		)	(2.2	)%
Operating margin	9.0		%	8.6		%					8.7		%	9.0		%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	4,202		$	4,013		$	189	4.7	%
Operating earnings	379			339			40		11.8	%
Operating margin	9.0		%	8.4		%

Operating Results

The increase in the Marine Systems segment’s revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:


	Second Quarter			Six Months
U.S. Navy ship construction	$	21		$	167		$	50
Commercial ship construction	74			92			(16		)
U.S. Navy ship engineering, repair and other services	(6		)	(70		)	(10		)
Total increase	$	89		$	189		$	24

Revenue from U.S. Navy ship construction increased ~~with~~due primarily to higher volume on ~~Blocks IV and V of~~ the Virginia-class submarine ~~program and the TAO-205 fleet oiler contract. Commercial~~program. This increase was partially offset by lower commercial ship construction ~~revenue increased as work ramped up on a contract for two container ships. Revenue from U.S.~~and Navy ~~ship~~

~~engineering,~~overhaul and repair ~~and other services decreased driven by a lower volume of submarine repair work and the timing of surface ship repair~~ work. ~~These decreases were offset partially by increased work on the Columbia-class submarine development program and Virginia-class submarine design enhancements.~~

The Marine Systems segment’s operating margin ~~increased 40~~decreased 30 basis points indriven by mix shift on the ~~second quarter~~Virginia-class program between the mature Block III contract and ~~60 basis points in~~ the ~~first six months of 2018 compared with the prior-year periods reflecting improved operating performance, particularly at our Electric Boat shipyard.~~

~~2018 Outlook~~

~~We expect the Marine Systems segment’s 2018 revenue to be slightly over $8.5 billion. Operating margin is expected to be in the mid- to high-8% range.~~Block IV and V contracts.

CORPORATE

Corporate ~~costs totaled $38 and $31 in~~operating results consisted of the second quarter and first six months of 2018, respectively, compared with income of $3 and $8 in the second quarter and first six months of 2017. The second quarter and first six months of 2018 included one-time transaction-related charges of approximately $45 associated with the costs to complete the CSRA acquisition. Absent these charges, following:



Three Months Ended	March 31, 2019			April 1, 2018
Operating (expense) income	$	(4	)	$	7

Corporate operating results ~~would have reflected income of $7 and $14 in the second quarter and first six months of 2018, respectively. These amounts~~ have two primary components: pension and other post-retirement benefit income, and stock option expense.

~~As discussed in Note A~~We are required to ~~the unaudited Consolidated Financial Statements in Part I, Item 1, Corporate operating results are impacted by Accounting Standards Update (ASU) 2017-07. ASU 2017-07 requires~~report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) ~~to be reported~~ in other income (expense) in the Consolidated Statement of Earnings. In our defense

segments, pension and other post-retirement benefit costs are ~~allocable~~recoverable contract costs. ~~For these segments, we report the offset for~~Therefore, the non-service cost components are included in ~~Corporate~~the operating ~~results.~~results of these segments, but an offset is reported in Corporate. This amount ~~exceeds our stock option expense~~decreased in ~~the second quarters and first six months of 2018 and 2017.~~

~~We expect Corporate operating costs of approximately $25~~2019, resulting in ~~2018.~~a net expense.

OTHER INFORMATION

PRODUCT REVENUE AND OPERATING COSTS


Three Months Ended	July 1, 2018			July 2, 2017			Variance				March 31, 2019			April 1, 2018			Variance
Revenue	$	4,754		$	4,666		$	88	1.9	%	$	5,251		$	4,576		$	675		14.8	%
Operating costs	(3,702		)	(3,597		)	105		2.9	%	(4,235		)	(3,546		)	(689		)	19.4	%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	9,330		$	9,133		$	197	2.2	%
Operating costs	(7,248		)	(7,035		)	213		3.0	%

The increase in product revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:


	Second Quarter			Six Months
Aircraft manufacturing and completions							$	324
Military vehicle production	$	125		$	301		142
C4ISR products							71
Ship construction	92			259			66
C4ISR products	97			98
Aircraft manufacturing and completions	(238		)	(501		)
Other, net	12			40			72
Total increase	$	88		$	197		$	675

