Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENT OF EARNINGS


	Year Ended December 31
(Dollars in millions, except per-share amounts)	2020		2019*		2018*
Revenue:
Products	$	22,188	$	23,130	$	20,149
Services	15,737		16,220		16,044
	37,925		39,350		36,193
Operating costs and expenses:
Products	(18,192)		(18,611)		(15,926)
Services	(13,408)		(13,752)		(13,610)
General and administrative (G&A)	(2,192)		(2,417)		(2,263)
	(33,792)		(34,780)		(31,799)
Operating earnings	4,133		4,570		4,394
Other, net	82		92		47
Interest, net	(477)		(460)		(356)
Earnings from continuing operations before income tax	3,738		4,202		4,085
Provision for income tax, net	(571)		(718)		(727)
Earnings from continuing operations	3,167		3,484		3,358
Discontinued operations, net of tax provision of $13 in 2018	—		—		(13)
Net earnings	$	3,167	$	3,484	$	3,345

Earnings per share
Basic:
Continuing operations	$	11.04	$	12.09	$	11.37
Discontinued operations	—		—		(0.04)
Net earnings	$	11.04	$	12.09	$	11.33
Diluted:
Continuing operations	$	11.00	$	11.98	$	11.22
Discontinued operations	—		—		(0.04)
Net earnings	$	11.00	$	11.98	$	11.18

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

*Prior-period information has been restated for the retrospective application of a change in accounting principle related to the amortization of actuarial gains and losses for our qualified U.S. government pension plans, which we adopted in the fourth quarter of 2020. For further discussion of this change in accounting principle, see Note T to the Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


	Year Ended December 31
(Dollars in millions)		2020		2019*		2018*
Net earnings		$	3,167	$	3,484	$	3,345
Gains on cash flow hedges		366		97		36

Foreign currency translation adjustments		353		186		(300)
Change in retirement plans’ funded status		(453)		(857)		(45)
Other comprehensive income (loss), pretax		266		(574)		(309)
Benefit for income tax, net		2		156		1
Other comprehensive income (loss), net of tax		268		(418)		(308)
Comprehensive income		$	3,435	$	3,066	$	3,037

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

CONSOLIDATED BALANCE SHEET


	December 31
(Dollars in millions)	2020		2019*

ASSETS
Current assets:
Cash and equivalents	$	2,824	$	902
Accounts receivable	3,161		3,544
Unbilled receivables	8,024		7,857
Inventories	5,745		6,306
Other current assets	1,789		1,679
Total current assets	21,543		20,288
Noncurrent assets:
Property, plant and equipment, net	5,100		4,475
Intangible assets, net	2,117		2,315
Goodwill	20,053		19,677
Other assets	2,495		2,594
Total noncurrent assets	29,765		29,061
Total assets	$	51,308	$	49,349

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	3,003	$	2,920
Accounts payable	2,952		3,162
Customer advances and deposits	6,276		7,148
Other current liabilities	3,733		3,571
Total current liabilities	15,964		16,801
Noncurrent liabilities:
Long-term debt	9,995		9,010
Other liabilities	9,688		9,560
Commitments and contingencies (see Note O)
Total noncurrent liabilities	19,683		18,570
Shareholders’ equity:
Common stock	482		482
Surplus	3,124		3,039
Retained earnings	33,498		31,633
Treasury stock	(17,893)		(17,358)
Accumulated other comprehensive loss	(3,550)		(3,818)
Total shareholders’ equity	15,661		13,978
Total liabilities and shareholders’ equity	$	51,308	$	49,349

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

CONSOLIDATED STATEMENT OF CASH FLOWS


	Year Ended December 31
(Dollars in millions)	2020		2019		2018
Cash flows from operating activities - continuing operations:
Net earnings	$	3,167	$	3,484	$	3,345
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation of property, plant and equipment	523		466		436
Amortization of intangible and finance lease right-of-use assets	355		363		327
Equity-based compensation expense	128		133		140
Deferred income tax (benefit) provision	(127)		92		(3)
Discontinued operations, net of tax	—		—		13
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	371		176		417
Unbilled receivables	(116)		(1,303)		(800)
Inventories	502		(376)		(591)
Other current assets	208		8		310
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	(215)		6		(197)
Customer advances and deposits	(707)		(105)		36
Other, net	(231)		37		(285)
Net cash provided by operating activities	3,858		2,981		3,148
Cash flows from investing activities:
Capital expenditures	(967)		(987)		(690)
Business acquisitions, net of cash acquired	(203)		(19)		(10,099)
Proceeds from sales of assets	171		14		562
Other, net	25		(2)		(7)
Net cash used by investing activities	(974)		(994)		(10,234)
Cash flows from financing activities:
Proceeds from fixed-rate notes	3,960		—		6,461
Repayment of fixed-rate notes	(2,000)		—		—
Dividends paid	(1,240)		(1,152)		(1,075)
Purchases of common stock	(587)		(231)		(1,769)
Repayment of floating-rate notes	(500)		—		—
(Repayment of) proceeds from credit facility, net	(441)		291		122
Proceeds from commercial paper, gross (maturities greater than 3 months)	420		—		—
Repayment of commercial paper, gross (maturities greater than 3 months)	(420)		—		—
(Repayment of) proceeds from commercial paper, net	—		(850)		850
Proceeds from floating-rate notes	—		—		1,000
Repayment of CSRA accounts receivable purchase agreement	—		—		(450)
Other, net	(95)		(55)		(53)
Net cash (used) provided by financing activities	(903)		(1,997)		5,086
Net cash used by discontinued operations	(59)		(51)		(20)
Net increase (decrease) in cash and equivalents	1,922		(61)		(2,020)
Cash and equivalents at beginning of year	902		963		2,983
Cash and equivalents at end of year	$	2,824	$	902	$	963

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

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY


	Common Stock				Retained		Treasury		Accumulated Other Comprehensive		Total Shareholders’
(Dollars in millions)	Par		Surplus		Earnings		Stock		Loss		Equity
December 31, 2017 (a)	$	482	$	2,872	$	26,509	$	(15,543)	$	(2,519)	$	11,801
Cumulative-effect adjustments (a) (b)	—		—		573		—		(573)		—
Net earnings	—		—		3,345		—		—		3,345
Cash dividends declared	—		—		(1,101)		—		—		(1,101)
Equity-based awards	—		74		—		105		—		179
Shares purchased	—		—		—		(1,806)		—		(1,806)
Other comprehensive loss (a)	—		—		—		—		(308)		(308)
December 31, 2018 (a)	482		2,946		29,326		(17,244)		(3,400)		12,110

Net earnings	—		—		3,484		—		—		3,484
Cash dividends declared	—		—		(1,177)		—		—		(1,177)
Equity-based awards	—		93		—		70		—		163
Shares purchased	—		—		—		(184)		—		(184)
Other comprehensive loss (a)	—		—		—		—		(418)		(418)
December 31, 2019 (a)	482		3,039		31,633		(17,358)		(3,818)		13,978
Cumulative-effect adjustment (c)	—		—		(37)		—		—		(37)
Net earnings	—		—		3,167		—		—		3,167
Cash dividends declared	—		—		(1,265)		—		—		(1,265)
Equity-based awards	—		85		—		67		—		152
Shares purchased	—		—		—		(602)		—		(602)
Other comprehensive income	—		—		—		—		268		268
December 31, 2020	$	482	$	3,124	$	33,498	$	(17,893)	$	(3,550)	$	15,661

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

(a)Prior-period information has been restated for the retrospective application of a change in accounting principle related to the amortization of actuarial gains and losses for our qualified U.S. government pension plans, which we adopted in the fourth quarter of 2020. For further discussion of this change in accounting principle, see Note T to the Consolidated Financial Statements.

(b)Reflects the cumulative 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.

(c)Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020. See Note A for additional details.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services.

Effective December 31, 2020, for segment reporting purposes, we reorganized our Information Technology and Mission Systems operating segments into a single segment: Technologies. This reorganization reflects our evolving strategic focus on the combined capabilities of the businesses to meet the customer demand for large-scale, end-to-end highly engineered solutions. Our company now has four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We refer to the latter three collectively as our defense segments. Prior-period segment information has been restated for this change.

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

Consistent with industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts may not be realized within one year.

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

Use of Estimates and Other Uncertainties. The Coronavirus (COVID-19) pandemic has caused significant disruptions to national and global economies and government activities. Our businesses have been designated as critical infrastructure by the U.S. government and many non-U.S. governments and, as such, are required to stay open. Within our Aerospace segment, quarantine and travel restrictions in connection with the pandemic have impacted the timing of aircraft deliveries, and the economic consequences of COVID-19 have impacted demand. Our defense business has also experienced disruptions, such as customer site closures, travel restrictions and social distancing requirements, which have impacted contract execution. We have instituted various initiatives throughout the company as part of our business continuity programs, and we continue to work to mitigate risk when disruptions occur. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the pandemic’s duration and its broader impact.

The nature of our business requires that we make estimates and assumptions in accordance with U.S. generally accepted accounting principles (GAAP). These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience, currently available information and various other assumptions that we believe are reasonable under the circumstances. The COVID-19 pandemic has impacted these estimates and assumptions and will continue to do so. The accounting for long-term contracts requires the use of estimates (see Note B). Our estimates at the end of the year included impacts from the disruptions caused by COVID-19. Given the uncertainties around the pandemic,

including its duration and potential future disruptions to our supply chain or workforce, it is reasonably possible that the actual impact of the pandemic on contract costs could be materially different than our current estimates. The United States and some other governments have taken steps to provide relief. Where our customer has agreed to reimburse certain costs, such as provided for by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), we have included those recoveries in our estimates of revenue. To the extent the U.S. government provides for reimbursement of additional costs through legislation and the U.S. Department of Defense (DoD) has available funds, we will seek reimbursement as appropriate.

