UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~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 ~~March 31,~~September 29, 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~~
11011 Sunset Hills Road	Reston,	Virginia	20190
Address of principal executive offices			Zip code

~~(703)~~ (703) 876-3000

Registrant’s telephone number, including area code

2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042-4513

(Former name or former address, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	GD	New York Stock Exchange

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. Yesü No ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yesü 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 filerü Accelerated filer ___ Non-accelerated filer ___

Smaller reporting ~~company ___~~company___☐ Emerging growth ~~company ___~~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 ___~~Yes___☐ No ü

~~288,871,990~~289,306,108 shares of the registrant’s common stock, $1 par value per share, were outstanding on ~~March 31,~~September 29, 2019.

INDEX




PART I -	FINANCIAL INFORMATION	PAGE
Item 1 -	Unaudited Consolidated Financial Statements
	Consolidated Statement of Earnings (Three Months)	3
	Consolidated Statement of ~~Comprehensive Income~~Earnings (Nine Months)	4
	Consolidated ~~Balance Sheet~~Statement of Comprehensive Income (Three and Nine Months)	5
	Consolidated ~~Statement of Cash Flows~~Balance Sheet	6
	Consolidated Statement of ~~Shareholders’ Equity~~Cash Flows	7
	~~Notes to Unaudited~~ Consolidated ~~Financial Statements~~Statement of Shareholders’ Equity (Three and Nine Months)	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3236
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	4451
Item 4 -	Controls and Procedures	4451
	FORWARD-LOOKING STATEMENTS	4451
PART II -	OTHER INFORMATION	4553
Item 1 -	Legal Proceedings	4553
Item 1A -	Risk Factors	4553
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	4653
Item 6 -	Exhibits	4653
	SIGNATURES	4754

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)


	Three Months Ended						Three Months Ended
(Dollars in millions, except per-share amounts)	March 31, 2019			April 1, 2018			September 29, 2019			September 30, 2018
Revenue:
Products	$	5,251		$	4,576		$	5,789		$	4,842
Services	4,010			2,959			3,972			4,252
	9,261			7,535			9,761			9,094
Operating costs and expenses:
Products	(4,235		)	(3,546		)	(4,640		)	(3,797		)
Services	(3,398		)	(2,444		)	(3,333		)	(3,610		)
General and administrative (G&A)	(614		)	(537		)	(572		)	(552		)
	(8,247		)	(6,527		)	(8,545		)	(7,959		)
Operating earnings	1,014			1,008			1,216			1,135
Interest, net	(117		)	(27		)	(114		)	(114		)
Other, net	18			(21		)	(12		)	2
Earnings before income tax	915			960
Earnings from continuing operations before income tax							1,090			1,023
Provision for income tax, net	(170		)	(161		)	(177		)	(159		)
Earnings from continuing operations							913			864
Discontinued operations, net of tax							—			(13		)
Net earnings	$	745		$	799		$	913		$	851

Earnings per share
Basic	$	2.59		$	2.70
Diluted	$	2.56		$	2.65
Basic:
Continuing operations							$	3.17		$	2.92
Discontinued operations							—			(0.04		)
Net earnings							$	3.17		$	2.88
Diluted:
Continuing operations							$	3.14		$	2.89
Discontinued operations							—			(0.04		)
Net earnings							$	3.14		$	2.85

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

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)



	Nine Months Ended
(Dollars in millions, except per-share amounts)	September 29, 2019			September 30, 2018
Revenue:
Products	$	16,441		$	14,172
Services	12,136			11,643
	28,577			25,815
Operating costs and expenses:
Products	(13,217		)	(11,045		)
Services	(10,258		)	(9,838		)
G&A	(1,782		)	(1,701		)
	(25,257		)	(22,584		)
Operating earnings	3,320			3,231
Interest, net	(350		)	(244		)
Other, net	18			(34		)
Earnings from continuing operations before income tax	2,988			2,953
Provision for income tax, net	(524		)	(504		)
Earnings from continuing operations	2,464			2,449
Discontinued operations, net of tax	—			(13		)
Net earnings	$	2,464		$	2,436

Earnings per share
Basic:
Continuing operations	$	8.55		$	8.27
Discontinued operations	—			(0.04		)
Net earnings	$	8.55		$	8.23
Diluted:
Continuing operations	$	8.47		$	8.16
Discontinued operations	—			(0.04		)
Net earnings	$	8.47		$	8.12

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						Three Months Ended						Nine Months Ended
(Dollars in millions)	March 31, 2019			April 1, 2018			September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
Net earnings	$	745		$	799		$	913		$	851		$	2,464		$	2,436
Gains (losses) on cash flow hedges	17			(3		)
Gains on cash flow hedges							2			61			70			40
Unrealized gains on marketable securities							1			—			1			—
Foreign currency translation adjustments	31			1			(109		)	85			47			(130		)
Change in retirement plans’ funded status	63			84			66			84			188			247
Other comprehensive income, pretax	111			82
Other comprehensive (loss) income, pretax							(40		)	230			306			157
Provision for income tax, net	(16		)	(15		)	(15		)	(33		)	(59		)	(60		)
Other comprehensive income, net of tax	95			67
Other comprehensive (loss) income, net of tax							(55		)	197			247			97
Comprehensive income	$	840		$	866		$	858		$	1,048		$	2,711		$	2,533

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

CONSOLIDATED BALANCE SHEET


	(Unaudited)						(Unaudited)
(Dollars in millions)	March 31, 2019			December 31, 2018			September 29, 2019			December 31, 2018

ASSETS
Current assets:
Cash and equivalents	$	673		$	963		$	974		$	963
Accounts receivable	3,718			3,759			3,489			3,759
Unbilled receivables	7,367			6,576			8,077			6,576
Inventories	6,185			5,977			6,573			5,977
Other current assets	924			914			1,038			914
Total current assets	18,867			18,189			20,151			18,189
Noncurrent assets:
Property, plant and equipment, net	4,054			3,978			4,217			3,978
Intangible assets, net	2,518			2,585			2,376			2,585
Goodwill	19,668			19,594			19,617			19,594
Other assets	2,359			1,062			2,427			1,062
Total noncurrent assets	28,599			27,219			28,637			27,219
Total assets	$	47,466		$	45,408		$	48,788		$	45,408

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	2,097		$	973		$	4,661		$	973
Accounts payable	3,008			3,179			2,999			3,179
Customer advances and deposits	6,695			7,270			6,854			7,270
Other current liabilities	3,582			3,317			3,713			3,317
Total current liabilities	15,382			14,739			18,227			14,739
Noncurrent liabilities:
Long-term debt	11,451			11,444			8,989			11,444
Other liabilities	8,399			7,493			8,059			7,493
Commitments and contingencies (see Note M)
Total noncurrent liabilities	19,850			18,937			17,048			18,937
Shareholders’ equity:
Common stock	482			482			482			482
Surplus	2,937			2,946			2,999			2,946
Retained earnings	29,781			29,326			30,909			29,326
Treasury stock	(17,283		)	(17,244		)	(17,346		)	(17,244		)
Accumulated other comprehensive loss	(3,683		)	(3,778		)	(3,531		)	(3,778		)
Total shareholders’ equity	12,234			11,732			13,513			11,732
Total liabilities and shareholders’ equity	$	47,466		$	45,408		$	48,788		$	45,408

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	Three Months Ended						Nine Months Ended
(Dollars in millions)	March 31, 2019			April 1, 2018			September 29, 2019			September 30, 2018
Cash flows from operating activities - continuing operations:
Net earnings	$	745		$	799		$	2,464		$	2,436
Adjustments to reconcile net earnings to net cash provided by operating activities:
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation of property, plant and equipment	114			89			352			315
Amortization of intangible and finance lease right-of-use assets	91			20			273			227
Equity-based compensation expense	40			29			103			110
Deferred income tax provision	(10		)	4
Deferred income tax benefit							(72		)	(66		)
Discontinued operations, net of tax							—			13
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	49			(150		)	253			472
Unbilled receivables	(873		)	(608		)	(1,603		)	(1,625		)
Inventories	(210		)	(236		)	(646		)	(854		)
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	(167		)	(358		)	(164		)	(324		)
Customer advances and deposits	(623		)	(149		)	(565		)	112
Other, net	49			64			192			265
Net cash used by operating activities	(795		)	(496		)
Net cash provided by operating activities							587			1,081
Cash flows from investing activities:
Capital expenditures	(181		)	(104		)	(606		)	(447		)
Business acquisitions, net of cash acquired							(19		)	(10,039		)
Other, net	(6		)	(1		)	21			169
Net cash used by investing activities	(187		)	(105		)	(604		)	(10,317		)
Cash flows from financing activities:
Proceeds from commercial paper, net	1,010			2,494			947			1,668
Dividends paid	(268		)	(250		)	(858		)	(801		)
Purchases of common stock	(133		)	(267		)	(231		)	(533		)
Proceeds from fixed-rate notes							—			6,461
Proceeds from floating-rate notes							—			1,000
Repayment of CSRA accounts receivable purchase agreement							—			(450		)
Other, net	88			(25		)	207			(68		)
Net cash provided by financing activities	697			1,952			65			7,277
Net cash used by discontinued operations	(5		)	(2		)	(37		)	(14		)
Net (decrease) increase in cash and equivalents	(290		)	1,349
Net increase (decrease) in cash and equivalents							11			(1,973		)
Cash and equivalents at beginning of period	963			2,983			963			2,983
Cash and equivalents at end of period	$	673		$	4,332		$	974		$	1,010
Supplemental cash flow information:
Income tax (payments) refunds, net	$	(37	)	$	4
Income tax payments, net							$	487		$	305
Interest payments	$	(48	)	$	(21	)	$	271		$	144

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

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)


																		Three Months Ended
	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, 2018	$	482	$	2,946		$	29,326		$	(17,244	)	$	(3,778	)	$	11,732
June 30, 2019																		$	482	$	2,959	$	30,291		$	(17,379	)	$	(3,476	)	$	12,877
Net earnings																		—		—		913			—			—			913
Cash dividends declared																		—		—		(295		)	—			—			(295		)
Equity-based awards																		—		40		—			33			—			73
Shares purchased																		—		—		—			—			—			—
Other comprehensive loss																		—		—		—			—			(55		)	(55		)
September 29, 2019																		$	482	$	2,999	$	30,909		$	(17,346	)	$	(3,531	)	$	13,513

July 1, 2018																		$	482	$	2,865	$	28,115		$	(15,910	)	$	(3,558	)	$	11,994
Net earnings	—		—			745			—			—			745			—		—		851			—			—			851
Cash dividends declared	—		—			(290		)	—			—			(290		)	—		—		(275		)	—			—			(275		)
Equity-based awards	—		(9		)	—			47			—			38			—		49		—			26			—			75
Shares purchased	—		—			—			(86		)	—			(86		)	—		—		—			(87		)	—			(87		)
Other comprehensive income	—		—			—			—			95			95			—		—		—			—			197			197
March 31, 2019	$	482	$	2,937		$	29,781		$	(17,283	)	$	(3,683	)	$	12,234

December 31, 2017	$	482	$	2,872		$	26,444		$	(15,543	)	$	(2,820	)	$	11,435
Cumulative-effect adjustment*	—		—			638			—			(638		)	—
Net earnings	—		—			799			—			—			799
Cash dividends declared	—		—			(276		)	—			—			(276		)
Equity-based awards	—		(52		)	—			58			—			6
Shares purchased	—		—			—			(257		)	—			(257		)
Other comprehensive income	—		—			—			—			67			67
April 1, 2018	$	482	$	2,820		$	27,605		$	(15,742	)	$	(3,391	)	$	11,774
September 30, 2018																		$	482	$	2,914	$	28,691		$	(15,971	)	$	(3,361	)	$	12,755



	Nine Months Ended
	Common Stock				Retained			Treasury			Accumulated Other Comprehensive			Total Shareholders’
(Dollars in millions)	Par		Surplus		Earnings			Stock			Loss			Equity
December 31, 2018	$	482	$	2,946	$	29,326		$	(17,244	)	$	(3,778	)	$	11,732
Net earnings	—		—		2,464			—			—			2,464
Cash dividends declared	—		—		(881		)	—			—			(881		)
Equity-based awards	—		53		—			82			—			135
Shares purchased	—		—		—			(184		)	—			(184		)
Other comprehensive income	—		—		—			—			247			247
September 29, 2019	$	482	$	2,999	$	30,909		$	(17,346	)	$	(3,531	)	$	13,513

December 31, 2017	$	482	$	2,872	$	26,444		$	(15,543	)	$	(2,820	)	$	11,435
Cumulative-effect adjustments*	—		—		638			—			(638		)	—
Net earnings	—		—		2,436			—			—			2,436
Cash dividends declared	—		—		(827		)	—			—			(827		)
Equity-based awards	—		42		—			95			—			137
Shares purchased	—		—		—			(523		)	—			(523		)
Other comprehensive income	—		—		—			—			97			97
September 30, 2018	$	482	$	2,914	$	28,691		$	(15,971	)	$	(3,361	)	$	12,755

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

* Reflects the cumulative ~~effect~~effects of Accounting Standards Update (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.