Aircraft manufacturing and completions revenue increased due to additional deliveries of the new large-cabin G500 aircraft. Military vehicle production revenue increased due to the transition from engineering to production on the U.K. AJAX armoured fighting vehicles program and a contract to produce combat vehicles for a Middle Eastern customer. Work also ramped up on programs to produce Piranha wheeled armored vehicles for several international customers and to upgrade LAVs for the Government of Canada. Ship construction revenue increased with higher volume on ~~Blocks IV~~the U.S. Army’s Abrams tank and ~~V of the Virginia-class submarine program, the TAO-205 fleet oiler contract,~~MPF programs and ~~commercial container ship construction.~~international wheeled armored vehicle programs. C4ISR products revenue increased due to higher volume on several ~~communication~~ground systems and ~~ISR systems~~products programs. ~~These increases were offset partially by lower aircraft manufacturing and completions~~Ship construction revenue ~~due to fewer aircraft deliveries.~~increased with higher volume on the Virginia-class submarine program. The primary drivers of the increase in product operating costs were the changes in volume on the programs described above.

SERVICE REVENUE AND OPERATING COSTS


Three Months Ended	July 1, 2018			July 2, 2017			Variance				March 31, 2019			April 1, 2018			Variance
Revenue	$	4,432		$	3,009		$	1,423	47.3	%	$	4,010		$	2,959		$	1,051		35.5	%
Operating costs	(3,807		)	(2,517		)	1,290		51.3	%	(3,398		)	(2,444		)	(954		)	39.0	%
Six Months Ended	July 1, 2018			July 2, 2017			Variance
Revenue	$	7,391		$	5,983		$	1,408	23.5	%
Operating costs	(6,251		)	(5,002		)	1,249		25.0	%

The increase in service revenue in the ~~second~~first quarter ~~and first six months~~ of ~~2018~~2019 consisted of the following:


	Second Quarter			Six Months
IT services	$	1,370		$	1,440		$	1,031
Aircraft services	86			102			57
Ship engineering, repair and other services	(2		)	(70		)
Other, net	(31		)	(64		)	(37		)
Total increase	$	1,423		$	1,408		$	1,051

IT services revenue increased due primarily to the CSRA acquisition in the second quarter of 2018. ~~Aircraft~~The aircraft services revenue ~~increased~~increase was driven by higher demand for maintenance work and the acquisition of Hawker Pacific in the second quarter of 2018. ~~These increases were offset partially by lower ship engineering, repair and other services revenue due primarily to a lower volume of submarine repair work and the timing of surface ship repair work.~~ Service operating costs increased at a higher rate than revenue due primarily to intangible asset amortization expense from the CSRA acquisition.

OTHER FINANCIAL INFORMATION

G&A Expenses

As a percentage of revenue, G&A expenses were ~~6.7%~~6.6% in the first ~~six~~three months of ~~2018~~2019 compared with ~~6.4%~~7.1% in the first ~~six~~three months of ~~2017. We expect G&A expenses as a percentage of revenue in 2018 to be generally consistent with 2017.~~2018.

Interest, Net

Net interest expense was ~~$130~~$117 in the first ~~six~~three months of ~~2018~~2019 compared with ~~$49~~$27 in the prior-year period. The increase is due primarily to the impact of financing the CSRA acquisition, including the issuance of $7.5 billion of fixed- and floating-rate notes in the second quarter of 2018. ~~We expect 2018 net interest expense to be approximately $355.~~ See Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including interest rates.

Other, Net

Net other ~~expense~~income was ~~$36~~$18 in the first ~~six~~three months of ~~2018~~2019 compared with ~~$22~~expense of $21 in the first ~~six~~three months of ~~2017. Other expense represents~~2018. These amounts represent primarily the non-service cost components of pension and other post-retirement ~~benefit cost, including amounts from legacy CSRA plans assumed as of the acquisition date. The 2018~~benefits, which became a net income item in 2019 versus a net expense ~~also includes approximately $30 of transaction costs associated with the CSRA acquisition. In 2018, we expect net other expense to be approximately $25.~~in 2018.