Change in Accounting Principle. In the fourth quarter of 2020, we retrospectively changed our accounting method related to the amortization of actuarial gains and losses for our qualified U.S. government pension plans that impacted our prior-period financial statements. See Note T for further discussion of this change in accounting principle.

Discontinued Operations, Net of Tax. On April 3, 2018, we completed our acquisition of CSRA, Inc. (CSRA). See Note C for further discussion of the acquisition. In the third quarter of 2018, we disposed of 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.

Research and Development Expenses. Company-sponsored research and development (R&D) expenses, including Aerospace product-development costs, were $374 in 2020, $466 in 2019 and $502 in 2018. R&D expenses have trended downward over the three-year period with the completion of the G500 and G600 aircraft test programs, offset partially by increased activities associated with the development of the new G700 aircraft model. R&D expenses are included in operating costs and expenses in the Consolidated Statement of Earnings in the period in which they are incurred. Customer-sponsored R&D expenses are charged directly to the related contracts.

The Aerospace segment has cost-sharing arrangements with some of its suppliers that enhance the segment’s internal development capabilities and offset a portion of the financial cost associated with the segment’s product development efforts. These arrangements explicitly state that supplier contributions are for reimbursement of costs we incur in the development of new aircraft models and technologies, and we retain substantial rights in the products developed under these arrangements. We record amounts received from these cost-sharing arrangements as a reduction of R&D expenses. We have no obligation to refund any amounts received under the agreements regardless of the outcome of the development efforts. Under the typical terms of an agreement, payments received from suppliers for their share of the costs are based on milestones and are recognized as received. Our policy is to defer payments in excess of the costs we have incurred.

Interest, Net. Net interest expense consisted of the following:


Year Ended December 31	2020		2019		2018
Interest expense	$	489	$	472	$	374
Interest income	(12)		(12)		(18)
Interest expense, net	$	477	$	460	$	356

The increase in 2019 is due primarily to the impact of financing the CSRA acquisition, including the issuance of $7.5 billion of fixed- and floating-rate notes in the second quarter of 2018. See Note K for additional information regarding our debt obligations, including interest rates.

Cash and Equivalents and Investments in Debt and Equity Securities. We consider securities with a maturity of three months or less to be cash equivalents. Our cash balances are invested primarily in time deposits rated A-/A3 or higher. Our investments in other securities are included in other current and noncurrent assets on the Consolidated Balance Sheet. We report our equity securities at fair value with subsequent changes in fair value recognized in net earnings. We report our available-for-sale debt securities at fair value with unrealized gains and losses recognized as a component of other comprehensive income in the Consolidated Statement of Comprehensive Income. We had no trading or held-to-maturity debt securities on December 31, 2020 or 2019. See Note E for additional information regarding our investments in debt and equity securities.

Other Contract Costs. Other contract costs represent amounts that are not currently allocable to government contracts, such as a portion of our estimated workers’ compensation obligations, other insurance-related assessments, pension and other post-retirement benefits, and environmental expenses. These costs will become allocable to contracts generally after they are paid. We have elected to defer these costs in other current assets on the Consolidated Balance Sheet until they can be allocated to contracts. We expect to recover these costs through ongoing business, including existing backlog and probable follow-on contracts. We regularly assess the probability of recovery of these costs. If the backlog in the future does not support the continued deferral of these costs, the profitability of our remaining contracts could be adversely affected. Other contract costs on December 31, 2020 and 2019, were $499 and $652, respectively.

Long-lived Assets and Goodwill. We review long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over the estimated fair value as determined by discounted cash flows.

The COVID-19 pandemic has caused significant disruptions to national and global economies and government activities, which has impacted our businesses. As of the end of the year, we have not identified a triggering event requiring an impairment test for our goodwill, intangibles or other long-lived assets. In our Aerospace segment, which has experienced a more significant impact from the pandemic, we do not believe the impact represents a longer-term change that would indicate that the carrying value of the segment’s intangibles and long-lived assets may not be recoverable or that the Aerospace reporting unit’s estimated fair value has been significantly affected.

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Our reporting units are consistent with our operating segments in Note S. We use both qualitative and quantitative approaches when testing goodwill for impairment. When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments. Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events. If, based on the qualitative assessment, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary. However, if a quantitative assessment is determined to be necessary, we compare the fair value of a reporting unit to its carrying value and, if necessary, recognize

an impairment loss for the amount by which the carrying value exceeds the reporting unit’s fair value. Our estimate of fair value is based primarily on the discounted cash flows of the underlying operations.

As of December 31, 2020, we completed qualitative assessments for our Aerospace, Marine Systems and Combat Systems reporting units as the estimated fair values of each of these reporting units significantly exceeded the respective carrying values based on our most recent quantitative assessments, which were performed as of December 31, 2018. Our qualitative assessments, including consideration of the impact of the COVID-19 pandemic, did not present indicators of impairment for these reporting units.

Effective December 31, 2020, we reorganized our Information Technology and Mission Systems operating segments into a single segment: Technologies. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Technology and Mission Systems reporting units was combined and assigned to the Technologies reporting unit. We performed goodwill impairment assessments immediately prior to the change, and the results indicated that no impairment existed at the former Information Technology and Mission Systems reporting units. As of December 31, 2020, we completed a quantitative assessment for our Technologies reporting unit, and the fair value was well in excess of its carrying value. For a summary of our goodwill by reporting unit, see Note C.

Accounting Standards Updates. Effective January 1, 2020, we adopted 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 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 adopted the standard on a modified retrospective basis and recognized the cumulative effect as a $37 decrease to retained earnings on the date of adoption.

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.

There are other accounting standards that have been issued by the Financial Accounting Standards Board (FASB) but are not effective until after December 31, 2020. These standards are not expected to have a material impact on our results of operations, financial condition or cash flows.

B. REVENUE

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 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 life cycle (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 77% of our revenue in 2020, 73% in 2019 and 74% in 2018. 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 23% of our revenue in 2020, 27% in 2019 and 26% in 2018. Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On December 31, 2020, we had $89.5 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 35% of our remaining performance obligations as revenue in 2021, an additional 30% by 2023 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:


Year Ended December 31	2020		2019		2018
Revenue	$	389	$	342	$	377
Operating earnings	283		271		345
Diluted earnings per share	$	0.78	$	0.74	$	0.91

No adjustment on any one contract was material to the Consolidated Financial Statements in 2020, 2019 or 2018.

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

Revenue by major products and services was as follows:


Year Ended December 31	2020		2019		2018
Aircraft manufacturing	$	6,115	$	7,541	$	6,262
Aircraft services and completions	1,960		2,260		2,193
Total Aerospace	8,075		9,801		8,455
Nuclear-powered submarines	6,938		6,254		5,712
Surface ships	2,055		1,912		1,872
Repair and other services	986		1,017		918
Total Marine Systems	9,979		9,183		8,502
Military vehicles	4,687		4,620		4,027
Weapons systems, armament and munitions	1,991		1,906		1,798
Engineering and other services	545		481		416
Total Combat Systems	7,223		7,007		6,241
Information technology (IT) services	7,892		8,422		8,269
C4ISR* solutions	4,756		4,937		4,726
Total Technologies	12,648		13,359		12,995
Total revenue	$	37,925	$	39,350	$	36,193

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

Revenue by contract type was as follows:


Year Ended December 31, 2020	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
Fixed-price	$	7,402	$	6,924	$	6,159	$	5,794	$	26,279
Cost-reimbursement	—		3,045		997		5,300		9,342
Time-and-materials	673		10		67		1,554		2,304
Total revenue	$	8,075	$	9,979	$	7,223	$	12,648	$	37,925
Year Ended December 31, 2019
Fixed-price	$	8,949	$	6,331	$	6,049	$	6,344	$	27,673
Cost-reimbursement	—		2,839		894		5,263		8,996
Time-and-materials	852		13		64		1,752		2,681
Total revenue	$	9,801	$	9,183	$	7,007	$	13,359	$	39,350
Year Ended December 31, 2018
Fixed-price	$	7,600	$	5,493	$	5,406	$	6,107	$	24,606
Cost-reimbursement	—		3,004		800		5,283		9,087
Time-and-materials	855		5		35		1,605		2,500
Total revenue	$	8,455	$	8,502	$	6,241	$	12,995	$	36,193

Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.

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

Revenue by customer was as follows:


Year Ended December 31, 2020	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
U.S. government:
Department of Defense (DoD)	$	394	$	9,656	$	3,813	$	6,977	$	20,840
Non-DoD	—		9		12		4,705		4,726
Foreign Military Sales (FMS)	119		206		366		46		737
Total U.S. government	513		9,871		4,191		11,728		26,303
U.S. commercial	4,268		97		254		272		4,891
Non-U.S. government	221		9		2,704		551		3,485
Non-U.S. commercial	3,073		2		74		97		3,246
Total revenue	$	8,075	$	9,979	$	7,223	$	12,648	$	37,925
Year Ended December 31, 2019
U.S. government:
DoD	$	305	$	8,837	$	3,695	$	7,027	$	19,864
Non-DoD	88		2		13		5,151		5,254
FMS	105		188		340		56		689
Total U.S. government	498		9,027		4,048		12,234		25,807
U.S. commercial	5,270		142		229		327		5,968
Non-U.S. government	399		9		2,663		673		3,744
Non-U.S. commercial	3,634		5		67		125		3,831
Total revenue	$	9,801	$	9,183	$	7,007	$	13,359	$	39,350
Year Ended December 31, 2018
U.S. government:
DoD	$	236	$	8,098	$	2,903	$	6,437	$	17,674
Non-DoD	—		2		8		5,296		5,306
FMS	98		145		317		66		626
Total U.S. government	334		8,245		3,228		11,799		23,606
U.S. commercial	3,983		245		251		301		4,780
Non-U.S. government	546		10		2,698		743		3,997
Non-U.S. commercial	3,592		2		64		152		3,810
Total revenue	$	8,455	$	8,502	$	6,241	$	12,995	$	36,193

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

liability balances during the year ended December 31, 2020, were not materially impacted by any other factors.