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

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 typically 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-month period~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 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-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 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, 2018.

Discontinued Operations, Net of Tax. In the third quarter of 2018, we disposed of certain CSRA operations to address an organizational conflict of interest with respect to services provided to a government customer. In accordance with GAAP, the sale did not result in a gain for financial reporting purposes. However, the sale generated a taxable gain, resulting in tax expense of $13.

Accounting Standards ~~Updates~~.Updates. Effective January 1, 2019, we adopted Accounting Standards Codification (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 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.

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). 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, financial condition or cash flows.

~~For a discussion of~~There are several other accounting standards that have been issued by the FASB but are not yet effective, ~~refer~~including Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes how entities account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. The ASU requires a number of changes to the ~~Accounting Standards Updates section in our Annual Report~~assessment of credit losses, including the utilization of an expected credit loss model, which requires consideration of a broader range of information to estimate expected credit losses over the entire lifetime of the asset, including losses where probability is considered remote. Additionally, the standard requires the estimation of lifetime expected losses for trade receivables and contract assets that are classified as current. We intend to adopt the standard on ~~Form 10-K for~~ the ~~year ended December 31, 2018. These standards are~~effective date of January 1, 2020. We have not ~~expected to have a material impact~~yet determined the effect of the ASU on our results of operations, financial condition 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 plus the assumption of outstanding net debt. CSRA is a provider of IT solutions to the defense, intelligence and federal civilian markets and is included in 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 allocation of the $9.7 billion cash purchase price to the estimated fair values of the assets acquired and liabilities assumed on the acquisition date, with the excess recorded as goodwill:



Cash and equivalents	$	45
Accounts receivable	155
Unbilled receivables	415
Other current assets	303
Property, plant and equipment, net	326
Intangible assets, net	2,066
Goodwill	7,935
Other noncurrent assets	369
Total assets	$	11,614
Accounts payable	$	(135	)
Customer advances and deposits	(151		)
Current lease obligation	(51		)
Other current liabilities	(434		)
Noncurrent lease obligation	(207		)
Noncurrent deferred tax liability	(355		)
Other noncurrent liabilities	(532		)
Total liabilities	$	(1,865	)
Net assets acquired	$	9,749

Cash and equivalents $ 45
Accounts receivable 155
Unbilled receivables 420
Other current assets 303
Property, plant and equipment, net 326
Intangible assets, net 2,066
Goodwill 7,931
Other noncurrent assets 369
Total assets $ 11,615
Account payable $ (135 )
Customer advances and deposits (151 )
Current lease obligation (51 )
Other current liabilities (434 )
Noncurrent lease obligation (207 )
Noncurrent deferred tax liability (356 )
Other noncurrent liabilities (532 )
Total liabilities $ (1,866 )
Net assets acquired $ 9,749
Pro Forma Information. The following pro forma information presents our consolidated revenue and earnings from continuing operations as if the acquisition of CSRA and the related financing transactions had occurred on January 1, 2017:



	Three Months Ended		Nine Months Ended
	September 30, 2018		September 30, 2018
Revenue	$	9,094	$	27,156
Earnings from continuing operations	872		2,470
Diluted earnings per share from continuing operations	$	2.92	$	8.23

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:

~~During the quarter,~~The impact of acquisition financing.

The removal of certain CSRA operations we ~~obtained additional information that resulted in adjustments~~were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the ~~estimated~~customer. We completed the sale of these operations in the third quarter of 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 estimate of fair ~~values that~~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 does not ~~material.~~

~~We have valued $2.1 billion~~reflect the realization of 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 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 of~~cost savings or synergies from the acquisition, ~~date.~~

~~Goodwill represents~~and does not reflect what our combined results of operations would have been had 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 deductible for income tax purposes over its remaining tax life.acquisition occurred on January 1, 2017.

Other Acquisitions and Divestitures

In the first ~~three~~nine months of 2019, we ~~completed the acquisition of~~acquired two businesses in our Aerospace segment and a business in ~~each of~~ our ~~Aerospace and~~ Missions Systems ~~segments.~~segment for a total of $19. In 2018, we acquired ~~five~~5 businesses in addition to the acquisition of CSRA for approximately $400: Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, and ~~two~~2 fixed-base operation (FBO) businesses in our Aerospace segment; a maintenance and service provider for the German Army and other international customers in our Combat Systems segment; and a provider of specialized transmitters and receivers in our Mission Systems segment. As the purchase prices of these acquisitions were not material for 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 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.

~~We did not have any divestitures in~~In the first ~~three~~nine months of ~~2019.~~2019, we completed the sale of a business in our Information Technology segment that was classified as held for sale on the Consolidated Balance Sheet on December 31, 2018. 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. AsFor the nine-month periods ended September 29, 2019, and September 30, 2018, the proceeds from the sale of ~~the commercial health products business~~businesses were not material ~~for the three-month period ended April 1, 2018, they~~and 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 Technology		Mission Systems			Marine Systems		Total Goodwill
December 31, 2018 (a)	$	2,813		$	2,633	$	9,622	$	4,229		$	297	$	19,594
Acquisitions/divestitures (b)	2			15		77		6			—		100
Other (c)	(16		)	14		—		(75		)	—		(77		)
September 29, 2019 (a)	$	2,799		$	2,662	$	9,699	$	4,160		$	297	$	19,617

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 Technology and Mission Systems reporting units is net of $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. Also includes an estimated allocation of goodwill in our Mission Systems reporting unit associated with a non-core operation classified as held for sale on the unaudited Consolidated Balance Sheet on September 29, 2019. As we expect this operation to be divested within the next 12 months, the assets and liabilities held for sale are included in other current assets and liabilities on the unaudited Consolidated Balance Sheet.

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
	March 31, 2019							December 31, 2018							September 29, 2019							December 31, 2018
Contract and program intangible assets (b)	$	3,771	$	(1,589	)	$	2,182	$	3,771	$	(1,531	)	$	2,240	$	3,775	$	(1,717	)	$	2,058	$	3,771	$	(1,531	)	$	2,240
Trade names and trademarks	463		(180		)	283		469		(177		)	292		465		(188		)	277		469		(177		)	292
Technology and software	171		(120		)	51		165		(116		)	49		165		(126		)	39		165		(116		)	49
Other intangible assets	159		(157		)	2		159		(155		)	4		159		(157		)	2		159		(155		)	4
Total intangible assets	$	4,564	$	(2,046	)	$	2,518	$	4,564	$	(1,979	)	$	2,585	$	4,564	$	(2,188	)	$	2,376	$	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 ~~$70~~$69 and ~~$20~~$209 for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1, 2018.~~$86 and $190 for the three- and nine-month periods ended September 30, 2018, respectively.

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.~~for revenue. 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 ~~75%~~72% and ~~73%~~74% of our revenue for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~75% and 76% of our revenue for the three- and nine-month periods ended September 30, 2018, 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 ~~25%~~28% and ~~27%~~26% of our revenue for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~25% and 24%

of our revenue for the three- and nine-month periods ended September 30, 2018, 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 ~~March 31,~~September 29, 2019, we had ~~$69.2~~$67.4 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately ~~65%~~55% of our remaining performance obligations as revenue by year-end 2020, an additional ~~25%~~30% by year-end 2022 and the balance thereafter. On December 31, 2018, we had $67.9 billion of remaining performance obligations, at which time we expected to recognize approximately 45% of these remaining performance obligations as revenue in 2019, an additional 35% by year-end 2021 and the balance thereafter.

Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. 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				Nine Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Revenue	$	95	$	96	$	263	$	302
Operating earnings	81		103		220		283
Diluted earnings per share	$	0.22	$	0.27	$	0.60	$	0.75

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

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, or ~~April 1,~~September 30, 2018.

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

Revenue by major products and services was as follows:



	Three Months Ended				Nine Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Aircraft manufacturing and completions	$	1,881	$	1,437	$	5,169	$	4,165
Aircraft services	523		525		1,567		1,507
Pre-owned aircraft	91		69		135		79
Total Aerospace	2,495		2,031		6,871		5,751
Military vehicles	1,137		991		3,361		2,937
Weapons systems, armament and munitions	474		425		1,336		1,251
Engineering and other services	129		107		338		309
Total Combat Systems	1,740		1,523		5,035		4,497
IT services	2,071		2,307		6,398		5,887
Total Information Technology	2,071		2,307		6,398		5,887
C4ISR solutions	1,220		1,230		3,655		3,475
Total Mission Systems	1,220		1,230		3,655		3,475
Nuclear-powered submarines	1,567		1,369		4,482		4,103
Surface ships	402		445		1,376		1,401
Repair and other services	266		189		760		701
Total Marine Systems	2,235		2,003		6,618		6,205
Total revenue	$	9,761	$	9,094	$	28,577	$	25,815

Three Months Ended March 31, 2019 April 1, 2018
Aircraft manufacturing and completions $ 1,691
$ 1,366
Aircraft services 507
451
Pre-owned aircraft 42
8
Total Aerospace 2,240

1,825
Military vehicles 1,134
956
Weapons systems, armament and munitions 401
383
Engineering and other services 101
101
Total Combat Systems 1,636

1,440
Information technology services 2,169
1,138
Total Information Technology 2,169

1,138
C4ISR* solutions 1,158
1,098
Total Mission Systems 1,158

1,098
Nuclear-powered submarines 1,377
1,296
Surface ships 446
483
Repair and other services 235
255
Total Marine Systems 2,058

2,034
Total revenue $ 9,261

$ 7,535

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

Revenue by contract type was as follows:



Three Months Ended September 29, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	2,306	$	1,501	$	824	$	719	$	1,517	$	6,867
Cost-reimbursement	—		230		838		458		716		2,242
Time-and-materials	189		9		409		43		2		652
Total revenue	$	2,495	$	1,740	$	2,071	$	1,220	$	2,235	$	9,761
Three Months Ended September 30, 2018
Fixed-price	$	1,807	$	1,309	$	941	$	695	$	1,284	$	6,036
Cost-reimbursement	—		204		955		499		718		2,376
Time-and-materials	224		10		411		36		1		682
Total revenue	$	2,031	$	1,523	$	2,307	$	1,230	$	2,003	$	9,094


Three Months Ended March 31, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Nine Months Ended September 29, 2019													Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	2,040	$	1,416	$	921	$	651	$	1,416	$	6,444	$	6,271	$	4,344	$	2,620	$	2,122	$	4,508	$	19,865
Cost-reimbursement	—		211		841		463		640		2,155		—		662		2,537		1,405		2,101		6,705
Time-and-materials	200		9		407		44		2		662		600		29		1,241		128		9		2,007
Total revenue	2,240		1,636		2,169		1,158		2,058		9,261		$	6,871	$	5,035	$	6,398	$	3,655	$	6,618	$	28,577
Three Months Ended April 1, 2018
Nine Months Ended September 30, 2018
Fixed-price	$	1,668	$	1,253	$	387	$	620	$	1,305	$	5,233	$	5,171	$	3,892	$	2,387	$	1,973	$	3,961	$	17,384
Cost-reimbursement	—		179		577		440		728		1,924		—		580		2,462		1,390		2,241		6,673
Time-and-materials	157		8		174		38		1		378		580		25		1,038		112		3		1,758
Total revenue	1,825		1,440		1,138		1,098		2,034		7,535		$	5,751	$	4,497	$	5,887	$	3,475	$	6,205	$	25,815