Provision for Income Tax, Net

Our effective tax rate was ~~17.9%~~18.6% in the first ~~six~~three months of ~~2018~~2019 compared with ~~26%~~16.8% in the prior-year period. The ~~decrease~~increase is due primarily to 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 six months of 2018 also included the impacta reduced favorable effect of excess tax benefits ~~from~~associated with equity-based ~~compensation. For 2018, we anticipate a full-year effective tax rate~~compensation in the first three months of ~~approximately 19%.~~2019 compared with 2018.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was ~~$66.3~~$69.2 billion at the end of the ~~second~~first quarter of ~~2018,~~2019, up ~~6.7%~~2% from ~~$62.1~~$67.9 billion on ~~April 1, 2018, due primarily to the CSRA acquisition.~~December 31, 2018. Our total backlog is equal to our remaining performance obligations under contracts that meet the criteria in ASC Topic 606 as discussed in Note C to the unaudited Consolidated Financial Statements in Part I, Item 1. Our total ~~estimated~~potential contract value, which combines total backlog with estimated potential contract value, was ~~$99~~$103.2 billion on ~~July 1, 2018, up 12.9% from $87.6 billion on April 1, 2018.~~March 31, 2019.

The following table details the backlog and estimated potential contract value of each segment at the end of the ~~second~~first quarter of 2019 and ~~first quarters~~the fourth quarter of 2018:


	Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Potential Contract Value		Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Potential Contract Value
	July 1, 2018										March 31, 2019
Aerospace	$	12,187	$	157	$	12,344	$	2,282	$	14,626	$	11,924	$	244	$	12,168	$	2,080	$	14,248
Combat Systems	16,646		376		17,022		2,840		19,862		15,475		515		15,990		4,185		20,175
Information Technology	4,633		4,576		9,209		18,931		28,140		4,770		3,584		8,354		16,666		25,020
Mission Systems	4,636		645		5,281		4,287		9,568		5,081		234		5,315		7,186		12,501
Marine Systems	17,310		5,124		22,434		4,333		26,767		19,935		7,446		27,381		3,831		31,212
Total	$	55,412	$	10,878	$	66,290	$	32,673	$	98,963	$	57,185	$	12,023	$	69,208	$	33,948	$	103,156

	April 1, 2018										December 31, 2018
Aerospace	$	11,898	$	158	$	12,056	$	1,868	$	13,924	$	11,208	$	167	$	11,375	$	3,130	$	14,505
Combat Systems	17,126		378		17,504		3,549		21,053		16,174		424		16,598		4,187		20,785
Information Technology	2,190		1,275		3,465		11,367		14,832		4,717		3,248		7,965		17,066		25,031
Mission Systems	4,549		800		5,349		4,420		9,769		4,890		445		5,335		7,409		12,744
Marine Systems	18,310		5,458		23,768		4,271		28,039		18,837		7,761		26,598		3,703		30,301
Total	$	54,073	$	8,069	$	62,142	$	25,475	$	87,617	$	55,826	$	12,045	$	67,871	$	35,495	$	103,366

AEROSPACE

Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace segment ended the ~~second~~first quarter of ~~2018~~2019 with backlog of ~~$12.3~~$12.2 billion, ~~compared with $12.1~~up 7% from $11.4 billion on ~~April 1,~~December 31, 2018.

Orders in the ~~second~~first quarter of ~~2018~~2019 reflected ~~strong~~ demand across our product and services portfolio. ~~We received orders for all models of Gulfstream aircraft, with particularly strong second-quarter orders for~~

~~the ultra-large-cabin G650 aircraft.~~ The segment’s book-to-bill ratio (orders divided by revenue) was 1.4-to-1 in the ~~Aerospace segment was 1.2-to-1 in the second~~first quarter of ~~2018~~2019 and exceeded 1-to-1 over the trailing 12 months.