Revenue recognized in 2020, 2019 and 2018 that was included in the contract liability balance at the beginning of each year was $3.8 billion, $4.5 billion and $4.3 billion, respectively. This revenue represented primarily the sale of business jet aircraft.

C. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS

Acquisitions and Divestitures

In 2020, we acquired three businesses in our Aerospace segment and two businesses in our Combat Systems segment for an aggregate of approximately $205.

In 2019, we acquired two businesses in our Aerospace segment and a business in our Technologies segment for an aggregate of approximately $20.

In 2018, in addition to the acquisition of CSRA (described below), we acquired three businesses in our Aerospace segment, a business in our Combat Systems segment and a business in our Technologies segment for an aggregate of approximately $400.

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

In 2020, we completed the sale of a business in our Aerospace segment and two businesses in our Technologies segment, one of which was classified as held for sale on the Consolidated Balance Sheet on December 31, 2019. In 2019, we completed the sale of a business in our Technologies segment that was classified as held for sale on the Consolidated Balance Sheet on December 31, 2018. In 2018, we completed the sale of three businesses in our Technologies segment: a commercial health products business, CSRA operations that we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer and a public-facing contact-center business.

CSRA Acquisition

On April 3, 2018, we acquired 100% of the outstanding shares of 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 Technologies segment.

Fair Value of Net Assets Acquired. 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

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


Year Ended December 31	2018
Revenue	$	37,534
Earnings from continuing operations	3,390
Diluted earnings per share from continuing operations	$	11.33

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

The impact of acquisition financing.
The removal of CSRA operations that we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer.
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 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 reflect the realization of expected cost savings or synergies from the acquisition, and does not reflect what our combined results of operations would have been had the acquisition occurred on January 1, 2017.

Goodwill

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


	Aerospace		Marine Systems		Combat Systems		Information Technology		Mission Systems		Technologies		Total Goodwill
December 31, 2018 (a)	$	2,813	$	297	$	2,633	$	9,622	$	4,229	$	—	$	19,594
Acquisitions/divestitures (b)	3		—		15		77		6		—		101
Other (c)	15		—		33		1		(67)		—		(18)




December 31, 2019 (a)	2,831		297		2,681		9,700		4,168		—		19,677
Acquisitions (b)	72		—		65		—		—		—		137
Other (c)	162		—		40		46		(9)		—		239

Change in reporting unit composition (d)	—		—		—		(9,746)		(4,159)		13,905		—
December 31, 2020 (e)	$	3,065	$	297	$	2,786	$	—	$	—	$	13,905	$	20,053

(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 and for the allocation of goodwill to operations classified as held for sale.

(d)Effective December 31, 2020, we reorganized our Information Technology and Mission Systems operating segments into a single Technologies segment. See Note A for additional information regarding the segment reorganization. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Technology and Mission Systems reporting units was combined and assigned to the Technologies reporting unit.

(e)Goodwill in the Technologies reporting unit is net of $1.8 billion of accumulated impairment losses.

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
December 31	2020						2019
Contract and program intangible assets (b)	$	3,399	$	(1,600)	$	1,799	$	3,776	$	(1,779)	$	1,997
Trade names and trademarks	516		(229)		287		474		(195)		279
Technology and software	134		(106)		28		164		(126)		38
Other intangible assets	161		(158)		3		159		(158)		1
Total intangible assets	$	4,210	$	(2,093)	$	2,117	$	4,573	$	(2,258)	$	2,315

(a)Changes in gross carrying amounts consist primarily of adjustments for write-offs of fully amortized intangible assets, acquired intangible assets and foreign currency translation.

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

We did not recognize any impairments of our intangible assets in 2020, 2019 or 2018. The amortization lives (in years) of our intangible assets on December 31, 2020, were as follows:


Intangible Asset						Range of Amortization Life
Contract and program intangible assets						7-30
Trade names and trademarks						30
Technology and software						5-15
Other intangible assets						7

Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $261 in 2020, $277 in 2019 and $270 in 2018. We expect to record annual amortization expense over the next five years as follows:


Year Ended December 31	Amortization Expense
2021	$	221
2022	197
2023	180
2024	170
2025	162

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 2020 and 2019 due to share repurchases. See Note M 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):


Year Ended December 31	2020	2019	2018
Basic weighted average shares outstanding	286,922	288,286	295,262
Dilutive effect of stock options and restricted stock/RSUs*	991	2,550	3,898
Diluted weighted average shares outstanding	287,913	290,836	299,160

*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 year and, therefore, the effect of including these options would be antidilutive. These options totaled 7,159 in 2020, 4,985 in 2019 and 3,143 in 2018.

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

We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2020 or 2019.

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 Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of

our other financial assets and liabilities on December 31, 2020 and 2019, 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)	December 31, 2020
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents	$	19	$	19	$	17	$	2	$	—
Available-for-sale debt securities	134		134		—		134		—
Equity securities	58		58		58		—		—
Other investments	9		9		—		—		9
Cash flow hedges	419		419		—		419		—
Measured at amortized cost:
Short- and long-term debt principal	(13,117)		(14,606)		—		(14,606)		—

	December 31, 2019
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents	$	24	$	24	$	11	$	13	$	—
Available-for-sale debt securities	129		129		—		129		—
Equity securities	54		54		54		—		—
Other investments	4		4		—		—		4
Cash flow hedges	26		26		—		26		—
Measured at amortized cost:
Short- and long-term debt principal	(12,005)		(12,339)		—		(12,339)		—

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, which consist primarily of fixed-income securities, cash flow hedge assets and our fixed-rate notes, is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets include direct private equity investments that are measured using inputs unobservable to a marketplace participant.

F. INCOME TAXES

Income Tax Provision. We calculate our provision for federal, state and foreign income taxes based on current tax law. The following is a summary of our net provision for income taxes for continuing operations:


Year Ended December 31	2020		2019		2018
Current:
U.S. federal	$	558	$	471	$	587
State	8		36		48
Foreign	132		119		95
Total current	698		626		730
Deferred:
U.S. federal	(130)		49		(37)
State	(2)		1		8
Foreign	5		42		26
Total deferred	(127)		92		(3)
Provision for income taxes, net	$	571	$	718	$	727
Net income tax payments	$	764	$	572	$	532

The reported tax provision differs from the amounts paid because some income and expense items are recognized in different time periods for financial reporting than for income tax purposes. State and local income taxes allocable to U.S. government contracts are included in operating costs and expenses in the Consolidated Statement of Earnings and, therefore, are not included in the provision above.

The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:


Year Ended December 31	2020		2019		2018
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
Domestic tax credits	(4.6)		(2.0)		(1.1)
Equity-based compensation	(0.2)		(1.1)		(1.1)
Contract close-outs	—		—		(0.5)
Foreign derived intangible income	(2.1)		(1.4)		(1.2)
State tax on commercial operations, net of federal benefits	0.1		0.7		1.1
Global impact of international operations	1.9		0.2		0.6

Other, net	(0.8)		(0.3)		(1.0)
Effective income tax rate	15.3	%	17.1	%	17.8	%

Net Deferred Tax Liability. The tax effects of temporary differences between reported earnings and taxable income consisted of the following:


December 31	2020		2019
Retirement benefits	$	1,042	$	990
Lease liabilities	373		418
Tax loss and credit carryforwards	311		323
Salaries and wages	259		167
Workers’ compensation	167		148
Other	373		367
Deferred assets	2,525		2,413
Valuation allowances	(273)		(291)
Net deferred assets	$	2,252	$	2,122

Intangible assets	$	(1,067)	$	(1,070)
Lease right-of-use assets	(379)		(418)
Contract accounting methods	(311)		(375)
Property, plant and equipment	(270)		(291)
Capital Construction Fund qualified ships	(59)		(164)
Other	(590)		(359)
Deferred liabilities	$	(2,676)	$	(2,677)
Net deferred tax liability	$	(424)	$	(555)

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:


December 31	2020		2019
Deferred tax asset	$	37	$	33
Deferred tax liability	(461)		(588)
Net deferred tax liability	$	(424)	$	(555)

We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized.

Our deferred tax balance associated with our retirement benefits includes a deferred tax asset of $1.2 billion on December 31, 2020 and $1.1 billion on December 31, 2019, related to the amounts recorded in accumulated other comprehensive loss (AOCL) to recognize the funded status of our retirement plans. See Notes M and R for additional details.

One of our deferred tax liabilities results from our participation in the Capital Construction Fund (CCF), a program established by the U.S. government and administered by the Maritime Administration that supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. The program allows us to defer federal and state income taxes on earnings derived from eligible programs as long as the proceeds are deposited in the fund and withdrawals are used for qualified activities. We had U.S. government accounts receivable pledged (and thereby deposited) to the CCF of $295 and $340 on December 31, 2020 and 2019, respectively.

On December 31, 2020, we had net operating loss carryforwards of $1.1 billion, substantially all of which are associated with jurisdictions that have an indefinite carryforward period.

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 2019.

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.

Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on December 31, 2020, was not material to our results of operations, financial condition or cash flows. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

G. ACCOUNTS RECEIVABLE

Accounts receivable represent amounts billed and currently due from customers. Payment is typically received from our customers either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Accounts receivable consisted of the following:


December 31	2020		2019
Non-U.S. government	$	1,701	$	1,847
U.S. government	1,040		1,076
Commercial	420		621
Total accounts receivable	$	3,161	$	3,544

Receivables from non-U.S. government customers included amounts related to long-term production programs for the Spanish Ministry of Defence of $1.6 billion and $1.7 billion on December 31, 2020 and 2019, respectively. A different ministry, the Spanish Ministry of Industry, has funded work on these programs in advance of costs incurred by the company. The cash advances are reported on the Consolidated Balance Sheet in current customer advances and deposits and will be repaid to the Ministry of Industry as we collect on the outstanding receivables from the Ministry of Defence. The net amounts for these programs on December 31, 2020 and 2019, were advance payments of $245 and $295, respectively. With respect to our other receivables, we expect to collect substantially all of the year-end 2020 balance during 2021.