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

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

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

Revenue by customer was as follows:



Three Months Ended September 29, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	87	$	931	$	875	$	861	$	2,157	$	4,911
Non-DoD	—		3		1,141		135		—		1,279
Foreign Military Sales (FMS)	18		58		3		12		43		134
Total U.S. government	105		992		2,019		1,008		2,200		6,324
U.S. commercial	1,420		62		52		33		31		1,598
Non-U.S. government	64		663		—		145		3		875
Non-U.S. commercial	906		23		—		34		1		964
Total revenue	$	2,495	$	1,740	$	2,071	$	1,220	$	2,235	$	9,761
Three Months Ended September 30, 2018
U.S. government:
DoD	$	35	$	698	$	864	$	854	$	1,895	$	4,346
Non-DoD	—		2		1,373		130		—		1,505
FMS	13		65		8		10		37		133
Total U.S. government	48		765		2,245		994		1,932		5,984
U.S. commercial	827		59		41		38		69		1,034
Non-U.S. government	59		677		21		156		2		915
Non-U.S. commercial	1,097		22		—		42		—		1,161
Total revenue	$	2,031	$	1,523	$	2,307	$	1,230	$	2,003	$	9,094


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
Nine Months Ended September 29, 2019													Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
DoD	$	41	$	607	$	433	$	742	$	1,950	$	3,773	$	262	$	2,634	$	2,725	$	2,529	$	6,375	$	14,525
Non-DoD	—		1		637		118		—		756		—		9		3,511		403		1		3,924
FMS	16		69		8		7		29		129		47		227		12		33		134		453
Total U.S. government	57		677		1,078		867		1,979		4,658		309		2,870		6,248		2,965		6,510		18,902
U.S. commercial	842		58		40		27		53		1,020		3,991		171		137		107		97		4,503
Non-U.S. government	10		697		20		172		2		901		264		1,951		13		492		7		2,727
Non-U.S. commercial	916		8		—		32		—		956		2,307		43		—		91		4		2,445
Total revenue	$	1,825	$	1,440	$	1,138	$	1,098	$	2,034	$	7,535	$	6,871	$	5,035	$	6,398	$	3,655	$	6,618	$	28,577
Nine Months Ended September 30, 2018
U.S. government:
DoD													$	165	$	1,965	$	2,321	$	2,360	$	5,877	$	12,688
Non-DoD													—		6		3,349		378		1		3,734
FMS													48		217		23		31		105		424
Total U.S. government													213		2,188		5,693		2,769		5,983		16,846
U.S. commercial													2,586		175		122		101		213		3,197
Non-U.S. government													212		2,086		72		489		8		2,867
Non-U.S. commercial													2,740		48		—		116		1		2,905
Total revenue													$	5,751	$	4,497	$	5,887	$	3,475	$	6,205	$	25,815

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

~~three-month~~ nine-month period ended ~~March 31,~~September 29, 2019, were not materially impacted by any other factors except for the delays in payment on an international wheeled armored vehicle contract in our Combat Systems segment, which contributed to growth in contract assets as further discussed in Note G.

Revenue recognized for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 2018, that was included in the contract liability balance at the beginning of each year was ~~$1.7~~$1.1 billion and ~~$1.5~~$4.0 billion, and $875 and $3.5 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 2019 and 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		Nine Months Ended
	September 29, 2019	September 30, 2018	September 29, 2019	September 30, 2018
Basic weighted average shares outstanding	288,374	295,339	288,130	295,964
Dilutive effect of stock options and restricted stock/RSUs*	2,518	3,748	2,704	4,114
Diluted weighted average shares outstanding	290,892	299,087	290,834	300,078

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 ~~3,975~~5,270 and ~~517~~4,899 for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~3,447 and 3,043 for the three- and nine-month periods ended September 30, 2018, 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 ~~March 31,~~September 29, 2019, or December 31, 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 ~~March 31,~~September 29, 2019, and December 31, 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)
Financial Assets (Liabilities)	September 29, 2019
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents	$	7		$	7		$	1	$	6		$	—
Available-for-sale debt securities	135			135			—		135			—
Equity securities	52			52			52		—			—
Other investments	4			4			—		—			4
Cash flow hedges	(10		)	(10		)	—		(10		)	—
Measured at amortized cost:
Short- and long-term debt principal	(13,733		)	(14,073		)	—		(14,073		)	—

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) March 31, 2019
Measured at fair value:
    Marketable securities held in trust:
        Cash and equivalents $ 6
$ 6
$ —
$ 6
$ —
        Available-for-sale debt securities 143
143
—
143
—
        Equity securities 50
50
50
—
—
    Other investments 4
4
—
—
4
    Cash flow hedges (61 ) (61 ) —
(61 ) —
Measured at amortized cost:
    Short- and long-term debt principal (13,646 ) (13,704 ) —
(13,704 ) —



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

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

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

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:



	September 29, 2019			December 31, 2018
Deferred tax asset	$	42		$	38
Deferred tax liability	(526		)	(577		)
Net deferred tax liability	$	(484	)	$	(539	)

March 31, 2019 December 31, 2018
Deferred tax asset $ 39
$ 38
Deferred tax liability (544 ) (577 )
Net deferred tax liability $ (505 ) $ (539 )

Tax Uncertainties. 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 2017 and is currently reviewing our 2018 tax year.

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 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 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 ~~March 31,~~September 29, 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.~~flows. In addition, there are no0 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.

Income Tax Provision. The U.S. Treasury Department and the IRS are expected to issue further guidance related to the Tax Cuts and Jobs Act (tax reform) enacted in 2017 that could impact our provision for income taxes in future periods. As a result, we believe it is reasonably possible there may be changes to provisional interpretations and assumptions we made in our initial application of tax reform provisions. We do not expect the impact of any changes to have a material impact 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. Unbilled receivables consisted of the following:



	September 29, 2019			December 31, 2018
Unbilled revenue	$	33,170		$	27,908
Advances and progress billings	(25,093		)	(21,332		)
Net unbilled receivables	$	8,077		$	6,576

March 31, 2019 December 31, 2018
Unbilled revenue $ 30,497
$ 27,908
Advances and progress billings (23,130 ) (21,332 )
Net unbilled receivables $ 7,367

$ 6,576

The increase in net unbilled receivables during the ~~three-month~~nine-month period ended ~~March 31,~~September 29, 2019, was due primarily to an international wheeled armored vehicle contract in our Combat Systems segment. At ~~March 31,~~September 29, 2019, the net unbilled receivable related to this contract was ~~$2.2~~$2.6 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:



	September 29, 2019		December 31, 2018
Work in process	$	4,706	$	4,357
Raw materials	1,670		1,504
Finished goods	46		33
Pre-owned aircraft	151		83
Total inventories	$	6,573	$	5,977

March 31, 2019 December 31, 2018
Work in process $ 4,510
$ 4,357
Raw materials 1,535
1,504
Finished goods 45
33
Pre-owned aircraft 95
83
Total inventories $ 6,185
$ 5,977

The increase in total inventories during the ~~three-month~~nine-month period ended ~~March 31,~~September 29, 2019, was due primarily to the ramp-up in production of the new G600 aircraft in our Aerospace ~~segment,~~segment. We received both type and production certification from the U.S. Federal Aviation Administration (FAA) for ~~which we are anticipating FAA type certification~~the G600 aircraft in June 2019 and ~~entry into service~~delivered the first G600 aircraft in the third quarter of 2019. The increase in total inventories was also driven by production of initial units of the newly-announced G700 aircraft.

I. DEBT

Debt consisted of the following:



		September 29, 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	2.117%	1,800		850
Other	Various	433		168
Total debt principal		13,733		12,518
Less unamortized debt issuance costs and discounts		83		101
Total debt		13,650		12,417
Less current portion		4,661		973
Long-term debt		$	8,989	$	11,444

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 Q 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.

On ~~March 31,~~September 29, 2019, we had ~~$1.9~~$1.8 billion of commercial paper outstanding with a dollar-weighted average interest rate of ~~2.516%~~2.117%. We have $5 billion in committed bank credit facilities to support our commercial paper issuances and for general corporate purposes and working capital ~~needs and to support our commercial paper issuances.~~needs. These credit facilities include a $2 billion 364-day facility expiring in March 2020, a $1 billion multi-year facility expiring in November 2020 and a $2 billion multi-year facility expiring in March 2023. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on ~~March 31,~~September 29, 2019.

J. OTHER LIABILITIES

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


	March 31, 2019		December 31, 2018		September 29, 2019		December 31, 2018

Salaries and wages	$	811	$	952	$	968	$	952
Workers’ compensation					274		244
Retirement benefits	267		272		280		272
Operating lease liabilities	255		—		241		—
Workers’ compensation	248		244
Fair value of cash flow hedges	102		141		62		141
Other (a)	1,899		1,708		1,888		1,708
Total other current liabilities	$	3,582	$	3,317	$	3,713	$	3,317

Retirement benefits	$	4,334	$	4,422	$	4,151	$	4,422
Operating lease liabilities	1,129		—		1,230		—
Customer deposits on commercial contracts	678		726		527		726
Deferred income taxes	544		577		526		577
Other (b)	1,714		1,768		1,625		1,768
Total other liabilities	$	8,399	$	7,493	$	8,059	$	7,493

(a)Consists primarily of dividends payable, taxes payable, 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 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 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 ~~three-month~~nine-month period ended ~~March 31,~~September 29, 2019, we repurchased ~~0.5~~1.1 million of our outstanding shares for ~~$86.~~$184. On ~~March 31,~~September 29, 2019, 76.4 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased ~~1.2~~2.5 million shares for ~~$257~~$522 in the ~~three-month~~nine-month period ended ~~April 1,~~September 30, 2018.

Dividends per Share. Our board of directors declared dividends of $1.02 and ~~$0.93~~$3.06 per share for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~$0.93 and $2.79 per share for the three- and nine-month periods ended September 30, 2018, respectively. We paid cash dividends of ~~$268~~$295 and ~~$250~~$858 for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~$275 and $801 for the three- and nine-month periods ended September 30, 2018, 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, 2018	$	(71	)	$	—	$	102	$	(3,809	)	$	(3,778	)
Other comprehensive income, pretax	70			1		47		188			306
Provision for income tax, net	(17		)	—		—		(42		)	(59		)
Other comprehensive income, net of tax	53			1		47		146			247
September 29, 2019	$	(18	)	$	1	$	149	$	(3,663	)	$	(3,531	)

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, 2017	$	(94	)	$	19		$	402		$	(3,147	)	$	(2,820	)
Cumulative-effect adjustments*	(4		)	(19		)	—			(615		)	(638		)
Other comprehensive income, pretax	40			—			(130		)	247			157
Provision for income tax, net	(8		)	—			—			(52		)	(60		)
Other comprehensive income, net of tax	32			—			(130		)	195			97
September 30, 2018	$	(66	)	$	—		$	272		$	(3,567	)	$	(3,361	)

December 31, 2017 $ (94 ) $ 19
$ 402
$ (3,147 ) $ (2,820 )
Cumulative effect adjustments* (4 ) (19 ) —
(615 ) (638 )
Other comprehensive income, pretax (3 ) —
1
84
82
Provision for income tax, net 1
—
—
(16 ) (15 )
Other comprehensive income, net of tax (2 ) —
1
68
67
April 1, 2018 $ (100 ) $ —
$ 403
$ (3,694 ) $ (3,391 )

* Reflects the cumulative ~~effect~~effects 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 ~~$68~~$232 and ~~$95~~$280 for the ~~three-month~~nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 2018, respectively. This was offset partially by pretax amortization of prior service credit of $5$16 and ~~$12~~$36 for the ~~three-month~~nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 2018, respectively. These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note O 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- and floating-rate long-term debt obligations. 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 ~~March~~September 29, 2019, and December 31, ~~2019,~~2018, we held ~~$673~~$974 and $963 in cash and equivalents, respectively, 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 ~~March 31,~~September 29, 2019, and December 31, 2018, these marketable securities totaled ~~$199~~$194 and $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 notional forward exchange and interest rate swap contracts outstanding of ~~$4.6~~$4.4 billion and $5.8 billion on ~~March 31,~~September 29, 2019, and December 31, 2018, respectively. These derivative financial instruments are cash flow hedges, and are reflected at fair value on the Consolidated Balance Sheet in other current assets and liabilities. See Note E for additional details.

Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in AOCL until the underlying transaction is reflected in earnings. 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.

Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 2018. Net gains and losses reclassified to earnings from AOCL related to qualified hedges also were not material to our results of operations for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and

~~April 1,~~ September 30, 2018, 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 ~~March 31,~~September 29, 2019, or December 31, 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 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-month~~three- and nine-month periods ended ~~March 31,~~

September 29, 2019, or ~~April 1,~~September 30, 2018. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the ~~three-month~~nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 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 which had been 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.

In the third quarter of 2019, the Department of Justice declined to intervene in the qui tam action, noting that its investigation continues, and the court unsealed the relator’s complaint. 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 ~~$1.3~~$1.2 billion on ~~March 31,~~September 29, 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. 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,~~September 29, 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 ~~three-month~~nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 2018, were as follows:



Nine Months Ended	September 29, 2019			September 30, 2018
Beginning balance	$	480		$	467
Warranty expense	84			87
Payments	(62		)	(77		)
Adjustments	(14		)	(16		)
Ending balance	$	488		$	461

Three Months Ended March 31, 2019 April 1, 2018
Beginning balance $ 480
$ 467
Warranty expense 27
29
Payments (24 ) (25 )
Adjustments (1 ) (3 )
Ending balance $ 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 aan 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			Nine Months Ended
	September 29, 2019			September 29, 2019
Finance lease cost:
Amortization of right-of-use assets	$	21		$	64
Interest on lease liabilities	7			19
Operating lease cost	86			250
Short-term lease cost	22			54
Variable lease cost	3			5
Sublease income	(3		)	(11		)
Total lease costs, net	$	136		$	381

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
Nine Months Ended				September 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	88		$	247
Operating cash flows from finance leases	7			19
Financing cash flows from finance leases	16			42
Right-of-use assets obtained in exchange for lease liabilities
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	40			292
Finance leases	6			5
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		%

Additional quantitative lease information was as follows:



	September 29, 2019
Weighted-average remaining lease term:
Operating leases	11.0 years
Finance leases	5.2 years
Weighted-average discount rate:
Operating leases	3	%
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~~the unaudited Consolidated Balance Sheet on ~~March 31,~~September 29, 2019:



Year Ended December 31	Operating Leases		Finance Leases
2019 (excluding the nine months ended September 29, 2019)	$	81	$	22
2020	281		81
2021	237		75
2022	191		75
2023	147		29
Thereafter	900		67
Total future lease payments	1,837		349
Less imputed interest	366		68
Present value of future lease payments	1,471		281
Less current portion of lease liabilities	241		66
Long-term lease liabilities	$	1,230	$	215
ROU assets	$	1,400	$	325

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~~the Consolidated Balance Sheet in current and noncurrent other liabilities, while ROU assets are included in noncurrent other assets.

~~As of March 31,~~On September 29, 2019, we ~~have~~had additional future payments on leases that ~~have~~had not yet commenced of ~~$218.~~$144. 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.

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-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~September 30, 2018, consisted of the following:



	Pension Benefits						Other Post-retirement Benefits
Three Months Ended	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
Service cost	$	28		$	45		$	2		$	3
Interest cost	150			140			9			8
Expected return on plan assets	(228		)	(225		)	(9		)	(10		)
Recognized net actuarial loss (gain)	98			94			(2		)	(1		)
Amortization of prior service credit	(4		)	(11		)	(1		)	(1		)
Net periodic benefit cost (credit)	$	44		$	43		$	(1	)	$	(1	)
Nine Months Ended
Service cost	$	84		$	135		$	6		$	8
Interest cost	450			394			27			24
Expected return on plan assets	(684		)	(632		)	(27		)	(29		)
Recognized net actuarial loss (gain)	238			283			(6		)	(3		)
Amortization of prior service credit	(13		)	(33		)	(3		)	(3		)
Net periodic benefit cost (credit)	$	75		$	147		$	(3	)	$	(3	)

Pension Benefits Other Post-retirement Benefits
Three Months Ended March 31, 2019 April 1, 2018 March 31, 2019 April 1, 2018
Service cost $ 28
$ 46
$ 2
$ 3
Interest cost 150
114
9
8
Expected return on plan assets (228 ) (179 ) (9 ) (9 )
Recognized net actuarial loss (gain) 70
96
(2 ) (1 )
Amortization of prior service credit (4 ) (11 ) (1 ) (1 )
Net periodic benefit cost (credit) $ 16
$ 66
$ (1 ) $ —

~~Beginning~~Based on recent market conditions, we adjusted our assumptions for our non-qualified supplemental retirement plans, and the third quarter of 2019 reflects a cumulative adjustment to recognize the resulting increase in 2019, we decreased the expected long-term rates of return on assets in our primary U.S. other post-retirement benefit plans by 100 basis points, following an assessment of the historical and expected long-term returns of our various asset classes.expense.

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 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.

P. SEGMENT INFORMATION

We have ~~five~~5 operating ~~segments,~~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
Three Months Ended	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Aerospace	$	2,495	$	2,031	$	393	$	376
Combat Systems	1,740		1,523		264		241
Information Technology	2,071		2,307		146		157
Mission Systems	1,220		1,230		185		179
Marine Systems	2,235		2,003		209		169
Corporate	—		—		19		13
Total	$	9,761	$	9,094	$	1,216	$	1,135
Nine Months Ended
Aerospace	$	6,871	$	5,751	$	1,052	$	1,108
Combat Systems	5,035		4,497		712		701
Information Technology	6,398		5,887		456		414
Mission Systems	3,655		3,475		495		478
Marine Systems	6,618		6,205		586		548
Corporate	—		—		19		(18		)
Total	$	28,577	$	25,815	$	3,320	$	3,231

Revenue Operating Earnings
Three Months Ended March 31, 2019 April 1, 2018 March 31, 2019 April 1, 2018
Aerospace $ 2,240
$ 1,825
$ 328
$ 346
Combat Systems 1,636
1,440
206
224
Information Technology 2,169
1,138
156
101
Mission Systems 1,158
1,098
148
146
Marine Systems 2,058
2,034
180
184
Corporate —
—
(4 ) 7
Total $ 9,261
$ 7,535
$ 1,014
$ 1,008

Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) in other income (expense) in the Consolidated

Statement of Earnings. As described in Note O, in our defense segments, pension and other post-retirement benefit costs are recoverable contract costs. Therefore, the non-service cost components are included in the operating results of these segments, but an offset is reported in Corporate.

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 September 29, 2019	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Revenue	$	—		$	7,660		$	2,101		$	—		$	9,761
Cost of sales	36			(6,257		)	(1,752		)	—			(7,973		)
G&A	(17		)	(415		)	(140		)	—			(572		)
Operating earnings	19			988			209			—			1,216
Interest, net	(105		)	(1		)	(8		)	—			(114		)
Other, net	(6		)	1			(7		)	—			(12		)
Earnings before income tax	(92		)	988			194			—			1,090
Provision for income tax, net	32			(168		)	(41		)	—			(177		)
Equity in net earnings of subsidiaries	973			—			—			(973		)	—
Net earnings	$	913		$	820		$	153		$	(973	)	$	913
Comprehensive income	$	858		$	813		$	53		$	(866	)	$	858
Three Months Ended September 30, 2018
Revenue	$	—		$	6,811		$	2,283		$	—		$	9,094
Cost of sales	26			(5,518		)	(1,915		)	—			(7,407		)
G&A	(15		)	(393		)	(144		)	—			(552		)
Operating earnings	11			900			224			—			1,135
Interest, net	(105		)	(2		)	(7		)	—			(114		)
Other, net	4			2			(4		)	—			2
Earnings before income tax	(90		)	900			213			—			1,023
Provision for income tax, net	8			(132		)	(35		)	—			(159		)
Discontinued operations, net of tax	(13		)	—			—			—			(13		)
Equity in net earnings of subsidiaries	946			—			—			(946		)	—
Net earnings	$	851		$	768		$	178		$	(946	)	$	851
Comprehensive income	$	1,048		$	769		$	307		$	(1,076	)	$	1,048

Three Months Ended March 31, 2019 Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenue $ —
$ 6,945
$ 2,316
$ —
$ 9,261
Cost of sales 18
(5,726 ) (1,925 ) —
(7,633 )
G&A (22 ) (419 ) (173 ) —
(614 )
Operating earnings (4 ) 800
218
—
1,014
Interest, net (107 ) —
(10 ) —
(117 )
Other, net (8 ) 4
22
—
18
Earnings before income tax (119 ) 804
230
—
915
Provision for income tax, net 31
(155 ) (46 ) —
(170 )
Equity in net earnings of subsidiaries 833
—
—
(833 ) —
Net earnings $ 745
$ 649
$ 184
$ (833 ) $ 745
Comprehensive income $ 840
$ 652
$ 237
$ (889 ) $ 840
Three Months Ended April 1, 2018
Revenue $ —
$ 6,484
$ 1,051
$ —
$ 7,535
Cost of sales 19
(5,202 ) (807 ) —
(5,990 )
G&A (13 ) (436 ) (88 ) —
(537 )
Operating earnings 6
846
156
—
1,008
Interest, net (26 ) —
(1 ) —
(27 )
Other, net (24 ) 1
2
—
(21 )
Earnings before income tax (44 ) 847
157
—
960
Provision for income tax, net 42
(165 ) (38 ) —
(161 )
Equity in net earnings of subsidiaries 801
—
—
(801 ) —
Net earnings $ 799
$ 682
$ 119
$ (801 ) $ 799
Comprehensive income $ 866
$ 685
$ 137
$ (822 ) $ 866

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED)



Nine Months Ended September 29, 2019	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated
Revenue	$	—		$	22,042		$	6,535		$	—		$	28,577
Cost of sales	75			(18,094		)	(5,456		)	—			(23,475		)
G&A	(58		)	(1,262		)	(462		)	—			(1,782		)
Operating earnings	17			2,686			617			—			3,320
Interest, net	(322		)	—			(28		)	—			(350		)
Other, net	17			4			(3		)	—			18
Earnings before income tax	(288		)	2,690			586			—			2,988
Provision for income tax, net	94			(495		)	(123		)	—			(524		)
Equity in net earnings of subsidiaries	2,658			—			—			(2,658		)	—
Net earnings	$	2,464		$	2,195		$	463		$	(2,658	)	$	2,464
Comprehensive income	$	2,711		$	2,182		$	576		$	(2,758	)	$	2,711
Nine Months Ended September 30, 2018
Revenue	$	—		$	20,088		$	5,727		$	—		$	25,815
Cost of sales	54			(16,195		)	(4,742		)	—			(20,883		)
G&A	(73		)	(1,247		)	(381		)	—			(1,701		)
Operating earnings	(19		)	2,646			604			—			3,231
Interest, net	(225		)	(1		)	(18		)	—			(244		)
Other, net	(38		)	6			(2		)	—			(34		)
Earnings before income tax	(282		)	2,651			584			—			2,953
Provision for income tax, net	89			(475		)	(118		)	—			(504		)
Discontinued operations, net of tax	(13		)	—			—			—			(13		)
Equity in net earnings of subsidiaries	2,642			—			—			(2,642		)	—
Net earnings	$	2,436		$	2,176		$	466		$	(2,642	)	$	2,436
Comprehensive income	$	2,533		$	2,154		$	386		$	(2,540	)	$	2,533