Beyond total backlog, estimated potential contract value in the Aerospace segment was ~~$2.3~~$2.1 billion on ~~July 1, 2018, up 22.2% from $1.9~~March 31, 2019, compared with $3.1 billion on ~~April 1,~~December 31, 2018. Estimated potential contract value represents primarily options and other agreements with existing customers to purchase new aircraft and long-term aircraft services agreements. ~~In the second quarter of 2018, the Aerospace segment was awarded a contract valued at over $500 to provide logistics support services to the U.S. government’s fleet of Gulfstream aircraft.~~

DEFENSE SEGMENTS

The total backlog in our defense segments 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. The unfunded portion includes the amounts that we believe are likely to 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 segments includes unexercised options associated with existing firm contracts and work awarded on unfunded indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options in our defense business represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.

Total backlog in our defense segments was ~~$53.9~~$57 billion on ~~July 1, 2018,~~March 31, 2019, up ~~7.7%~~ from ~~$50.1~~$56.5 billion on ~~April 1,~~December 31, 2018. The ~~increase was due primarily to the CSRA acquisition in our~~ Information Technology, ~~segment. Organically, Information Technology~~Mission Systems and Marine Systems segments each achieved a book-to-bill ratio of 1-to-1 or greater ~~than 1-to-1~~ in the ~~second~~first quarter of ~~2018. Additionally, the book-to-bill ratio in the Mission Systems segment was 1-to-1 in the second quarter of 2018.~~2019. Estimated potential contract value in our defense segments was ~~$30.4~~$31.9 billion on ~~July 1, 2018, up 28.7% from $23.6 billion on April 1, 2018, due primarily to the CSRA acquisition.~~March 31, 2019. We received the following significant contract awards during the ~~second~~first quarter of ~~2018:~~2019:

Combat Systems:

$~~440~~225 from the U.S. Army ~~to upgrade~~for inventory management and support services for the Stryker fleet.

$160 from the Army for various munitions.

$145 from the Army for systems technical support on the Abrams ~~tanks to~~and Stryker programs.

$65 from the ~~M1A2~~Army for design and prototype development of the Abrams tank System Enhancement Package Version ~~3 configuration.~~4 (SEPv4).

Information Technology:

An IDIQ contract from the U.S. Navy to provide cyber mission engineering support services. The program has a maximum potential contract value of $900 among ten awardees.

$~~260~~580 for several key contracts to provide services to classified customers.

An IDIQ contract from the Defense Threat Reduction Agency (DTRA) to provide IT support services and capabilities. The program has a maximum potential contract value of $535 among five awardees.

An IDIQ contract from the DoD to provide cybersecurity, planning, execution and analysis services to the Joint Chiefs of Staff’s J7 training activities. The program has a maximum potential contract value of $500 among six awardees.

A blanket purchase agreement of $490 from the Defense Information Systems Agency (DISA) to operate, maintain, deploy and manage Pentagon and regional government-furnished network infrastructures.

$125 to provide turnkey training and simulation services for the Army’s Aviation Center of Excellence in Fort Rucker, Alabama.

$60 from the U.S. Air Force Central Command for communications technical support services in Asia.

$55 from the National Geospatial-Intelligence Agency (NGA) for IT lifecycle management and virtual desktop services.

$50 from the U.S. Department of Veterans Affairs to provide managed services to improve service desk interactions with end users.

Mission Systems:

$115 from the Army ~~to upgrade Stryker flat-bottom vehicles to~~for computing and communications equipment under the ~~Stryker A1 configuration.~~Common Hardware Systems-5 (CHS-5) program.

$~~150~~55 to provide development and maintenance services for the Army’s Consolidated Project Management (CPM) Next program.

$55 from the Navy for the production of Digital Modular Radios (DMR).