H. UNBILLED RECEIVABLES

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


December 31	2020		2019
Unbilled revenue	$	36,657	$	33,481
Advances and progress billings	(28,633)		(25,624)
Net unbilled receivables	$	8,024	$	7,857

On December 31, 2020 and 2019, net unbilled receivables included $2.8 billion and $2.9 billion, respectively, associated with a large international wheeled armored vehicle contract in our Combat Systems segment. We had experienced delays in payment under the contract in 2018 and 2019, which resulted in the large unbilled receivables balances. In March 2020, we finalized a contract amendment with the customer that included a revised payment schedule. Under the amended contract, we received two $500 progress payments, one in each of the first and second quarters of 2020. Further progress payments will be due annually that will liquidate the net unbilled receivables balance over the next few years. Other than the balance related to the large international vehicle contract, we expect to bill substantially all of the remaining year-end 2020 net unbilled receivables balance during 2021. The amount not expected to be billed in 2021 results primarily from the agreed-upon contractual billing terms.

G&A costs in unbilled revenue on December 31, 2020 and 2019, were $427 and $441, respectively. Contract costs also may include estimated contract recoveries for matters such as contract changes and claims for unanticipated contract costs. We record revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable.

I. INVENTORIES

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

Inventories consisted of the following:


December 31	2020		2019
Work in process	$	3,990	$	4,419
Raw materials	1,712		1,733
Finished goods	30		30
Pre-owned aircraft	13		124
Total inventories	$	5,745	$	6,306

J. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. PP&E by major asset class consisted of the following:


December 31	2020		2019
Machinery and equipment	$	5,941	$	5,441
Buildings and improvements	3,558		3,232
Construction in process	802		688
Land and improvements	413		400
Total PP&E	10,714		9,761
Accumulated depreciation	(5,614)		(5,286)
PP&E, net	$	5,100	$	4,475

We depreciate most of our assets using the straight-line method and the remainder using accelerated methods. Buildings and improvements are depreciated over periods of up to 50 years. Machinery and equipment are depreciated over periods of up to 30 years. Our government customers provide certain facilities and equipment for our use that are not included above.

K. DEBT

Debt consisted of the following:


December 31			2020		2019
Fixed-rate notes due:	Interest rate:
May 2020	2.875%		$	—	$	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
April 2025	3.250%		750		—
May 2025	3.500%		750		750
August 2026	2.125%		500		500
April 2027	3.500%		750		—
November 2027	2.625%		500		500
May 2028	3.750%		1,000		1,000
April 2030	3.625%		1,000		—
April 2040	4.250%		750		—
November 2042	3.600%		500		500
April 2050	4.250%		750		—
Floating-rate notes due:
May 2020	3-month LIBOR +	0.29%	—		500
May 2021	3-month LIBOR +	0.38%	500		500

Other	Various		117		505
Total debt principal			13,117		12,005
Less unamortized debt issuance costs and discounts			119		75
Total debt			12,998		11,930
Less current portion			3,003		2,920
Long-term debt			$	9,995	$	9,010

In March 2020, we issued $4 billion of fixed-rate notes. The proceeds were used to repay $2.5 billion of fixed- and floating-rate notes that matured in May 2020 and for general corporate purposes, including the repayment of a portion of our borrowings under our commercial paper program. We also amended two of our credit facilities to, among other things, extend their expiration dates.

Interest payments associated with our debt were $459 in 2020, $434 in 2019 and $312 in 2018.

The aggregate amounts of scheduled principal maturities of our debt are as follows:


Year Ended December 31	Debt Principal
2021	$	3,006
2022	1,010
2023	1,255
2024	505
2025	1,503
Thereafter	5,838
Total debt principal	$	13,117

On December 31, 2020, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. These credit facilities include a $2 billion 364-day facility expiring in March 2021, a $2 billion multi-year facility expiring in March 2023 and a $1 billion multi-year facility expiring in March 2025. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. 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 December 31, 2020.

L. OTHER LIABILITIES

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


December 31	2020		2019
Salaries and wages	$	1,007	$	941
Workers’ compensation	338		306
Retirement benefits	306		296
Operating lease liabilities	262		252
Fair value of cash flow hedges	79		32
Other (a)	1,741		1,744
Total other current liabilities	$	3,733	$	3,571

Retirement benefits	$	5,182	$	5,172
Operating lease liabilities	1,149		1,251
Customer deposits on commercial contracts	872		709
Deferred income taxes	461		588
Other (b)	2,024		1,840
Total other liabilities	$	9,688	$	9,560

(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.

M. SHAREHOLDERS’ EQUITY

Authorized Stock. Our authorized capital stock consists of 500 million shares of $1 per share par value common stock and 50 million shares of $1 per share par value preferred stock. The preferred stock is issuable in series, with the rights, preferences and limitations of each series to be determined by our board of directors.

Shares Issued and Outstanding. On December 31, 2020, we had 481,880,634 shares of common stock issued and 286,477,836 shares of common stock outstanding, including unvested restricted stock of 488,435 shares. On December 31, 2019, we had 481,880,634 shares of common stock issued and 289,610,336 shares of common stock outstanding. No shares of our preferred stock were outstanding on either date. The only changes in our shares outstanding during 2020 and 2019 resulted from shares repurchased in the open market and share activity under our equity compensation plans. See Note Q for additional details.

Share Repurchases. Our board of directors from time to time authorizes management to repurchase outstanding shares of our common stock on the open market. On March 4, 2020, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In 2020, we repurchased 4.1 million of our outstanding shares for $602. On December 31, 2020, 12.3 million shares remained authorized by our board of directors for repurchase, representing 4.3% of our total shares outstanding. We repurchased 1.1 million shares for $184 in 2019 and 10.1 million shares for $1.8 billion in 2018.

Dividends per Share. Our board of directors declared dividends per share of $4.40 in 2020, $4.08 in 2019 and $3.72 in 2018. We paid cash dividends of $1.2 billion in 2020 and 2019 and $1.1 billion in 2018.

Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of AOCL consisted of the following:


	(Losses)/Gains on Cash Flow Hedges		Unrealized Gains on Marketable Securities		Foreign Currency Translation Adjustments		Changes in Retirement Plans’ Funded Status		AOCL
December 31, 2017	$	(94)	$	19	$	402	$	(2,846)	$	(2,519)
Cumulative-effect adjustments*	(4)		(19)		—		(550)		(573)
Other comprehensive loss, pretax	36		—		(300)		(45)		(309)
Benefit from income tax, net	(9)		—		—		10		1
Other comprehensive loss, net of tax	27		—		(300)		(35)		(308)
December 31, 2018	(71)		—		102		(3,431)		(3,400)

Other comprehensive loss, pretax	97		—		186		(857)		(574)
Benefit from income tax, net	(24)		—		—		180		156
Other comprehensive loss, net of tax	73		—		186		(677)		(418)
December 31, 2019	2		—		288		(4,108)		(3,818)

Other comprehensive income, pretax	366		—		353		(453)		266
Benefit from income tax, net	(96)		—		—		98		2
Other comprehensive income, net of tax	270		—		353		(355)		268
December 31, 2020	$	272	$	—	$	641	$	(4,463)	$	(3,550)

*Reflects the cumulative 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.

Amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and included pretax recognized net actuarial losses and amortization of prior service credit. See Note R for these amounts, which are included in our net periodic pension and other post-retirement benefit cost.

N. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use 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 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 December 31, 2020 and 2019, we held $2.8 billion and $902 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 pension plans. On December 31, 2020 and 2019, we held marketable securities in trust of $211 and $207, respectively. These marketable securities are reflected at fair value on the Consolidated Balance Sheet in other current and noncurrent assets. See Note E for additional details.

Hedging Activities. We had notional forward exchange and interest rate swap contracts outstanding of $9.4 billion and $5 billion on December 31, 2020 and 2019, 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 in any of the past three years. Net gains and losses reclassified to earnings from AOCL related to qualified hedges were also not material to our results of operations in any of the past three years, and we do not expect the amount of these gains and losses that will be reclassified to earnings during the next 12 months to be material.

We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2020 or 2019.

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 and earnings into U.S. dollars was not material to our results of operations in any of the past three years. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in any of the past three years.

O. 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 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. In the fourth quarter of 2020, the relator filed a second amended 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 $1.4 billion on December 31, 2020. 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 December 31, 2020, the estimated change in fair market values from the date of the commitments was not material.

Labor Agreements. On December 31, 2020, approximately one-fifth of the employees of our subsidiaries were working under collectively bargained terms and conditions, including 61 collective agreements that we have negotiated directly with unions and works councils. A number of these agreements expire within any given year. Historically, we have been successful at renegotiating these labor agreements without any material disruption of operating activities. In 2021, we expect to negotiate the terms of 19 agreements covering approximately 2,200 employees. We do not expect the renegotiations will, either individually or in the aggregate, have a material impact on our results of operations, financial condition or cash flows.

Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally 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 each of the past three years were as follows:


Year Ended December 31	2020		2019		2018
Beginning balance	$	619	$	480	$	467
Warranty expense	113		258		129
Payments	(108)		(105)		(102)
Adjustments	36		(14)		(14)
Ending balance	$	660	$	619	$	480

P. 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 an ROU asset and lease liability for leases with terms of 12 months or less. Some 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:



Year Ended December 31	2020		2019
Finance lease cost:
Amortization of right-of-use assets	$	94	$	86
Interest on lease liabilities	25		24
Operating lease cost	326		332
Short-term lease cost	62		75
Variable lease cost	12		14
Sublease income	(16)		(13)
Total lease costs, net	$	503	$	518

Additional information related to leases was as follows:


Year Ended December 31	2020		2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	323	$	325
Operating cash flows from finance leases	25		24
Financing cash flows from finance leases	64		57
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	205		365
Finance leases	45		50

Additional quantitative lease information was as follows:


December 31	2020		2019

Weighted-average remaining lease term:
Operating leases	10.5 years		10.7 years
Finance leases	10.1 years		6.1 years
Weighted-average discount rate:
Operating leases	3	%	3	%
Finance leases	7	%	8	%

The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the Consolidated Balance Sheet on December 31, 2020:


Year Ended December 31	Operating Leases		Finance Leases
2021	$	298	$	87
2022	252		86
2023	192		38
2024	156		21
2025	107		19
Thereafter	705		145
Total future lease payments	1,710		396
Less imputed interest	299		73
Present value of future lease payments	1,411		323
Less current portion of lease liabilities	262		68
Long-term lease liabilities	$	1,149	$	255
ROU assets	$	1,328	$	333

On December 31, 2019, operating and finance lease liabilities and the related ROU assets were as follows:


	Operating Leases		Finance Leases
Current portion of lease liabilities	$	252	$	67
Long-term lease liabilities	1,251		287
ROU assets	1,432		391

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

On December 31, 2020, we had additional future payments on leases that had not yet commenced of $79. These leases will commence in 2021 and 2022, and have lease terms of 1 to 20 years.

Q. EQUITY COMPENSATION PLANS

Equity Compensation Overview. We have equity compensation plans for employees, as well as for non-employee members of our board of directors. The equity compensation plans seek to provide an effective means of attracting and retaining directors, officers and key employees, and to provide them with incentives to enhance our growth and profitability. Under the equity compensation plans, awards may be granted to officers, employees or non-employee directors in common stock, options to purchase common stock, restricted shares of common stock, participation units or any combination of these.

Annually, we grant awards of stock options, restricted stock and RSUs to participants in our equity compensation plans in early March. Additionally, we may make limited ad hoc grants on a quarterly basis for new hires or promotions. We issue common stock under our equity compensation plans from treasury stock. On December 31, 2020, in addition to the shares reserved for issuance upon the exercise of outstanding stock options, approximately 23 million shares have been authorized for awards that may be granted in the future.

Equity-based Compensation Expense. Equity-based compensation expense is included in G&A expenses. The following table details the components of equity-based compensation expense recognized in net earnings in each of the past three years:


Year Ended December 31	2020		2019		2018
Stock options	$	43	$	43	$	45
Restricted stock/RSUs	58		62		65
Total equity-based compensation expense, net of tax	$	101	$	105	$	110

Stock Options. Stock options granted under our equity compensation plans are issued with an exercise price at the fair value of our common stock determined by the average of the high and low stock prices as listed on the New York Stock Exchange (NYSE) on the date of grant. The majority of our outstanding stock options vest over three years, with 50% of the options vesting after two years and the remaining 50% vesting the following year, and expire 10 years after the grant date.

We recognize compensation expense related to stock options on a straight-line basis over the vesting period of the awards, net of estimated forfeitures. Estimated forfeitures are based on our historical forfeiture experience. We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model with the following assumptions for each of the past three years:


Year Ended December 31	2020		2019		2018
Expected volatility	21.1-26.9%		19.7-20.0%		17.6-18.2%
Weighted average expected volatility	21.2	%	19.7	%	17.6	%
Expected term (in months)	60		64		68
Risk-free interest rate	0.4-1.5%		1.7-2.6%		2.6-2.9%
Expected dividend yield	2.4	%	2.0	%	1.8	%

We determine the above assumptions based on the following:

Expected volatility is based on the historical volatility of our common stock over a period equal to the expected term of the option.
Expected term is based on assumptions used by a set of comparable peer companies.
Risk-free interest rate is the yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option at the grant date.
Expected dividend yield is based on our historical dividend yield.

The resulting weighted average fair value per stock option granted (in dollars) was $24.86 in 2020, $29.06 in 2019 and $37.42 in 2018. Stock option expense reduced pretax operating earnings (and on a diluted per-share basis) by $55 ($0.15) in 2020 and 2019 and $57 ($0.15) in 2018. Compensation expense for stock options is reported as a Corporate expense for segment reporting purposes (see Note S). On December 31, 2020, we had $72 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.9 years.

A summary of stock option activity during 2020 follows:


In Shares and Dollars	Shares Under Option	Weighted Average Exercise Price Per Share
Outstanding on December 31, 2019	9,767,749	$	161.54
Granted	2,538,120	165.20
Exercised	(910,572)	101.16
Forfeited/canceled	(266,576)	174.52
Outstanding on December 31, 2020	11,128,721	$	167.00
Vested and expected to vest on December 31, 2020	10,746,380	$	167.02
Exercisable on December 31, 2020	6,133,048	$	161.18

Summary information with respect to our stock options’ intrinsic value and remaining contractual term on December 31, 2020, follows:


	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding	6.7	$	56
Vested and expected to vest	6.6	56
Exercisable	5.1	56

In the table above, intrinsic value is calculated as the excess, if any, of the market price of our stock on the last trading day of the year over the exercise price of the options. For stock options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the exercise price. The total intrinsic value of stock options exercised was $57 in 2020, $244 in 2019 and $147 in 2018.

Restricted Stock/RSUs. The fair value of restricted stock and RSUs equals the average of the high and low market prices of our common stock as listed on the NYSE on the date of grant. Grants of restricted stock are awards of shares of common stock. Participation units represent obligations that have a value derived from or related to the value of our common stock. These include stock appreciation rights, phantom stock units and RSUs, and are payable in cash or common stock.

Restricted stock and RSUs generally vest over a three-year restriction period after the grant date, during which recipients may not sell, transfer, pledge, assign or otherwise convey their restricted shares to another party. During this period, restricted stock recipients receive cash dividends on their restricted shares and are entitled to vote those shares, while RSU recipients receive dividend-equivalent units instead of cash dividends and are not entitled to vote their RSUs or dividend-equivalent units.

We grant RSUs with one or more performance measures determined by the compensation committee of the board of directors as described in our proxy statement. Depending on the company’s performance, the number of RSUs earned may be less than, equal to or greater than the original number of RSUs awarded subject to a payout range.

We generally recognize compensation expense related to restricted stock and RSUs on a straight-line basis over the vesting period of the awards. Compensation expense related to restricted stock and RSUs reduced pretax operating earnings (and on a diluted per-share basis) by $73 ($0.20) in 2020, $79 ($0.21) in 2019 and $83 ($0.22) in 2018. Compensation expense for restricted stock and RSUs is reported as an operating expense for segment reporting purposes (see Note S). On December 31, 2020, we had $56 of

unrecognized compensation cost related to restricted stock and RSUs, which is expected to be recognized over a weighted average period of 1.6 years.

A summary of restricted stock and RSU activity during 2020 follows:


In Shares and Dollars	Shares/ Share-Equivalent Units	Weighted Average Grant-Date Fair Value Per Share
Nonvested at December 31, 2019	1,224,364	$	181.11
Granted	559,168	170.57
Vested	(609,870)	172.23
Forfeited	(23,511)	173.91
Nonvested at December 31, 2020	1,150,151	$	180.98

The total fair value of vesting shares was $103 in 2020, $88 in 2019 and $242 in 2018.

R. RETIREMENT PLANS

We provide retirement benefits to eligible employees through a variety of plans:

Defined contribution
Defined benefit

◦Pension (qualified and non-qualified)

◦Other post-retirement benefit

Substantially all of our plans use a December 31 measurement date consistent with our fiscal year.

Defined Contribution Plans

We provide eligible employees the opportunity to participate in defined contribution plans (commonly known as 401(k) plans), which permit contributions on a before-tax and after-tax basis. Employees may contribute to various investment alternatives. In most of these plans, we match a portion of the employees’ contributions. Our contributions to these plans totaled $379 in 2020, $333 in 2019 and $302 in 2018. The defined-contribution plans held approximately 19 million shares of our common stock, representing approximately 7% of our outstanding shares on December 31, 2020 and 2019.

Defined Benefit Plans

Plan Descriptions. We have trusteed, qualified pension plans covering eligible employees aligned with the markets in our business: U.S. government, non-U.S. government and commercial. Some of these plans require employees to make contributions to the plan. We also sponsor several non-qualified pension plans, which provide eligible executives with additional benefits, including excess benefits over limits imposed on qualified plans by federal tax law. The principal factors affecting the benefits earned by participants in our pension plans are employees’ years of service and compensation levels. Our primary U.S. pension plans, which comprise the majority of our unfunded obligation, were closed to new salaried participants on January 1, 2007, and were closed to new hourly participants in subsequent collective bargaining agreements over the next several years. Additionally, we have made several changes to these plans for certain participants that limit or cease the benefits that accrue for future service.

In addition to pension benefits, we maintain plans that provide post-retirement healthcare and life insurance coverage for certain employees and retirees. These benefits vary by employment status, age,

service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. The plans provide health and life insurance benefits only to those employees who retire directly from our service and not to those who terminate service prior to eligibility for retirement.

Contributions. It is our policy to fund our qualified pension plans in a manner that optimizes the tax deductibility and contract recovery of contributions considered within our capital deployment framework. Therefore, we may make discretionary contributions in addition to the required contributions determined in accordance with IRS regulations. We contributed $480 to our qualified pension plans in 2020. In 2021, our required contributions are approximately $360.