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)



September 29, 2019	Parent*			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments			Total Consolidated

ASSETS
Current assets:
Cash and equivalents	$	412		$	—		$	562		—			$	974
Accounts receivable	—			1,083			2,406			—			3,489
Unbilled receivables	—			3,268			4,809			—			8,077
Inventories	—			6,419			154			—			6,573
Other current assets	(404		)	920			522			—			1,038
Total current assets	8			11,690			8,453			—			20,151
Noncurrent assets:
Property, plant and equipment (PP&E)	341			7,486			1,630			—			9,457
Accumulated depreciation of PP&E	(88		)	(4,238		)	(914		)	—			(5,240		)
Intangible assets, net	—			219			2,157			—			2,376
Goodwill	—			7,960			11,657			—			19,617
Other assets	196			1,158			1,073			—			2,427
Net investment in subsidiaries	30,594			—			—			(30,594		)	—
Total noncurrent assets	31,043			12,585			15,603			(30,594		)	28,637
Total assets	$	31,051		$	24,275		$	24,056		$	(30,594	)	$	48,788

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	4,294		$	—		$	367		$	—		$	4,661
Customer advances and deposits	—			3,965			2,889			—			6,854
Other current liabilities	677			4,116			1,919			—			6,712
Total current liabilities	4,971			8,081			5,175			—			18,227
Noncurrent liabilities:
Long-term debt	8,923			52			14			—			8,989
Other liabilities	3,644			2,659			1,756			—			8,059
Total noncurrent liabilities	12,567			2,711			1,770			—			17,048
Total shareholders’ equity	13,513			13,483			17,111			(30,594		)	13,513
Total liabilities and shareholders’ equity	$	31,051		$	24,275		$	24,056		$	(30,594	)	$	48,788


*	Includes the funded status of the company’s primary domestic qualified defined-benefit pension plans as the Parent has the ultimate obligation for the plans.

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 $ 329
$ —
$ 344
$ —
$ 673
Accounts receivable —
1,253
2,465
—
3,718
Unbilled receivables —
2,985
4,382
—
7,367
Inventories —
6,067
118
—
6,185
Other current assets (43 ) 445
522
—
924
Total current assets 286
10,750
7,831
—
18,867
Noncurrent assets:
Property, plant and equipment (PP&E) 288
7,263
1,594
—
9,145
Accumulated depreciation of PP&E (85 ) (4,138 ) (868 ) —
(5,091 )
Intangible assets, net —
241
2,277
—
2,518
Goodwill —
8,036
11,632
—
19,668
Other assets 207
1,052
1,100
—
2,359
Net investment in subsidiaries 27,050
—
—
(27,050 ) —
Total noncurrent assets 27,460
12,454
15,735
(27,050 ) 28,599
Total assets $ 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 $ 1,863
$ —
$ 234
$ —
$ 2,097
Customer advances and deposits —
4,245
2,450
—
6,695
Other current liabilities 691
4,000
1,899
—
6,590
Total current liabilities 2,554
8,245
4,583
—
15,382
Noncurrent liabilities:
Long-term debt 11,405
39
7
—
11,451
Other liabilities 1,553
4,656
2,190
—
8,399
Total noncurrent liabilities 12,958
4,695
2,197
—
19,850
Total shareholders’ equity 12,234
10,264
16,786
(27,050 ) 12,234
Total liabilities and shareholders’ equity $ 27,746
$ 23,204
$ 23,566
$ (27,050 ) $ 47,466

CONDENSED CONSOLIDATING BALANCE SHEET



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	$	460		$	—		$	503		$	—		$	963
Accounts receivable	—			1,171			2,588			—			3,759
Unbilled receivables	—			2,758			3,818			—			6,576
Inventories	—			5,855			122			—			5,977
Other current assets	(251		)	647			518			—			914
Total current assets	209			10,431			7,549			—			18,189
Noncurrent assets:
PP&E	273			7,177			1,522			—			8,972
Accumulated depreciation of PP&E	(83		)	(4,071		)	(840		)	—			(4,994		)
Intangible assets, net	—			251			2,334			—			2,585
Goodwill	—			8,031			11,563			—			19,594
Other assets	195			274			593			—			1,062
Net investment in subsidiaries	27,887			—			—			(27,887		)	—
Total noncurrent assets	28,272			11,662			15,172			(27,887		)	27,219
Total assets	$	28,481		$	22,093		$	22,721		$	(27,887	)	$	45,408

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	850		$	—		$	123		$	—		$	973
Customer advances and deposits	—			4,541			2,729			—			7,270
Other current liabilities	552			3,944			2,000			—			6,496
Total current liabilities	1,402			8,485			4,852			—			14,739
Noncurrent liabilities:
Long-term debt	11,398			39			7			—			11,444
Other liabilities	3,949			2,115			1,429			—			7,493
Total noncurrent liabilities	15,347			2,154			1,436			—			18,937
Total shareholders’ equity	11,732			11,454			16,433			(27,887		)	11,732
Total liabilities and shareholders’ equity	$	28,481		$	22,093		$	22,721		$	(27,887	)	$	45,408


*	Includes the funded status of the company’s primary domestic qualified defined-benefit pension plans as the Parent has the ultimate obligation for the plans.

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 $ 460
$ —
$ 503
$ —
$ 963
Accounts receivable —
1,171
2,588
—
3,759
Unbilled receivables —
2,758
3,818
—
6,576
Inventories —
5,855
122
—
5,977
Other current assets (45 ) 441
518
—
914
Total current assets 415
10,225
7,549
—
18,189
Noncurrent assets:
Property, plant and equipment (PP&E)

273
7,177
1,522
—
8,972
Accumulated depreciation of PP&E (83 ) (4,071 ) (840 ) —
(4,994 )
Intangible assets, net —
251
2,334
—
2,585
Goodwill —
8,031
11,563
—
19,594
Other assets 195
274
593
—
1,062
Net investment in subsidiaries 25,313
—
—
(25,313 ) —
Total noncurrent assets 25,698
11,662
15,172
(25,313 ) 27,219
Total assets $ 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 $ 850
$ —
$ 123
$ —
$ 973
Customer advances and deposits —
4,541
2,729
—
7,270
Other current liabilities 552
3,944
2,000
—
6,496
Total current liabilities 1,402
8,485
4,852
—
14,739
Noncurrent liabilities:
Long-term debt 11,398
39
7
—
11,444
Other liabilities 1,581
4,073
1,839
—
7,493
Total noncurrent liabilities 12,979
4,112
1,846
—
18,937
Total shareholders’ equity 11,732
9,290
16,023
(25,313 ) 11,732
Total liabilities and shareholders’ equity $ 26,113
$ 21,887
$ 22,721
$ (25,313 ) $ 45,408

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)



Nine Months Ended September 29, 2019	Parent			Guarantors on a Combined Basis			Other Subsidiaries on a Combined Basis			Consolidating Adjustments		Total Consolidated
Net cash provided by operating activities*	$	181		$	679		$	(273	)	$	—	$	587
Cash flows from investing activities:
Capital expenditures	(65		)	(404		)	(137		)	—		(606		)
Other, net	6			21			(25		)	—		2
Net cash used by investing activities	(59		)	(383		)	(162		)	—		(604		)
Cash flows from financing activities:
Proceeds from commercial paper, net	947			—			—			—		947
Dividends paid	(858		)	—			—			—		(858		)
Purchases of common stock	(231		)	—			—			—		(231		)
Other, net	24			(1		)	184			—		207
Net cash provided by financing activities	(118		)	(1		)	184			—		65
Net cash used by discontinued operations	(37		)	—			—			—		(37		)
Cash sweep/funding by parent	(15		)	(295		)	310			—		—
Net increase in cash and equivalents	(48		)	—			59			—		11
Cash and equivalents at beginning of period	460			—			503			—		963
Cash and equivalents at end of period	$	412		$	—		$	562		$	—	$	974
Nine Months Ended September 30, 2018
Net cash provided by operating activities*	$	(204	)	$	1,561		$	(276	)	$	—	$	1,081
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(9,749		)	(74		)	(216		)	—		(10,039		)
Capital expenditures	(36		)	(331		)	(80		)	—		(447		)
Other, net	93			76			—			—		169
Net cash used by investing activities	(9,692		)	(329		)	(296		)	—		(10,317		)
Cash flows from financing activities:
Proceeds from fixed-rate notes	6,461			—			—			—		6,461
Proceeds from commercial paper, net	1,668			—			—			—		1,668
Proceeds from floating-rate notes	1,000			—			—			—		1,000
Dividends paid	(801		)	—			—			—		(801		)
Purchases of common stock	(533		)	—			—			—		(533		)
Repayment of CSRA accounts receivable purchase agreement	—			—			(450		)	—		(450		)
Other, net	(10		)	—			(58		)	—		(68		)
Net cash provided by financing activities	7,785			—			(508		)	—		7,277
Net cash used by discontinued operations	(14		)	—			—			—		(14		)
Cash sweep/funding by parent	844			(1,232		)	388			—		—
Net decrease in cash and equivalents	(1,281		)	—			(692		)	—		(1,973		)
Cash and equivalents at beginning of period	1,930			—			1,053			—		2,983
Cash and equivalents at end of period	$	649		$	—		$	361		$	—	$	1,010

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:
Capital expenditures (20 ) (106 ) (55 ) —
(181 )
Other, net 5
1
(12 ) —
(6 )
Net cash used by investing activities (15 ) (105 ) (67 ) —
(187 )
Cash flows from financing activities:
Proceeds from commercial paper, net 1,010
—
—
—
1,010
Dividends paid (268 ) —
—
—
(268 )
Purchases of common stock (133 ) —
—
—
(133 )
Other, net (5 ) —
93
—
88
Net cash provided by financing activities 604
—
93
—
697
Net cash used by discontinued operations (5 ) —
—
—
(5 )
Cash sweep/funding by parent (774 ) 272
502
—
—
Net decrease in cash and equivalents (131 ) —
(159 ) —
(290 )
Cash and equivalents at beginning of period 460
—
503
—
963
Cash and equivalents at end of period $ 329
$ —
$ 344
$ —
$ 673
Three Months Ended April 1, 2018
Net cash (used) provided by operating activities* $ 80
$ 105
$ (681 ) $ —
$ (496 )
Cash flows from investing activities:
Capital expenditures (7 ) (86 ) (11 ) —
(104 )
Other, net 1
(2 ) —
—
(1 )
Net cash used by investing activities (6 ) (88 ) (11 ) —
(105 )
Cash flows from financing activities:
Proceeds from commercial paper, net 2,494
—
—
—
2,494
Purchases of common stock (267 ) —
—
—
(267 )
Dividends paid (250 ) —
—
—
(250 )
Other, net (25 ) —
—
—
(25 )
Net cash provided by financing activities 1,952
—
—
—
1,952
Net cash used by discontinued operations (2 ) —
—
—
(2 )
Cash sweep/funding by parent (167 ) (17 ) 184
—
—
Net increase in cash and equivalents 1,857
—
(508 ) —
1,349
Cash and equivalents at beginning of period 1,930
—
1,053
—
2,983
Cash and equivalents at end of period $ 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,~~command, control, communications, computers, intelligence, surveillance and ~~reconnaissance)~~reconnaissance (C4ISR) solutions; and shipbuilding and ship repair.