$45 from the Army for the production of ~~Hydra-70 rockets.~~

~~$35 for~~ the ~~production of Army Ground Mobility Vehicles (AGMVs) and associated kits.~~

~~$25 from the Army for munitions demilitarization.~~

~~Information Technology:~~

~~$615 from the Centers for Medicare & Medicaid Services for contact-center services.~~

~~$375 from the New York State Department of Health to provide engineering and technical improvements to the state’s health benefits exchange.~~

~~$125 from the U.S. Department of State to provide supply chain management services.~~

~~$85 to provide IT hardware, software, and network and communications support services to the U.S. European Command (USEUCOM) and U.S. Africa Command (USAFRICOM).~~

~~$45 to provide support for live and virtual operations under the Warfighter Field Operations Customer Support (FOCUS) program.~~

~~Mission Systems:~~Prophet Enhanced Tactical Signals Intelligence System.

$~~85 from the U.S. Army~~40 for ~~computing and communications~~additional equipment ~~under the~~ ~~CHS-4 program.~~

~~$60~~ to ~~provide program management and engineering, technical, and logistics~~ support ~~for~~ the Army’s mobile communications network.

~~$45 to support the engineering and manufacturing of the Navy’s Air and Missile Defense Radar (AMDR) program.~~

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

~~$30 from the U.S. Air Force for the Battlefield Information Collection and Exploitation System (BICES) program to provide information sharing support to coalition operations.~~

Marine Systems:

$~~225~~2 billion from the ~~U.S.~~ Navy for long-lead materials for Block V Virginia-class submarines.

$~~125 from the Navy to support the Common Missile Compartment work under joint development for the U.S. Navy and the U.K. Royal Navy.~~

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

~~$55~~300 from the Navy to provide ~~ongoing lead yard~~maintenance and repair services for the ~~DDG-51~~Arleigh Burke-class (DDG-51) guided-missile destroyer, ~~program. The contract has~~Wasp-class amphibious assault ship and Nimitz-class aircraft carrier programs.

$210 from the Navy for planning, scheduling and technical support for maintenance activities on the USS South Dakota, a ~~potential value of approximately $305.~~Virginia-class submarine.

$4070 from the Navy for planning yard services for the DDG-51 destroyer ~~and FFG-7 frigate programs.~~program.

$40 from the Navy to provide non-nuclear maintenance and repair services for submarines located at the Naval Submarine ~~Base~~Support Facility in New London, in Connecticut.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We ended the ~~second~~first quarter of ~~2018~~2019 with a cash balance of ~~$1.9 billion,~~$673, down ~~$1.1 billion~~$290 from the end of ~~2017.~~2018. Our net debt position, defined as debt less cash and equivalents and marketable securities, was ~~$12.4~~$12.9 billion at the end of the ~~second~~first quarter of ~~2018~~2019 compared with ~~$999~~$11.5 billion at the end of ~~2017. The increase is due primarily to financing the CSRA acquisition.~~2018.

We expect to continue to generate funds in excess of our short- and long-term liquidity needs. We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy. The following is a discussion of our major operating, investing and financing activities

in the first ~~six~~three months of ~~2018~~2019 and ~~2017,~~2018, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1.

OPERATING ACTIVITIES

~~We generated cash from~~Cash used for operating activities ~~of $291~~was $795 in the first ~~six~~three months of ~~2018~~2019 compared ~~with $1 billion of cash generated from operating activities~~to $496 in the same period in ~~2017.~~2018. The primary driver of cash inflows in both periods was net earnings. However, cash flows in ~~the first six months of 2018~~both periods were affected negatively by growth in operating working capital, particularly the timing of ~~billings and collections~~payments on ~~large~~ international armored vehicle contracts in our Combat Systems segment. ~~Additionally, in both periods, cash flows were affected negatively by the ramp-up in production of the new G500 and G600 aircraft programs in our Aerospace segment.~~

INVESTING ACTIVITIES

Cash used for investing activities was ~~$10.2 billion~~$187 in the first ~~six~~three months of ~~2018~~2019 compared with ~~$195~~$105 in the same period in ~~2017~~.2018. Our investing activities include cash paid for capital expenditures and business acquisitions; proceeds from asset sales; and purchases, sales and maturities of marketable ~~securities; and proceeds from asset sales. In the first six months~~securities. The primary use of ~~2018, we acquired three businesses~~cash for ~~an aggregate of $10 billion, including $9.7 billion for CSRA. In the first six months of 2017, we acquired two businesses for an aggregate of $89.~~our investing activities in both periods was capital expenditures. Capital expenditures were ~~$279~~$181 in the first ~~six~~three months of ~~2018~~2019 compared with ~~$153~~$104 in the same period in ~~2017~~2018 to support ~~the~~ growth at ~~Gulfstream and~~ our shipyards. We expect capital expenditures ~~of around 2%~~to be approximately 3% of revenue in ~~2018.~~2019.