We maintain several tax-advantaged accounts, primarily Voluntary Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations for some of our other post-retirement benefit plans. For non-funded plans, claims are paid as received. Contributions to our other post-retirement benefit plans were not material in 2020 and are not expected to be material in 2021.

Benefit Payments. We expect the following benefits to be paid from our defined benefit plans over the next 10 years:


	Pension Benefits		Other Post-retirement Benefits
2021	$	887	$	64
2022	912		63
2023	935		62
2024	961		60
2025	981		59
2026-2030	5,094		273

Benefit Cost. Our annual benefit cost consists of five primary elements:

the cost of benefits earned by employees for services rendered during the year.
an interest charge on our plan liabilities.
an expected return on our plan assets for the year.
actuarial gains and losses, which result from changes in assumptions and differences between actual and expected return on assets and participant experience.
the cost or credit attributed to prior service resulting from changes we make to plan benefit terms.

For qualified pension plans and other post-retirement benefit plans, actuarial gains and losses and prior service costs or credits are initially deferred in AOCL and then amortized on a straight-line basis over future years. For our qualified U.S. government pension plans, we amortize actuarial gains and losses over a custom amortization period based on the amount of pension costs allocable to our U.S. government contracts. For the remaining qualified pension plans and other post-retirement benefit plans, we amortize only the amount of actuarial gains and losses that exceeds 10% of the greater of plan assets or benefit obligations. This amount is amortized over the average remaining service period of plan participants who are active employees unless all or almost all of a plan’s participants are inactive or are not accruing additional benefits, then the amortization period is based on the average remaining life expectancy of the plan participants. To further reduce the volatility of our annual benefit cost, gains and losses resulting from the return on plan assets are included over five years in the determination of the amortizable amount of actuarial gains and losses. For non-qualified pension plans, we recognize actuarial gains and losses immediately.

Net annual benefit cost (credit) consisted of the following:


	Pension Benefits
Year Ended December 31	2020		2019		2018
Service cost	$	115	$	111	$	180
Interest cost	491		600		532
Expected return on plan assets	(926)		(911)		(856)
Net actuarial loss	387		355		375
Prior service credit	(18)		(19)		(46)
Net annual benefit cost	$	49	$	136	$	185


	Other Post-retirement Benefits
Year Ended December 31	2020		2019		2018
Service cost	$	10	$	8	$	10
Interest cost	27		35		33
Expected return on plan assets	(36)		(36)		(40)
Net actuarial gain	(3)		(8)		(4)
Prior service credit	(1)		(3)		(4)
Net annual benefit credit	$	(3)	$	(4)	$	(5)

Our contractual arrangements with the U.S. government provide for the recovery of pension and other post-retirement benefit costs related to employees working on government contracts. For these plans, the amount allocated to contracts is determined in accordance with the Cost Accounting Standards (CAS) and Federal Acquisition Regulation. At this time, cumulative benefit costs exceed the amount allocated to contracts. To the extent we consider recovery of benefit costs 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. See Note A for a discussion of our other contract costs. To the extent there is a non-service component of net annual benefit cost (credit) for our defined benefit plans, it is reported in other income (expense) in the Consolidated Statement of Earnings.

Funded Status. We recognize an asset or liability on the Consolidated Balance Sheet equal to the funded status of each of our defined benefit plans. The funded status is the difference between the fair value of the plan’s assets and its benefit obligation. The following is a reconciliation of the benefit obligations and plan/trust assets, and the resulting funded status, of our defined benefit plans:


	Pension Benefits				Other Post-retirement Benefits
Year Ended December 31	2020		2019		2020		2019
Change in Benefit Obligation
Benefit obligation at beginning of year	$	(18,107)	$	(15,720)	$	(1,027)	$	(935)
Service cost	(115)		(111)		(10)		(8)
Interest cost	(491)		(600)		(27)		(35)

Amendments	37		(3)		2		(8)
Actuarial loss	(1,780)		(2,446)		(60)		(101)
Settlement/curtailment/other	(65)		(33)		(4)		(4)
Benefits paid	829		806		64		64
Benefit obligation at end of year	$	(19,692)	$	(18,107)	$	(1,062)	$	(1,027)
Change in Plan/Trust Assets
Fair value of assets at beginning of year	$	13,177	$	11,532	$	644	$	570
Actual return on plan assets	1,843		2,206		102		117

Employer contributions	480		185		—		2
Settlement/curtailment/other	58		39		—		—
Benefits paid	(807)		(785)		(41)		(45)
Fair value of assets at end of year	$	14,751	$	13,177	$	705	$	644
Funded status at end of year	$	(4,941)	$	(4,930)	$	(357)	$	(383)

The overall increase in our pension benefit obligation for the year ended December 31, 2020, was due primarily to actuarial losses created by the change in the weighted-average discount rate, which decreased from 3.19% at December 31, 2019, to 2.54% at December 31, 2020.

The overall increase in our pension benefit obligation for the year ended December 31, 2019, was due primarily to actuarial losses created by the change in the weighted-average discount rate, which decreased from 4.28% at December 31, 2018, to 3.19% at December 31, 2019.

Amounts recognized on the Consolidated Balance Sheet consisted of the following:


	Pension Benefits				Other Post-retirement Benefits
December 31	2020		2019		2020		2019
Noncurrent assets	$	69	$	61	$	121	$	94
Current liabilities	(181)		(166)		(125)		(130)
Noncurrent liabilities	(4,829)		(4,825)		(353)		(347)
Net liability recognized	$	(4,941)	$	(4,930)	$	(357)	$	(383)

Amounts deferred in AOCL for our defined benefit plans consisted of the following:


	Pension Benefits				Other Post-retirement Benefits
December 31	2020		2019		2020		2019
Net actuarial loss (gain)	$	5,752	$	5,276	$	(12)	$	(9)
Prior service (credit) cost	(93)		(73)		12		12
Total amount recognized in AOCL, pretax	$	5,659	$	5,203	$	—	$	3

The following is a reconciliation of the change in AOCL for our defined benefit plans:


	Pension Benefits				Other Post-retirement Benefits
Year Ended December 31	2020		2019		2020		2019
Net actuarial loss (gain)	$	863	$	1,151	$	(6)	$	20
Prior service credit (cost)	(38)		3		(1)		8
Amortization of:
Net actuarial (loss) gain from prior years	(387)		(355)		3		8
Prior service credit	18		19		1		3

Change in AOCL, pretax	$	456	$	818	$	(3)	$	39

A pension plan’s funded status is the difference between the plan’s assets and its projected benefit obligation (PBO). The PBO is the present value of future benefits attributed to employee services rendered to date, including assumptions about future compensation levels. On December 31, 2020 and 2019, most of our pension plans had a PBO that exceeded the plans’ assets. Summary information for those plans follows:


December 31	2020		2019
PBO	$	(19,189)	$	(17,651)
Fair value of plan assets	14,191		12,673

A pension plan’s accumulated benefit obligation (ABO) is the present value of future benefits attributed to employee services rendered to date, excluding assumptions about future compensation levels. The ABO for all pension plans was $19.4 billion and $17.8 billion on December 31, 2020 and 2019, respectively. The ABO for all other post-retirement plans was $1.1 billion and $1 billion on December 31, 2020 and 2019, respectively. On December 31, 2020 and 2019, most of our defined benefit plans had an ABO that exceeded the plans’ assets. Summary information for those plans follows:


	Pension Benefits				Other Post-retirement Benefits
December 31	2020		2019		2020		2019

ABO	$	(18,596)	$	(17,080)	$	(784)	$	(783)
Fair value of plan assets	13,829		12,354		300		301

Assumptions. We calculate the plan assets and liabilities for a given year and the net annual benefit cost for the subsequent year using assumptions determined as of December 31 of the year in question.

The following table summarizes the weighted average assumptions used to determine our benefit obligations:


Assumptions on December 31	2020		2019
Pension Benefits
Benefit obligation discount rate	2.54	%	3.19	%
Rate of increase in compensation levels	2.66	%	2.68	%
Other Post-retirement Benefits
Benefit obligation discount rate	2.52	%	3.18	%
Healthcare cost trend rate:
Trend rate for next year	6.00	%	6.00	%
Ultimate trend rate	5.00	%	5.00	%
Year rate reaches ultimate trend rate	2024		2024

The following table summarizes the weighted average assumptions used to determine our net annual benefit cost:


Assumptions for Year Ended December 31	2020		2019		2018
Pension Benefits
Discount rates:
Benefit obligation	3.19	%	4.28	%	3.69	%
Service cost	2.74	%	3.81	%	3.51	%
Interest cost	2.78	%	3.92	%	3.34	%
Expected long-term rate of return on assets	7.41	%	7.46	%	7.45	%
Rate of increase in compensation levels	2.73	%	2.77	%	2.79	%
Other Post-retirement Benefits
Discount rates:
Benefit obligation	3.18	%	4.24	%	3.64	%
Service cost	3.35	%	4.23	%	3.79	%
Interest cost	2.78	%	3.88	%	3.27	%
Expected long-term rate of return on assets	6.86	%	6.84	%	7.75	%

We base the discount rates on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period.

We determine the long-term rates of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy. 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 beginning in 2019. For 2021, we decreased the expected long-term rates of return on assets in our primary U.S. pension plans by 25 basis points and in our primary U.S. other post-retirement benefit plans by 25 basis points or 125 basis points depending on the investment mix of each plan’s assets. These changes to our expected long-term rates of return in both years resulted from an assessment of the historical and expected long-term returns of our various asset classes.

Retirement plan assumptions are based on our best judgment, including consideration of current and future market conditions. Given the long-term nature of the assumptions being made, actual outcomes can and often do differ from these estimates. Changes in these estimates impact future pension and other post-retirement benefit cost. As discussed above, we defer recognition of the cumulative benefit cost for our government plans in excess of costs allocated to contracts and included in revenue. Therefore, the impact of annual changes in financial reporting assumptions on the cost for these plans does not immediately affect our operating results.