~~We operate through~~Our company is organized into five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We refer to the latter four segments collectively as our defense segments. 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 2018 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

DEFENSE BUSINESS ENVIRONMENT

With approximately 65% of our revenue from the U.S. government, government spending levels, particularly defense spending, influence our financial performance. At the start of the government’s new fiscal year (FY) that began on October 1, 2019, the Congress had not passed the FY 2020 defense appropriations bill. On September 27, 2019, a continuing resolution (CR) was signed into law, providing funding for federal agencies at FY 2019 spending levels through November 21, 2019. When the government operates under a CR, newly awarded programs are not funded, which could result in program delays. We do not anticipate that the current CR, or subsequent extensions, will have a material impact on our results of operations, financial condition or cash flows.

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 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 services performed during the period.

The majority of the Aerospace segment’s operating costs relates to new aircraft production on firm orders and consists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at 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 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	March 31, 2019			April 1, 2018			Variance					September 29, 2019			September 30, 2018			Variance
Revenue	$	9,261		$	7,535		$	1,726		22.9	%	$	9,761		$	9,094		$	667		7.3	%
Operating costs and expenses	(8,247		)	(6,527		)	(1,720		)	26.4	%	(8,545		)	(7,959		)	(586		)	7.4	%
Operating earnings	1,014			1,008			6			0.6	%	1,216			1,135			81			7.1	%
Operating margin	10.9		%	13.4		%						12.5		%	12.5		%
Nine Months Ended												September 29, 2019			September 30, 2018			Variance
Revenue												$	28,577		$	25,815		$	2,762		10.7	%
Operating costs and expenses												(25,257		)	(22,584		)	(2,673		)	11.8	%
Operating earnings												3,320			3,231			89			2.8	%
Operating margin												11.6		%	12.5		%

Our consolidated revenue increased in the third quarter and first ~~quarter~~nine months of 2019 driven by ~~growth in all of our segments. The growth~~additional aircraft deliveries in our ITAerospace segment, higher volume from U.S. military vehicles in our Combat Systems segment and increased U.S. Navy ship construction in our Marine Systems segment. In the first nine months of 2019, the increase in revenue was also driven by the acquisition of CSRA Inc. (CSRA), in our Information Technology segment, 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 additional aircraft deliveries and in our Combat Systems segment due to higher volume from U.S. military vehicle programs.~~

Operating ~~costs and expenses increased at a greater rate than revenue~~margin remained steady in the third quarter of 2019 but declined 90 basis points in the first ~~quarter~~nine months of ~~2019, resulting in a lower operating margin, due primarily to~~2019. Both periods were impacted by a less favorable aircraft delivery mix in our Aerospace segment and ~~intangible asset amortization expense from~~a less favorable contract mix in our Combat Systems segment. The unfavorable impacts of these items were fully offset in the ~~CSRA acquisition.~~third quarter as a result of ongoing operational performance improvements and cost containment activities across the company.

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 markets and 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 P to the unaudited Consolidated Financial Statements in Part I, Item 1.

AEROSPACE


Three Months Ended	March 31, 2019			April 1, 2018			Variance					September 29, 2019			September 30, 2018			Variance
Revenue	$	2,240		$	1,825		$	415		22.7	%	$	2,495		$	2,031		$	464		22.8	%
Operating earnings	328			346			(18		)	(5.2	)%	393			376			17			4.5	%
Operating margin	14.6		%	19.0		%						15.8		%	18.5		%
Gulfstream aircraft deliveries (in units)	34			26			8			30.8	%	38			27			11			40.7	%
Nine Months Ended												September 29, 2019			September 30, 2018			Variance
Revenue												$	6,871		$	5,751		$	1,120		19.5	%
Operating earnings												1,052			1,108			(56		)	(5.1	)%
Operating margin												15.3		%	19.3		%
Gulfstream aircraft deliveries (in units)												103			79			24			30.4	%

Operating Results

The increase in the Aerospace segment’s revenue in the third quarter and first ~~quarter~~nine months of 2019 consisted of the following:


			Third Quarter			Nine Months
Aircraft manufacturing and completions	$	324	$	444		$	1,004
Aircraft services	57		(2		)	60
Pre-owned aircraft	34		22			56
Total increase	$	415	$	464		$	1,120

Aircraft manufacturing and completions revenue increased due primarily to the initial deliveries of the new large-cabin G600 aircraft, which entered into service in the third quarter of 2019, and additional deliveries of the ~~new~~ large-cabin G500 aircraft, which entered into service in the third quarter of 2018. ~~The~~We expect deliveries of both of these aircraft to continue to ramp up in the fourth quarter.

In the first nine months of 2019, 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~~the Asia-Pacific region and the Middle East. ~~We sold four pre-owned aircraft in the first quarter of 2019 compared with one in the prior-year period.~~

The components of the change in the segment’s operating earnings in the third quarter and first nine months of 2019 are presented below. Operating earnings were up in the quarter over the third quarter of ~~2019 consisted~~2018, which is particularly notable in light of a significant favorable supplier settlement in the third quarter of 2018 that was the primary driver of the ~~following:~~decrease in operating earnings in the first nine months of 2019.


				Third Quarter			Nine Months
Aircraft manufacturing and completions	$	(30	)	$	(4	)	$	(40	)
Aircraft services				10			3
Pre-owned aircraft	(2		)	—			(7		)
G&A/other expenses	14			11			(12		)
Total decrease	$	(18	)
Total increase (decrease)				$	17		$	(56	)

~~Aircraft~~In addition to the supplier settlement, aircraft manufacturing and completions operating earnings were ~~down due to a~~impacted by the shift in the mix of Gulfstream aircraft deliveries toas the G600 was introduced and G500 ~~and~~production increased, bringing the typical lower margin associated with initial units of a new aircraft model. The ~~segment’s~~shift in the mix was offset by the operating earnings generated from additional deliveries in the current-year periods.

Net G&A/other expenses were ~~impacted favorably by lower~~higher in the first nine months of 2019 compared with the prior-year period as a result of the receipt in the second quarter of 2018 of milestone payments from suppliers under our cost sharing arrangements on aircraft development programs. Overall, R&D ~~expenses. Overall,~~expenses have been trending downward with the completion of the G500 and G600 aircraft test programs, resulting in lower G&A/other expenses in the third quarter of 2019. In total, the Aerospace segment’s operating margin decreased ~~440~~270 basis ~~points.~~

points in the third quarter and 400 basis points in the first nine months of 2019 compared with the prior-year periods.

COMBAT SYSTEMS


Three Months Ended	March 31, 2019			April 1, 2018			Variance					September 29, 2019			September 30, 2018			Variance
Revenue	$	1,636		$	1,440		$	196		13.6	%	$	1,740		$	1,523		$	217	14.2	%
Operating earnings	206			224			(18		)	(8.0	)%	264			241			23		9.5	%
Operating margin	12.6		%	15.6		%						15.2		%	15.8		%
Nine Months Ended												September 29, 2019			September 30, 2018			Variance
Revenue												$	5,035		$	4,497		$	538	12.0	%
Operating earnings												712			701			11		1.6	%
Operating margin												14.1		%	15.6		%

Operating Results

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


			Third Quarter			Nine Months
U.S. military vehicles	$	105	$	140		$	398
Weapons systems and munitions			82			183
International military vehicles	51		(5		)	(43		)
Weapons systems and munitions	40
Total increase	$	196	$	217		$	538

Revenue from U.S. ~~Military~~military vehicles increased due primarily 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,~~tank and ~~the~~ new Mobile Protected Firepower (MPF) ~~vehicle. Additionally, revenue from international military vehicles increased due to higher volume on wheeled armored~~ vehicle programs. Weapons systems and munitions revenue was up due to increased volume on several products, including ~~Hydra-70 rockets~~artillery for the ~~U.S. government.~~Army and missile subcomponents. Revenue from international military vehicles decreased due to lower volume on various wheeled armored vehicle programs and reduced volume on the British Army’s AJAX armored fighting vehicle program as it transitions from engineering to production.

The Combat Systems segment’s operating margin decreased ~~300~~60 basis points in the third quarter and 150 basis points in the first nine months of 2019 driven by contract mix in our U.S. military vehicles business and aan unfavorable settlement in the first quarter of 2019 relating to a lease at a former operating site outside the United States.

INFORMATION TECHNOLOGY


Three Months Ended	March 31, 2019			April 1, 2018			Variance				September 29, 2019			September 30, 2018			Variance
Revenue	$	2,169		$	1,138		$	1,031	90.6	%	$	2,071		$	2,307		$	(236	)	(10.2	)%
Operating earnings	156			101			55		54.5	%	146			157			(11		)	(7.0	)%
Operating margin	7.2		%	8.9		%					7.0		%	6.8		%
Nine Months Ended											September 29, 2019			September 30, 2018			Variance
Revenue											$	6,398		$	5,887		$	511		8.7	%
Operating earnings											456			414			42			10.1	%
Operating margin											7.1		%	7.0		%

Operating Results

The change in the Information Technology segment’s revenue in the third quarter and first nine months of 2019 consisted of the following:



	Third Quarter			Nine Months
Defense	$	(19	)	$	354
Intelligence and homeland security	(85		)	110
Federal civilian	(132		)	47
Total (decrease) increase	$	(236	)	$	511

In the first nine months of 2019, revenue increased ~~from~~across all three businesses due to the CSRA acquisition in the second quarter of 2018. ~~This increase was offset partially by~~Federal civilian revenue in the third quarter and first nine months

of 2019 were lower because of the sale of the segment’s public-facing contact-center business in the fourth quarter of ~~2018. Operating~~2018 and other portfolio shaping following the acquisition. Revenue also decreased in the third quarter of 2019 driven by the completion of several legacy CSRA programs in 2018, offset partially by the ramp up of new programs.

The Information Technology segment’s operating margin ~~decreased 170~~was up 20 basis points in the third quarter of 2019 compared with the prior-year period due to lower intangible asset amortization expense from the CSRA ~~acquisition. Excluding the impact~~acquisition, offset somewhat by a charge recorded as we exited a non-core line of ~~this amortization, operating~~business. Operating margin increased 6010 basis points ~~to 9.5%~~in the first nine months of 2019 compared with the prior-year period due to ~~the addition of CSRA’s higher-margin, fixed-price work.~~favorable program mix and acquisition-related synergies offsetting additional intangible asset amortization expense.

MISSION SYSTEMS


Three Months Ended	March 31, 2019			April 1, 2018			Variance				September 29, 2019			September 30, 2018			Variance
Revenue	$	1,158		$	1,098		$	60	5.5	%	$	1,220		$	1,230		$	(10	)	(0.8	)%
Operating earnings	148			146			2		1.4	%	185			179			6			3.4	%
Operating margin	12.8		%	13.3		%					15.2		%	14.6		%
Nine Months Ended											September 29, 2019			September 30, 2018			Variance
Revenue											$	3,655		$	3,475		$	180		5.2	%
Operating earnings											495			478			17			3.6	%
Operating margin											13.5		%	13.8		%

Operating Results

The ~~increase~~change in the Mission Systems segment’s revenue in the third quarter and first ~~quarter~~nine months of 2019 consisted of the following:


				Third Quarter			Nine Months
Naval, air and electronic systems				$	7		$	92
Ground systems and products	$	65		(19		)	64
Naval, air and electronic systems	17
Space, intelligence and cyber systems	(22		)	2			24
Total increase	$	60
Total (decrease) increase				$	(10	)	$	180

Revenue in the Mission Systems segment was down slightly in the third quarter but up in the first nine months of 2019 compared with the prior-year periods. Increased volume on combat and seaframe control systems for the U.S. Navy’s Independence-variant Littoral Combat Ships and fire-control systems for the Navy’s submarine programs drove the increase in the naval, air and electronic systems business. Ground systems and products revenue was up in the first nine months of 2019 due primarily to higher demand for computing and communications ~~equipment and increased volume on our ground-based satellite communication systems programs in our ground systems and products business.~~equipment.

The Mission Systems segment’s operating margin ~~was down 50~~increased 60 basis points in the third quarter and decreased 30 basis points in the first nine months of 2019 compared with prior-year periods due to program mix.