FINANCING ACTIVITIES

Cash provided by financing activities was ~~$8.8 billion~~$697 in the first ~~six~~three months of ~~2018~~2019 compared with cash ~~used for~~provided by financing activities of ~~$1.3~~$2 billion in the same period in ~~2017. Our~~2018. Net cash from financing activities ~~include~~includes proceeds received from debt and commercial paper issuances and employee stock option exercises. ~~Net cash from~~Our financing activities also ~~includes~~include repurchases of common stock, payment of dividends and debt repayments.

On ~~March 1, 2017,~~December 5, 2018, our board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the first ~~six~~three months of ~~2018,~~2019, we repurchased ~~approximately 2.1~~0.5 million of our outstanding shares for ~~$436.~~$86. On ~~July 1, 2018, 5.5~~March 31, 2019, 7 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased ~~4.6~~1.2 million shares for ~~$893~~$257 in the first ~~six~~three months of ~~2017.~~2018.

On March ~~7, 2018,~~6, 2019, our board of directors declared an increased quarterly dividend of ~~$0.93~~$1.02 per share, the ~~21st~~22nd consecutive annual increase. Previously, the board had increased the quarterly dividend to ~~$0.84~~$0.93 per share in March ~~2017.~~2018. Cash dividends paid were ~~$526~~$268 in the first ~~six~~three months of ~~2018~~2019 compared with ~~$483~~$250 in the same period in ~~2017.~~2018.

In ~~May 2018, we issued $7.5 billion of fixed- and floating-rate notes, which we used to repay borrowings under a short-term credit facility that, in part, financed~~ the ~~acquisition of CSRA.~~ ~~See Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including interest rates. Additionally, in the second~~first quarter of 2018, we ~~paid $450 to satisfy obligations under CSRA’s accounts receivable purchase agreement.~~

~~On July 1, 2018, we had $2.8~~issued $2.5 billion of commercial paper ~~outstanding.~~in anticipation of the acquisition of CSRA, which was completed on April 3, 2018.

We issued $1 billion of commercial paper in the first quarter of 2019, leaving $1.9 billion outstanding on March 31, 2019. We have $5$5 billionin committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. ~~For a discussion of credit facilities, see Note I to the unaudited Consolidated Financial~~

~~Statements in Part I, Item 1.~~ We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

For additional information regarding our debt obligations, including interest rates, and our credit facilities, see Note I to the unaudited Consolidated Financial Statements in Part I, Item 1.

NON-GAAP FINANCIAL 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 in Part I, Item 1:


Six Months Ended	July 1, 2018			July 2, 2017
Net cash provided by operating activities	$	291		$	1,010
Three Months Ended							March 31, 2019			April 1, 2018
Net cash used by operating activities							$	(795	)	$	(496	)
Capital expenditures	(279		)	(153		)	(181		)	(104		)
Free cash flow from operations	$	12		$	857		$	(976	)	$	(600	)
Cash flows as a percentage of earnings from continuing operations:
Net cash provided by operating activities	18		%	67		%
Net cash used by operating activities							(107		)%	(62		)%
Free cash flow from operations	1		%	57		%	(131		)%	(75		)%

ADDITIONAL FINANCIAL INFORMATION

ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

Revenue. 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 ~~$83~~$68 ($~~0.22)~~0.18) and ~~$180~~$97 ($~~0.47)~~0.25) for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, and April 1, 2018, ~~and $121 ($0.26) and $171 ($0.36) for the three- and six-month periods ended July 2, 2017,~~ respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the ~~three- and six-month~~three-month periods ended ~~July~~March 31, 2019, or April 1, ~~2018,~~2018.