Assets. A committee of our board of directors is responsible for the strategic oversight of our defined benefit plan assets held in trust. Management develops investment policies and provides oversight of a third-party investment manager who reports to the committee on a regular basis. The outsourced third-party investment manager develops investment strategies and makes all day-to-day investment decisions related to defined benefit plan assets in accordance with our investment policy and target allocation percentages.

Our investment policy endeavors to strike the appropriate balance among capital preservation, asset growth and current income. The objective of our investment policy is to generate future returns consistent with our assumed long-term rates of return used to determine net annual benefit cost. Target

allocation percentages vary over time depending on the perceived risk and return potential of various asset classes and market conditions. At the end of 2020, our asset allocation policy ranges were:


Equities			48-68%
Fixed income			20-48%
Cash			0-5%
Other asset classes			0-16%

More than 90% of our pension plan assets are held in a single trust for our primary qualified U.S. government and commercial pension plans. On December 31, 2020, the trust was invested largely in publicly traded equities, fixed-income securities and commingled funds comprised of equity securities. The trust also invests in other asset classes consistent with our investment policy. Our investment policy allows the use of derivative instruments when appropriate to reduce anticipated asset volatility, to gain exposure to an asset class or to adjust the duration of fixed-income assets.

We hold assets in VEBA trusts for some of our other post-retirement benefit plans. These assets are managed by a third-party investment manager with oversight by management and are generally invested in publicly traded equities, fixed-income securities and commingled funds comprised of equity and fixed-income securities. Our asset allocation strategy for the VEBA trusts considers potential fluctuations in our other post-retirement benefit obligation, the taxable nature of certain VEBA trusts, tax deduction limits on contributions and the regulatory environment.

Our defined benefit plan assets are reported at fair value. See Note E for a discussion of the hierarchy for determining fair value. Our Level 1 assets include investments in publicly traded equity securities. These securities are actively traded and valued using quoted prices for identical securities from the market exchanges. Our Level 2 assets include fixed-income securities and commingled funds whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our plan assets that are invested in commingled funds are valued using a unit price or net asset value (NAV) that is based on the underlying investments of the fund. Our Level 3 assets consist of real estate funds, insurance deposit contracts, retirement annuity contracts and direct private equity investments.

Certain investments valued using NAV as a practical expedient are excluded from the fair value hierarchy. These investments are redeemable at NAV on a monthly or quarterly basis and have redemption notice periods of up to 90 days. The unfunded commitments related to these investments were not material on December 31, 2020 or 2019.

The fair value of our pension plan assets by investment category and the corresponding level within the fair value hierarchy were as follows:


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset Category	December 31, 2020
Cash and equivalents	$	112	$	—	$	112	$	—
Equity securities (a):
U.S. companies	1,137		1,137		—		—
Non-U.S. companies	90		90		—		—
Private equity investments	33		—		—		33
Fixed-income securities:
Corporate bonds (b)	3,532		—		3,532		—
Treasury securities	1,129		—		1,129		—
Commingled funds:
Equity funds	7,306		—		7,306		—
Fixed-income funds	416		—		416		—
Real estate funds	90		—		—		90
Other investments:
Insurance deposit contracts	157		—		—		157
Retirement annuity contracts	38		—		—		38
Total plan assets in fair value hierarchy	$	14,040	$	1,227	$	12,495	$	318
Plan assets measured using NAV as a practical expedient (c):
Real estate funds	446
Hedge funds	254


Equity funds	11
Total pension plan assets	$	14,751

(a)No single equity holding amounted to more than 1% of the total fair value.

(b)Our corporate bond investments had an average rating of A-.

(c)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset Category	December 31, 2019
Cash and equivalents	$	56	$	—	$	56	$	—
Equity securities (a):
U.S. companies	958		958		—		—
Non-U.S. companies	128		128		—		—
Private equity investments	26		—		—		26
Fixed-income securities:
Corporate bonds (b)	2,163		—		2,163		—
Treasury securities	1,855		—		1,855		—
Commingled funds:
Equity funds	6,494		—		6,494		—
Fixed-income funds	365		—		365		—
Real estate funds	84		—		—		84
Other investments:
Insurance deposit contracts	137		—		—		137
Retirement annuity contracts	35		—		—		35
Total plan assets in fair value hierarchy	$	12,301	$	1,086	$	10,933	$	282
Plan assets measured using NAV as a practical expedient (c):
Real estate funds	443
Hedge funds	419

Equity funds	14
Total pension plan assets	$	13,177

(a)No single equity holding amounted to more than 1% of the total fair value.

(b)Our corporate bond investments had an average rating of A.

The fair value of our other post-retirement benefit plan assets by category and the corresponding level within the fair value hierarchy were as follows:


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Asset Category (a)	December 31, 2020
Cash and equivalents	$	16	$	—	$	16
Equity securities	97		97		—
Fixed-income securities	134		—		134
Commingled funds:
Equity funds	320		—		320
Fixed-income funds	128		—		128
Real estate funds	2		2		—
Total plan assets in fair value hierarchy	$	697	$	99	$	598
Plan assets measured using NAV as a practical expedient (b):
Real estate funds	5
Hedge funds	3



Total other post-retirement benefit plan assets	$	705

(a)We had no Level 3 investments on December 31, 2020.

(b)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Asset Category (a)	December 31, 2019
Cash and equivalents	$	18	$	—	$	18
Equity securities	92		92		—
Fixed-income securities	122		—		122
Commingled funds:
Equity funds	288		—		288
Fixed-income funds	113		—		113
Real estate funds	2		2		—
Total plan assets in fair value hierarchy	$	635	$	94	$	541
Plan assets measured using NAV as a practical expedient (b):
Real estate funds	5
Hedge funds	4


Total other post-retirement benefit plan assets	$	644

(a)We had no Level 3 investments on December 31, 2019.

Changes in our Level 3 defined benefit plan assets during 2020 and 2019 were as follows:


	Private Equity Investments		Real Estate Funds		Insurance Deposits Contracts		Retirement Annuity Contracts		Total Level 3 Assets
December 31, 2018	$	20	$	68	$	128	$	—	$	216
Actual return on plan assets:
Unrealized gains, net	5		6		6		—		17

Purchases, sales and settlements, net	1		10		3		35		49
December 31, 2019	26		84		137		35		282
Actual return on plan assets:
Unrealized gains, net	5		7		18		3		33
Realized losses, net	—		(1)		—		—		(1)
Purchases, sales and settlements, net	2		—		2		—		4
December 31, 2020	$	33	$	90	$	157	$	38	$	318

S. SEGMENT INFORMATION

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

Summary financial information for each of our segments follows:


	Revenue*						Operating Earnings						Revenue from U.S. Government
Year Ended December 31	2020		2019		2018		2020		2019		2018		2020		2019		2018
Aerospace	$	8,075	$	9,801	$	8,455	$	1,083	$	1,532	$	1,490	$	513	$	498	$	334
Marine Systems	9,979		9,183		8,502		854		785		761		9,871		9,027		8,245
Combat Systems	7,223		7,007		6,241		1,041		996		962		4,191		4,048		3,228
Technologies	12,648		13,359		12,995		1,211		1,311		1,267		11,728		12,234		11,799
Corporate	—		—		—		(56)		(54)		(86)		—		—		—
Total	$	37,925	$	39,350	$	36,193	$	4,133	$	4,570	$	4,394	$	26,303	$	25,807	$	23,606

*See Note B for additional revenue information by segment.

Corporate operating results consist primarily of equity-based compensation expense. Corporate operating results in 2018 also included one-time charges of approximately $45 associated with the costs to complete the CSRA acquisition.

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


	Identifiable Assets						Capital Expenditures						Depreciation and Amortization
Year Ended December 31	2020		2019		2018		2020		2019		2018		2020		2019		2018
Aerospace	$	12,050	$	12,324	$	11,220	$	95	$	138	$	194	$	201	$	178	$	154
Marine Systems	4,488		3,918		3,304		604		449		243		145		122		116
Combat Systems	12,034		11,220		9,872		92		109		91		95		85		87
Technologies	19,663		20,453		20,143		172		222		111		428		437		398
Corporate*	3,073		1,434		1,348		4		69		51		9		7		8
Total	$	51,308	$	49,349	$	45,887	$	967	$	987	$	690	$	878	$	829	$	763

*Corporate identifiable assets are primarily cash and equivalents.

The following table presents our revenue by geographic area based on the location of our customers:


Year Ended December 31	2020		2019		2018
North America:
United States	$	31,194	$	31,775	$	28,386
Other	1,078		898		813
Total North America	32,272		32,673		29,199





Europe	2,846		2,836		2,807



Asia/Pacific	1,292		1,739		2,287



Africa/Middle East	1,249		1,785		1,611
South America	266		317		289
Total revenue	$	37,925	$	39,350	$	36,193

Our revenue from non-U.S. operations was $4.3 billion in 2020, $4.4 billion in 2019 and $4.2 billion in 2018, and earnings from continuing operations before income taxes from non-U.S. operations were $585 in 2020, $600 in 2019 and $578 in 2018. The long-lived assets associated with these operations were 4% of our total long-lived assets on December 31, 2020 and 2019, and 3% on December 31, 2018.

T. CHANGE IN ACCOUNTING PRINCIPLE

In the fourth quarter of 2020, we retrospectively changed our accounting method related to the amortization of actuarial gains and losses for our qualified U.S. government pension plans in which the participants worked on U.S. government contracts (the Change in Accounting Principle). Prior to the Change in Accounting Principle, actuarial gains and losses were initially recognized as a component of AOCL and then subsequently amortized out of AOCL over time only when they exceeded the accounting corridor, a defined range within which amortization of net gains and losses is not required.