MARINE SYSTEMS


Three Months Ended	March 31, 2019			April 1, 2018			Variance					September 29, 2019			September 30, 2018			Variance
Revenue	$	2,058		$	2,034		$	24		1.2	%	$	2,235		$	2,003		$	232	11.6	%
Operating earnings	180			184			(4		)	(2.2	)%	209			169			40		23.7	%
Operating margin	8.7		%	9.0		%						9.4		%	8.4		%
Nine Months Ended												September 29, 2019			September 30, 2018			Variance
Revenue												$	6,618		$	6,205		$	413	6.7	%
Operating earnings												586			548			38		6.9	%
Operating margin												8.9		%	8.8		%

Operating Results

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


				Third Quarter			Nine Months
U.S. Navy ship construction	$	50		$	175		$	460
U.S. Navy ship engineering, repair and other services				97			70
Commercial ship construction	(16		)	(40		)	(117		)
U.S. Navy ship engineering, repair and other services	(10		)
Total increase	$	24		$	232		$	413

Revenue from U.S. Navy ship construction ~~increased~~was up due ~~primarily~~ to higher volume on Block V of the Virginia-class submarine ~~program. This increase was~~program, the Columbia-class submarine program and the John Lewis-class (T-AO-205) fleet replenishment oiler contract. Revenue from U.S. Navy ship engineering, repair and other services increased driven by a higher volume of surface ship repair work. These increases were offset partially ~~offset~~ by lower commercial ship construction ~~and Navy overhaul and repair work.~~volume.

The Marine Systems segment’s operating margin ~~decreased 30~~increased 100 basis points in the third quarter of 2019 and 10 basis points in the first nine months of 2019 compared with the prior-year periods driven by favorable performance on the end of Block III of the Virginia-class submarine program. In the first nine months of 2019, this favorable performance offset the impact of mix shift, onparticularly in our submarine and auxiliary ship workloads, that the ~~Virginia-class program between the mature Block III contract and the Block IV and V contracts.~~segment has been experiencing in 2019.

CORPORATE

Corporate operating results consisted of the following:

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



	Three Months Ended				Nine Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Operating income (expense)	$	19	$	13	$	19	$	(18	)

Corporate operating results in the first nine months of 2018 included one-time transaction-related charges of approximately $45 associated with the costs to complete the CSRA acquisition. Excluding these charges, Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense.

We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) in other income (expense) in the Consolidated Statement of Earnings. In our defense

segments, pension and other post-retirement benefit costs are recoverable contract costs. Therefore, the non-service cost components are included in the operating results of these segments, but an offset is reported in Corporate. ~~This amount decreased~~

Based on recent market conditions, we adjusted our assumptions for our non-qualified supplemental retirement plans, and the third quarter of 2019 reflects a cumulative adjustment to recognize the resulting increase in ~~2019, resulting~~expense. In our defense segments, this results in ~~a net expense.~~an increase in the offset reported in Corporate, as described above. Due to the revised assumptions, we expect minimal income/expense for Corporate in the fourth quarter.

OTHER INFORMATION

PRODUCT REVENUE AND OPERATING COSTS


Three Months Ended	March 31, 2019			April 1, 2018			Variance					September 29, 2019			September 30, 2018			Variance
Revenue	$	5,251		$	4,576		$	675		14.8	%	$	5,789		$	4,842		$	947		19.6	%
Operating costs	(4,235		)	(3,546		)	(689		)	19.4	%	(4,640		)	(3,797		)	(843		)	22.2	%
Nine Months Ended												September 29, 2019			September 30, 2018			Variance
Revenue												$	16,441		$	14,172		$	2,269		16.0	%
Operating costs												(13,217		)	(11,045		)	(2,172		)	19.7	%

The increase in product revenue in the third quarter and first ~~quarter~~nine months of 2019 consisted of the following:


			Third Quarter		Nine Months
Aircraft manufacturing and completions	$	324	$	444	$	1,004
Ship construction			130		340
C4ISR products			97		327
Military vehicle production	142		123		300
C4ISR products	71
Ship construction	66
Other, net	72		153		298
Total increase	$	675	$	947	$	2,269

Aircraft manufacturing and completions revenue increased due primarily to ~~additional~~the initial deliveries of the new large-cabin G600 aircraft and additional deliveries of the large-cabin G500 aircraft. Ship construction revenue increased due to higher volume on Block V of the Virginia-class submarine program, the Columbia-class submarine program and the John Lewis-class fleet replenishment oiler contract, offset partially by lower commercial ship construction volume. C4ISR products revenue was up due to higher demand for computing and communications equipment and increased volume on combat and seaframe control systems. Military vehicle production revenue ~~increased~~was up due to higher volume on the U.S. Army’s Abrams tank and new MPF ~~programs and international wheeled armored vehicle~~ programs. C4ISR products revenue increased due to higher volume on several ground systems and products programs. Ship construction revenue 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 March 31, 2019 April 1, 2018 Variance
Revenue $ 4,010
$ 2,959
$ 1,051
35.5 %
Operating costs (3,398 ) (2,444 ) (954 ) 39.0 %

~~The increase in service revenue in the first quarter of 2019 consisted of the following:~~

IT services $ 1,031
Aircraft services 57
Other, net (37 )
Total increase $ 1,051

IT services revenue increased due primarily to the CSRA acquisition in the second quarter of 2018. The aircraft services revenue increase was driven by higher demand for maintenance work and the acquisition of Hawker Pacific in the second quarter of 2018. ServiceProduct operating costs increased at a higher rate than revenue due primarily to the shift in mix of Gulfstream aircraft deliveries.

SERVICE REVENUE AND OPERATING COSTS



Three Months Ended	September 29, 2019			September 30, 2018			Variance
Revenue	$	3,972		$	4,252		$	(280	)	(6.6	)%
Operating costs	(3,333		)	(3,610		)	277			(7.7	)%
Nine Months Ended	September 29, 2019			September 30, 2018			Variance
Revenue	$	12,136		$	11,643		$	493		4.2	%
Operating costs	(10,258		)	(9,838		)	(420		)	4.3	%

The change in service revenue in the third quarter and first nine months of 2019 consisted of the following:



	Third Quarter			Nine Months
IT services	$	(236	)	$	511
Other, net	(44		)	(18		)
Total (decrease) increase	$	(280	)	$	493

In the first nine months of 2019, IT services revenue increased due to the CSRA acquisition in the second quarter of 2018. IT services revenue decreased in the third quarter of 2019 due primarily to the sale of a public-facing contact-center business in the fourth quarter of 2018. In the third quarter of 2019, service operating costs decreased at a higher rate than revenue due primarily to lower intangible asset amortization expense from the CSRA acquisition.

OTHER FINANCIAL INFORMATION

G&A Expenses

As a percentage of revenue, G&A expenses were 6.2% in the first nine months of2019 compared with 6.6% in the first ~~three months of2019 compared with 7.1% in the first three~~nine months of 2018.

Interest, Net

Net interest expense was ~~$117~~$350 in the first ~~three~~nine months of 2019 compared with ~~$27~~$244 in the prior-year period. The increase iswas due primarily to the impact of financing the CSRA acquisition, including the issuance of $7.5 billion of fixed- and floating-rate notes in the second quarter of 2018. See Note 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 income was $18 in the first ~~three~~nine months of 2019 compared with expense of ~~$21~~$34 in the first ~~three~~nine months of 2018. These amounts represent primarily the non-service cost components of pension and other post-retirement benefits, which became a net income item in the first nine months of 2019 versus a net expense in ~~2018.~~the prior-year period. The first nine months of 2018 also included approximately $30 of transaction costs associated with the CSRA acquisition.

Based on recent market conditions, we adjusted our assumptions for our non-qualified supplemental retirement plans, and the third quarter of 2019 reflects a cumulative adjustment to recognize the resulting increase in expense. Due to the revised assumptions, we expect minimal other income/expense in the fourth quarter.

Provision for Income Tax, Net

Our effective tax rate was ~~18.6%~~17.5% in the first ~~three~~nine months of 2019 compared with ~~16.8%~~17.1% in the prior-year period. ~~The increase is due primarily to~~For 2019, we anticipate a ~~reduced favorable effect of excess~~full-year effective tax ~~benefits associated with equity-based compensation~~rate in the ~~first three months~~mid-17% range.

Discontinued Operations, Net of ~~2019 compared~~Tax

Concurrent with ~~2018.~~the acquisition of CSRA, we were required by a government customer to dispose of certain CSRA operations to address an organizational conflict of interest with respect to services provided to the customer. In the third quarter of 2018, we sold these operations. In accordance with U.S. generally accepted accounting principles (GAAP), the sale did not result in a gain for financial reporting purposes. However, the sale generated a taxable gain, resulting in tax expense of $13.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was ~~$69.2~~$67.4 billion at the end of the ~~first~~third quarter of 2019, ~~up 2%~~down slightly from ~~$67.9~~$67.7 billion on ~~December 31, 2018.~~June 30, 2019. Our total backlog is equal to our remaining performance obligations under contracts ~~that meet the criteria in ASC Topic 606~~with customers as discussed in Note C to the unaudited Consolidated Financial Statements in Part I, Item 1. Our total ~~potential~~estimated contract value, which combines total backlog with estimated potential contract value, was ~~$103.2~~$103 billion on ~~March 31,~~September 29, 2019, up 1.1% from $101.9 billion on June 30, 2019.

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


	Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Potential Contract Value		Funded		Unfunded		Total Backlog		Estimated Potential Contract Value		Total Estimated Contract Value
	March 31, 2019										September 29, 2019
Aerospace	$	11,924	$	244	$	12,168	$	2,080	$	14,248	$	11,195	$	188	$	11,383	$	2,065	$	13,448
Combat Systems	15,475		515		15,990		4,185		20,175		15,069		449		15,518		4,255		19,773
Information Technology	4,770		3,584		8,354		16,666		25,020		4,782		4,381		9,163		18,063		27,226
Mission Systems	5,081		234		5,315		7,186		12,501		5,152		307		5,459		6,764		12,223
Marine Systems	19,935		7,446		27,381		3,831		31,212		17,801		8,072		25,873		4,497		30,370
Total	$	57,185	$	12,023	$	69,208	$	33,948	$	103,156	$	53,999	$	13,397	$	67,396	$	35,644	$	103,040

	December 31, 2018										June 30, 2019
Aerospace	$	11,208	$	167	$	11,375	$	3,130	$	14,505	$	11,932	$	213	$	12,145	$	2,079	$	14,224
Combat Systems	16,174		424		16,598		4,187		20,785		14,794		438		15,232		4,113		19,345
Information Technology	4,717		3,248		7,965		17,066		25,031		4,446		4,405		8,851		17,983		26,834
Mission Systems	4,890		445		5,335		7,409		12,744		4,925		258		5,183		6,847		12,030
Marine Systems	18,837		7,761		26,598		3,703		30,301		18,344		7,899		26,243		3,223		29,466
Total	$	55,826	$	12,045	$	67,871	$	35,495	$	103,366	$	54,441	$	13,213	$	67,654	$	34,245	$	101,899

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 ~~first~~third quarter of 2019 with backlog of ~~$12.2 billion, up 7% from~~ $11.4 billion compared with $12.1 billion on ~~December 31, 2018.~~June 30, 2019.

Orders in the ~~first~~third quarter of 2019 reflected demand across our product and services ~~portfolio.~~portfolio including orders for all models of Gulfstream aircraft. The segment’s book-to-bill ratio (orders divided by revenue) was ~~1.4-to-1~~0.7-to-1 in the ~~first~~third quarter of 2019 and ~~exceeded~~approximately 1-to-1 over the trailing 12 months. We received both type and production certification from the U.S. Federal Aviation Administration (FAA) for the G600 aircraft in June 2019 and delivered the first G600 aircraft in the third quarter of 2019.

Beyond total backlog, estimated ~~potential contract value in the Aerospace segment was $2.1 billion on March 31, 2019, compared with $3.1 billion on 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. On September 29, 2019, estimated potential contract value in the Aerospace segment was $2.1 billion, consistent with June 30, 2019.