Leases. Effective January 1, 2019, we adopted ASC Topic 842, Leases. ASC Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees

were not required to recognize on the balance sheet assets and liabilities arising from operating leases. As we elected the cumulative-effect adoption method, prior-period information has not been restated. The most significant effects of the standard on our Consolidated Financial Statements are (1) the recognition of new right-of-use assets and lease liabilities on our Consolidated Balance Sheet for our operating leases, and (2) significant new disclosures about our leasing activities (see Note N to the unaudited Consolidated Financial Statements in Part 1, Item1). On January 1, 2019, we recognized operating lease liabilities and right-of-use assets of $1.4 billion based on the present value of the remaining lease payments over the lease term. The adoption did not result in a cumulative-effect adjustment to retained earnings. The new standard did not have a material impact on our results of operations or ~~July 2, 2017.~~cash flows.

CSRA Acquisition. We are required to estimate the fair value of the assets acquired and liabilities assumed in business combinations on the acquisition date, including identified intangible assets. The amount of purchase price paid in excess of the net assets acquired is recorded as goodwill. The fair values are estimated in accordance with the principles of ASC Topic 820, Fair Value Measurement, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair values of the net assets acquired are determined primarily using Level 3 inputs (inputs that are unobservable to the market place participant).

The most significant of the fair value estimates is related to long-lived assets, specifically intangible assets subject to amortization. We have ~~preliminarily~~ valued $2.1 billion of acquired intangible ~~assets.~~assets in connection with the CSRA acquisition. This amount was determined based primarily on CSRA’s projected cash flows. The projected cash flows include various assumptions, including the timing of work embedded in backlog, success in securing future business, profitability of work, and the appropriate risk-adjusted interest rate used to discount the projected cash flows.

We are in various phases of valuing the net tangible and intangible assets acquired and liabilities assumed, and our estimate of these values was still preliminary on July 1, 2018. Therefore, these provisional amounts are subject to change as we complete the valuations throughout the measurement period, which will extend throughout 2018.

~~Reorganization of Operating Segments and Composition of Reporting Units.~~ Concurrent with the acquisition of CSRA, we reorganized our Information Systems and Technology operating segment in accordance with the nature of the segment’s products and services into the Information Technology and Mission Systems segments. Prior-period segment information was restated for this change.

This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization. The estimated fair value of our Information Systems and Technology reporting unit (and its individual components) was well in excess of its respective carrying value when we completed the required annual goodwill impairment test as of December 31, 2017. There have been no material changes in the estimated fair values or carrying values of our Information Technology and Mission Systems reporting units since the December 31, 2017, impairment test date excluding the acquisition of CSRA. As the CSRA assets acquired and liabilities assumed have been recorded at their estimated acquisition date fair value, the outcome of our qualitative assessment as of the date of the reorganization is that there is a less than 50% likelihood that the fair values of the Information Technology and Mission Systems reporting units are less than the reporting units’ respective carrying values.

Other. 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 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, ~~2017.~~2018. 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,II, Item 1.8 in our Annual Report on Form 10-K for the year ended December 31, 2018. These standards are not expected to have a material impact on our results of operations or cash flows.

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, ~~2017.~~2018.

ITEM 4. CONTROLS AND PROCEDURES

Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures ~~as of July 1, 2018,~~ (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended). as of March 31, 2019. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on ~~July 1, 2018,~~March 31, 2019, our disclosure controls and procedures were effective. ~~As permitted by SEC guidance,~~

In conjunction with the ~~scope~~adoption of ~~this evaluation did not include the~~ASC Topic 842, effective January 1, 2019, we implemented a lease accounting system and related processes and internal controls, ~~over financial reporting~~which represent a material change to a component of CSRA Inc., which we acquired on April 3, 2018. See Note B to the unaudited Consolidated Financial Statements in Part I, Item 1, for further discussion of the acquisition. CSRA represented approximately 15% of our consolidated revenue in the second quarter of 2018 and 20% of our consolidated assets on July 1, 2018.