Under the new method, we will no longer use an accounting corridor, and we will amortize the actuarial gains and losses over a custom period. While the historical accounting method was acceptable, we believe the Change in Accounting Principle is preferable as it accelerates the amortization of the actuarial gains and losses, and aligns better with the method used for the allocation of qualified pension costs to our U.S. government contracts in accordance with the CAS. The Change in Accounting Principle has been applied retrospectively to all prior years presented. As of January 1, 2018, the cumulative effect of this change resulted in a $366 decrease in AOCL, $40 decrease in deferred tax asset in other noncurrent assets, $57 increase in deferred tax liability in other noncurrent liabilities and $463 increase in other contract costs in other current assets on the Consolidated Balance Sheet.

The following tables summarize the effects of the Change in Accounting Principle on selected line items of our Consolidated Financial Statements:

CONSOLIDATED STATEMENT OF EARNINGS


Year Ended December 31, 2020	As Calculated Under Previous Method		Effect of the Change in Accounting Principle		As Reported
Operating costs and expenses	$	(33,739)	$	(53)	$	(33,792)
Other, net	29		53		82


Year Ended December 31, 2019	As Previously Reported		Effect of the Change in Accounting Principle		As Adjusted
Operating costs and expenses	$	(34,702)	$	(78)	$	(34,780)
Other, net	14		78		92


Year Ended December 31, 2018	As Previously Reported		Effect of the Change in Accounting Principle		As Adjusted
Operating costs and expenses	$	(31,736)	$	(63)	$	(31,799)
Other, net	(16)		63		47

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


Year Ended December 31, 2020	As Calculated Under Previous Method		Effect of the Change in Accounting Principle		As Reported
Change in retirement plans’ funded status	$	(491)	$	38	$	(453)
Benefit from income tax, net	10		(8)		2
Other comprehensive income, net of tax	238		30		268
Comprehensive income	3,405		30		3,435


Year Ended December 31, 2019	As Previously Reported		Effect of the Change in Accounting Principle		As Adjusted
Change in retirement plans’ funded status	$	(886)	$	29	$	(857)
Benefit from income tax, net	162		(6)		156
Other comprehensive loss, net of tax	(441)		23		(418)
Comprehensive income	3,043		23		3,066


Year Ended December 31, 2018	As Previously Reported		Effect of the Change in Accounting Principle		As Adjusted
Change in retirement plans’ funded status	$	(61)	$	16	$	(45)
Benefit from income tax, net	5		(4)		1
Other comprehensive loss, net of tax	(320)		12		(308)
Comprehensive income	3,025		12		3,037

CONSOLIDATED BALANCE SHEET


December 31, 2020	As Calculated Under Previous Method		Effect of the Change in Accounting Principle		As Reported
Other current assets	$	1,243	$	546	$	1,789
Other liabilities	9,573		115		9,688
Accumulated other comprehensive loss	(3,981)		431		(3,550)


December 31, 2019	As Previously Reported		Effect of the Change in Accounting Principle		As Adjusted
Other current assets	$	1,171	$	508	$	1,679
Other liabilities	9,453		107		9,560
Accumulated other comprehensive loss	(4,219)		401		(3,818)

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY


	Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
December 31, 2017 – as reported	$	26,444	$	(2,820)	$	11,435
Cumulative-effect of the Change in Accounting Principle as of December 31, 2017	65		301		366


December 31, 2017 – as adjusted	26,509		(2,519)		11,801
Year ended December 31, 2018 – as reported	2,882		(958)		297
Effect of the Change in Accounting Principle*	(65)		77		12

December 31, 2018 – as adjusted	29,326		(3,400)		12,110
Year ended December 31, 2019 – as reported	2,307		(441)		1,845
Effect of the Change in Accounting Principle	—		23		23
December 31, 2019 – as adjusted	31,633		(3,818)		13,978
Year ended December 31, 2020 – under previous method	1,865		238		1,653

Effect of the Change in Accounting Principle	—		30		30
December 31, 2020 – as reported	$	33,498	$	(3,550)	$	15,661

*Includes the impact of our January 1, 2018, adoption of ASU 2018-02, the change in accounting principle which resulted in a reclassification of $65 of stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act (tax reform) from accumulated other comprehensive loss to retained earnings.

UNAUDITED QUARTERLY CONSOLIDATED STATEMENT OF EARNINGS


	2019								2020
As Calculated Under Previous Method	1Q		2Q		3Q		4Q		1Q		2Q		3Q		4Q
Operating costs and expenses	$	(8,247)	$	(8,465)	$	(8,545)	$	(9,445)	$	(7,808)	$	(8,423)	$	(8,347)	$	(9,161)
Other, net	18		12		(12)		(4)		14		18		12		(15)
Effect of the Change in Accounting Principle
Operating costs and expenses	$	(13)	$	(13)	$	(32)	$	(20)	$	(7)	$	(7)	$	(12)	$	(27)
Other, net	13		13		32		20		7		7		12		27
As Calculated Under New Method
Operating costs and expenses	$	(8,260)	$	(8,478)	$	(8,577)	$	(9,465)	$	(7,815)	$	(8,430)	$	(8,359)	$	(9,188)
Other, net	31		25		20		16		21		25		24		12

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of General Dynamics Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying Consolidated Balance Sheet of General Dynamics Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows, and Shareholders’ Equity for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the Consolidated Financial Statements). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 9, 2021, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note A to the Consolidated Financial Statements, the Company changed its method of accounting for leases as of January 1, 2019, in accordance with the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.

Basis for Opinion

These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the Consolidated Financial Statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the Consolidated Financial

Statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the Consolidated Financial Statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Estimation of costs to complete for select long-term contracts

As discussed in Note B to the Consolidated Financial Statements, accounting for long-term contracts involves estimation of the costs to complete a contract in order to accurately recognize the associated revenue. The estimated costs to complete each contract are used to assess the proportion of revenues to recognize based upon the costs incurred-to-date in comparison to the total estimate of costs to complete the contract.

We identified the assessment of the estimation of costs to complete for a select group of long-term contracts in the defense segments as a critical audit matter. The estimated costs to complete for the select group of long-term contracts incorporates assumptions, such as labor hours and the cost of materials for the work to be performed. The evaluation of one or more of the assumptions used in estimating the costs to complete each selected contract required a high level of subjective auditor judgment, due to the nature of the individual contracts and related contract performance risks. Specifically, changes to certain assumptions may have a significant impact on the estimated revenue recorded during the period.

The following are primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the estimation of costs to complete the selected long-term contracts. This included contract level controls over the estimated cost assumptions. For certain contracts, we compared the Company’s historical estimates of costs to actual costs incurred to assess the Company’s ability to estimate accurately. Based on the nature of the individual contract, we evaluated certain assumptions within the Company’s estimation of costs to complete by:

–reading the underlying contract and related amendments to obtain an understanding of the contractual requirements and related performance obligations

–assessing costs incurred to-date and the relative progress toward satisfying the performance obligation(s) of the contract

–assessing, if relevant, the estimated costs to complete on similar or predecessor contracts and programs

–inquiring of financial and operational personnel of the Company to identify factors that should be considered within the cost to complete estimates or indications of potential management bias

–inspecting correspondence, if any, between the Company and the customer regarding actual to-date and expected performance

–analyzing the sufficiency of the Company’s assessment of contract performance risks included within the estimated costs to complete.

Discount rates used in pension benefit obligation

As discussed in Note R to the Consolidated Financial Statements, the Company’s pension benefit obligation and the associated plan assets were $19.7 billion and $14.8 billion, respectively, on December 31, 2020. These balances resulted in a net liability of $4.9 billion. The pension benefit obligation is the estimated present value of future pension benefits attributed to employee services rendered to date, including assumptions about future market conditions. The weighted average discount rate used in estimating the pension benefit obligation as of December 31, 2020, of 2.54% was based on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period. The selected discount rate has a significant effect on the measurement of the pension benefit obligation.

We identified the evaluation of the discount rate for certain pension benefit obligations to be a critical audit matter. This is due to the specialized skills required to assess the discount rate assumption used to discount estimated future benefit payments. In addition, the pension benefit obligations for certain plans were sensitive to changes in this assumption.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the pension benefit obligation process. This included a control related to the determination of the discount rate assumption. We involved an actuarial professional with specialized skills and knowledge, who assisted in:

–evaluating the Company’s methodology used to develop the discount rates

–recalculating discount rates using the cash flows and spot rates provided by the Company

–evaluating the Company’s determination of the discount rates for certain plans by comparing changes in the discount rate from the prior year against changes in published indices using publicly available market data and historical experience.

We have served as the Company’s auditor since 2002.

McLean, Virginia

February 9, 2021

SUPPLEMENTARY DATA (UNAUDITED)


(Dollars in millions, except per-share amounts)	2019								2020
	1Q		2Q		3Q		4Q		1Q		2Q		3Q		4Q
Revenue	$	9,261	$	9,555	$	9,761	$	10,773	$	8,749	$	9,264	$	9,431	$	10,481
Operating earnings	1,001		1,077		1,184		1,308		934		834		1,072		1,293
Net earnings	745		806		913		1,020		706		625		834		1,002
Earnings per share*:
Basic	$	2.59	$	2.80	$	3.17	$	3.53	$	2.45	$	2.18	$	2.91	$	3.50
Diluted	$	2.56	$	2.77	$	3.14	$	3.51	$	2.43	$	2.18	$	2.90	$	3.49

Quarterly data are based on a 13-week period. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year.

Prior-period information has been restated for the retrospective application of a change in accounting principle related to the amortization of actuarial gains and losses for our qualified U.S. government pension plans, which we adopted in the fourth quarter of 2020. For further discussion of this change in accounting principle, see Note T.

*The sum of the basic and diluted earnings per share for the four quarters of the year may differ from the annual basic and diluted earnings per share due to the required method of computing the weighted average number of shares in interim periods.

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