On October 21, 2019, we introduced the new G700 aircraft, combining our industry-leading high-speed, ultra-long-range, ultra-long-cabin G650ER aircraft with an expanded cabin, a new high-thrust, high-efficiency engine to optimize performance and our Symmetry Flight Deck – the industry’s most technologically advanced flight deck, which we launched on our new G500 and G600 aircraft. The G700 is expected to enter into service in 2022, following type certification from the FAA and European Aviation Safety Agency. Although the G700 was only recently announced, demand for the next generation aircraft has been solid, and our September 29, 2019, backlog already includes orders associated with the new model.

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 ~~$57~~$56 billion on ~~March 31,~~September 29, 2019, ~~up from $56.5~~compared with $55.5 billion on ~~December 31, 2018.~~June 30, 2019. The Combat Systems, Information Technology ~~Mission Systems~~ and ~~Marine~~Mission Systems segments each achieved a book-to-bill ratio in excess of 1-to-1 ~~or greater~~ in the ~~first~~third quarter of 2019. Estimated potential contract value in our defense segments was ~~$31.9~~$33.6 billion on ~~March 31,~~September 29, 2019, up 4.4% from $32.2 billion on June 30, 2019. We received the following significant contract awards during the ~~first~~third quarter of 2019:

Combat Systems:

$~~225~~1.3 billion from the Canadian government to produce armored combat support vehicles (ACSVs) and provide associated support services.

$155 from the U.S. Army for ~~inventory management~~various munitions and ~~support services~~ordnance.

$70 to produce gun systems for the ~~Stryker fleet.~~F-35 Joint Strike Fighter.

$~~160~~55 from the Army for various ~~munitions.~~

~~$145 from~~maintenance and enhancements at the Lima Army ~~for systems technical support on the Abrams and Stryker programs.~~

~~$65 from the Army for design and prototype development of the Abrams tank System Enhancement Package Version 4 (SEPv4).~~Tank Plant in Lima, Ohio.

Information Technology:

An IDIQ contract ~~from~~to provide C4ISR installation services for the U.S. ~~Navy to provide cyber mission engineering support services.~~Navy. The program has a maximum potential ~~contract~~ value of ~~$900~~$2.5 billion among ~~ten~~6 awardees.

~~$580 for several key contracts~~A contract to provide program management and engineering services to ~~classified customers.~~

~~An IDIQ~~the Cybersecurity and Infrastructure Security Agency’s (CISA) emergency communications infrastructure. The 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.~~

$325.

~~An IDIQ~~A 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 under the Veterans Intake, Conversion and Communications Services (VICCS) program to provide ~~managed~~support and communication services to ~~improve service desk interactions with end users.~~U.S. veterans. The contract has a maximum potential value of $280.

$155 from the U.S. Department of State to provide business process support services for the Bureau of Consular Affairs’ Global Support Strategy (GSS) program for visa services.

$125 to provide design, development, testing, installation, maintenance, logistics support and modernization services for Navy airborne and shipboard platforms.

$95 from the Centers for Medicare and Medicaid Services for several key contracts, including support of the Medicare Secondary Payer (MSP) program. These contracts have a maximum potential value of $220.

Mission Systems:

$~~115~~265 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.

$5595 from the Army to provide ~~development~~continued software support and ~~maintenance services~~engineering for the ~~Army’s Consolidated Project Management (CPM) Next~~Warfighter Information Network-Tactical (WIN-T) Increment 2 program.

$5565 from the Navy to provide fire control system modifications for ~~the production of Digital Modular Radios (DMR).~~ballistic-missile and guided-missile submarines.

$45 from the Navy to produce five Knifefish surface mine countermeasure systems and associated support equipment.

$25 from the Army for the production of ~~the~~ Prophet ~~Enhanced Tactical Signals Intelligence System.~~

~~$40 for additional equipment to support the Army’s mobile communications network.~~

enhanced ground-based signals intelligence and electronic warfare systems. The contract has a maximum potential value of $295.

Marine Systems:


•	$1.1 billion from the Navy for design and construction of two Expeditionary Sea Base (ESB) auxiliary support ships and an option totaling approximately $550 for an additional ship.

$~~2 billion~~175 from the Navy to provide engineering, technical, design and planning yard support services for ~~long-lead materials for Block V Virginia-class~~operational strategic and attack submarines. The program has a maximum potential value of $1 billion.


•	$390 from the Navy for Advanced Nuclear Plant Studies (ANPS) in support of the Columbia-class submarine program.

$~~300~~110 from the Navy to provide maintenance and repair services for the ~~Arleigh Burke-class (DDG-51) guided-missile destroyer, Wasp-class~~USS Kearsarge, an amphibious assault ~~ship and Nimitz-class aircraft carrier programs.~~

ship.

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

~~$70 from the Navy for planning yard services for the DDG-51 destroyer program.~~

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

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We ended the ~~first~~third quarter of 2019 with a cash balance of ~~$673, down $290 from~~$974 compared with $963 at the end of 2018. Our net debt position, defined as debt less cash and equivalents and marketable securities, was ~~$12.9~~$12.7 billion at the end of the ~~first~~third quarter of 2019 compared with $11.5 billion at the end of 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 ~~three~~nine months of 2019and2018, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1.

OPERATING ACTIVITIES

~~Cash used for~~We generated cash from operating activities ~~was $795~~of $587 in the first ~~three~~nine months of 2019 compared ~~to $496~~with $1.1 billion in the same period in 2018. The primary driver of cash inflows in both periods was net earnings. However, cash flows in both periods were affected negatively by growth in operating working capital (OWC), particularly the timing of payments on international armored vehicle contracts in our Combat Systems segment. For additional information about the growth in our unbilled receivables balance, see Note G to the unaudited Consolidated Financial Statements in Part I, Item 1. Cash flows in the first nine months of 2019 were also affected negatively by net OWC growth in our Aerospace segment driven by our position in the development, production and cash collection cycles of our Gulfstream aircraft models.

Additionally, cash flows in the first nine months of 2018 reflected a discretionary pension plan contribution of $255.

INVESTING ACTIVITIES

Cash used for investing activities was ~~$187~~$604 in the first ~~three~~nine months of 2019 compared with ~~$105~~$10.3 billion in the same period in 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. The primary use~~securities; and proceeds from asset sales. In the first nine months of ~~cash~~2018, we acquired three businesses for ~~our investing activities in both periods was capital expenditures.~~an aggregate of $10 billion, including $9.7 billion for CSRA. Capital expenditures were ~~$181~~$606 in the first ~~three~~nine months of 2019 compared with ~~$104~~$447 in the same period in ~~2018~~2018. The increase reflects ongoing investments to support growth at our shipyards. ~~We expect capital expenditures to be approximately 3% of revenue in 2019.~~

FINANCING ACTIVITIES

Cash provided by financing activities was ~~$697~~$65 in the first ~~three~~nine months of 2019 compared with ~~cash provided by financing activities of $2~~$7.3 billion in the same period in 2018. Net cash from financing activities includes proceeds received from debt and commercial paper issuances and ~~employee stock option exercises.~~payment of dividends. Our financing activities also include repurchases of common stock, ~~payment of dividends~~debt repayments and ~~debt repayments.~~employee stock option exercises.

On 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 ~~three~~nine months of 2019, we repurchased ~~0.5~~1.1 million of our outstanding shares for ~~$86.~~$184. On ~~March 31,~~September 29, 2019, 76.4 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding. We repurchased ~~1.2~~2.5 million shares for ~~$257~~$522 in the first ~~three~~nine months of 2018.

On March 6, 2019, our board of directors declared an increased quarterly dividend of $1.02 per share, the 22nd consecutive annual increase. Previously, the board had increased the quarterly dividend to $0.93 per share in March 2018. Cash dividends paid were ~~$268~~$858 in the first ~~three~~nine months of 2019 compared with ~~$250~~$801 in the same period in 2018.

~~In the first quarter~~We received net proceeds of ~~2018, we issued $2.5 billion of commercial paper in anticipation of the acquisition of CSRA, which was completed on April 3, 2018.~~

~~We issued $1 billion of~~$947 from commercial paper in the first ~~quarter~~nine months of 2019, ~~leaving $1.9~~resulting in $1.8 billion outstanding on ~~March 31,~~September 29, 2019. We have $5 billion in committed bank credit facilities to support our commercial paper issuances and for general corporate purposes and working capital ~~needs and to support our commercial paper issuances.~~needs. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

In the first nine months of 2018, we issued $7.5 billion of fixed- and floating-rate notes to finance the acquisition of CSRA. Additionally, in the first nine months of 2018, we paid $450 to satisfy obligations under CSRA’s accounts receivable purchase agreement.

Fixed- and floating-rate notes totaling $2.5 billion mature in May 2020. As we approach the maturity date of this debt, we plan to repay these notes using a combination of cash on hand and the issuance of commercial paper. For additional information regarding our debt obligations, including scheduled debt maturities and 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:


Three Months Ended	March 31, 2019			April 1, 2018
Net cash used by operating activities	$	(795	)	$	(496	)
Nine Months Ended							September 29, 2019			September 30, 2018
Net cash provided by operating activities							$	587		$	1,081
Capital expenditures	(181		)	(104		)	(606		)	(447		)
Free cash flow from operations	$	(976	)	$	(600	)	$	(19	)	$	634
Cash flows as a percentage of earnings from continuing operations:
Net cash used by operating activities	(107		)%	(62		)%
Net cash provided by operating activities							24		%	44		%
Free cash flow from operations	(131		)%	(75		)%	(1		)%	26		%

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 ~~$68~~$81 ($~~0.18)~~0.22) and ~~$97~~$220 ($~~0.25)~~0.60) for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, and ~~April 1,~~$103 ($0.27) and $283 ($0.75) for the three- and nine-month periods ended September 30, 2018, respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 29, 2019, or ~~April 1,~~September 30, 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~~associated with our operating leases, and (2) significant new disclosures about our leasing activities (see Note N to the unaudited Consolidated Financial Statements in Part 1,I, 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 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 valued $2.1 billion of acquired intangible assets in connection with the CSRA acquisition. This amount was determined based primarily on CSRA’s projected cash flows. The projected cash flows include various assumptions, including the timing of work embedded in backlog, success in securing future business, profitability of work, and the appropriate risk-adjusted interest rate used to discount the projected cash flows.

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, 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 ~~II,~~I, Item ~~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.~~1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 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 defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of ~~March 31,~~September 29, 2019. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on ~~March 31,~~September 29, 2019, our disclosure controls and procedures were effective.

In conjunction with the adoption of ASC Topic 842, effective January 1, 2019, we implemented a lease accounting system and related processes and internal controls, which represent a material change to a component ofThere were no changes in our internal control over financial ~~reporting. There were no other changes~~reporting that occurred during the quarter ended ~~March 31,~~September 29, 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 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;

the status or outcome of legal and/or regulatory 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, 2018.

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

The following table provides information about our ~~first-quarter~~third-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
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



Period	Total Number of Shares	Average Price per Share
Shares Delivered or Withheld Pursuant to Restricted Stock Vesting*
7/1/19-7/28/19	1,148	$	167.16
7/29/19-8/25/19	398	184.07
8/26/19-9/29/19	36	184.36
	1,582	$	171.81

* 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.

On December 5, 2018, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding common stock on the open market. We did not repurchase any shares in the third quarter of 2019. On September 29, 2019, 6.4 million shares remained authorized by our board of directors for repurchase.

We did not make any unregistered sales of equity securities in the ~~first~~third quarter of 2019.

ITEM 6. EXHIBITS


~~10.1~~	Form of Performance Stock Unit Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants to named 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~~101.INS	Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File*File because its XBRL tags are embedded within the Inline XBRL document.


101.SCH	Inline XBRL Taxonomy Extension Schema Document*


101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document*


101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document*


101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document*


101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document*


104	Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

* Filed or furnished electronically 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: ~~April 24,~~October 23, 2019

4754



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



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



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