~~Other than our acquisition of CSRA, there were no changes in~~ our internal control over financial ~~reporting~~reporting. There were no other changes that occurred during the quarter ended ~~July 1, 2018,~~March 31, 2019, 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.~~10-K for the year ended December 31, 2018. 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.~~proceedings;

potential effects of audits and reviews by government agencies of our government contract performance, compliance and internal control systems and policies;

risks and uncertainties relating to our acquisitions and joint ventures; and

potential for cybersecurity events and other disruptions.

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 M 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, ~~2017~~2018.

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

The following table provides information about our ~~second-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
4/2/18-4/29/18 —
$ —
—
6,410,168
4/30/18-5/27/18 300,000
203.77
300,000
6,110,168
5/28/18-7/1/18 600,000
196.43
600,000
5,510,168

Shares Delivered or Withheld Pursuant to Restricted Stock Vesting*
4/2/18-4/29/18 —
—

4/30/18-5/27/18 13,998
217.18

5/28/18-7/1/18 396
199.05

914,394
$ 199.16



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
1/1/19-1/27/19	425,000	$	162.87	425,000	7,055,168
1/28/19-2/24/19	100,000	171.52		100,000	6,955,168
2/25/19-3/31/19	—	—		—	6,955,168

Shares Delivered or Withheld Pursuant to Restricted Stock Vesting*
1/1/19-1/27/19	79,377	155.64
1/28/19-2/24/19	3,660	170.31
2/25/19-3/31/19	118,712	167.57
	726,749	$	164.08

* 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 ~~second~~first quarter of ~~2018.~~2019.

ITEM 6. EXHIBITS

~~4.1~~10.1

~~First Supplemental Indenture, dated as~~Form of ~~May 11, 2018, among~~Performance Stock Unit Award Agreement pursuant to the General Dynamics Corporation ~~the Guarantors~~Amended and Restated 2012 Equity Compensation Plan (for grants to named ~~therein and The Bank of New York Mellon, as Trustee (incorporated by reference from the company’s current report on Form 8-K, filed with the Securities and Exchange Commission on May 11, 2018)~~executive officers beginning March 6, 2019)*


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.

SIGNATURES

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



	GENERAL DYNAMICS CORPORATION
	by
		William A. Moss
		Vice President and Controller
		(Authorized Officer and Chief Accounting Officer)
Dated: ~~July 25, 2018~~April 24, 2019

5647



2018 (9 months post-acquisition)	$	188
2019	204
2020	195
2021	154
2022	136



	Aerospace			Combat Systems			Information Systems and Technology			Information Technology		Mission Systems			Marine Systems		Total Goodwill
December 31, 2017 (a)	$	2,638		$	2,677		$	6,302		$	—	$	—		$	297	$	11,914
Acquisitions/ divestitures (b)	—			—			16			—		—			—		16
Other (c)	40			(14		)	(1		)	—		—			—		25
April 1, 2018 (a)	2,678			2,663			6,317			—		—			297		11,955
Change in reporting unit composition (d)	—			—			(6,317		)	2,076		4,241			—		—
Acquisitions/ divestitures (b)	149			—			—			7,752		1			—		7,902
Other (c)	(71		)	(36		)	—			—		(12		)	—		(119		)
July 1, 2018 (e)	$	2,756		$	2,627		$	—		$	9,828	$	4,230		$	297	$	19,738



2018	$	2,887
2019	2
2020	2,502
2021	3,002
2022	1,002
Thereafter	5,005
Total debt principal	$	14,400



	Capital Expenditures				Depreciation and Amortization
Six Months Ended	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Aerospace	$	102	$	50	$	72	$	77
Combat Systems	26		31		42		42
Information Technology	21		4		120		15
Mission Systems	26		25		33		29
Marine Systems	81		37		55		51
Corporate	23		6		5		6
Total	$	279	$	153	$	327	$	220



	Second Quarter			Six Months
Intelligence, surveillance and reconnaissance (ISR) systems	$	39		$	87
Communication systems	66			27
Platform systems and sensors	(10		)	(9		)
Total increase	$	95		$	105