filings.toolsItem 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Item 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
| Three Months Ended | |||||||||||
| (Dollars in millions, except per-share amounts) | October 3, 2021 | September 27, 2020 | |||||||||
| Revenue: | |||||||||||
| Products | $ | 5,518 | $ | 5,454 | |||||||
| Services | 4,050 | 3,977 | |||||||||
| 9,568 | 9,431 | ||||||||||
| Operating costs and expenses: | |||||||||||
| Products | (4,552) | (4,459) | |||||||||
| Services | (3,386) | (3,388) | |||||||||
| General and administrative (G&A) | (550) | (512) | |||||||||
| (8,488) | (8,359) | ||||||||||
| Operating earnings | 1,080 | 1,072 | |||||||||
| Other, net | 34 | 24 | |||||||||
| Interest, net | (99) | (118) | |||||||||
| Earnings before income tax | 1,015 | 978 | |||||||||
| Provision for income tax, net | (155) | (144) | |||||||||
| Net earnings | $ | 860 | $ | 834 | |||||||
| Earnings per share | |||||||||||
| Basic | $ | 3.09 | $ | 2.91 | |||||||
| Diluted | $ | 3.07 | $ | 2.90 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
| Nine Months Ended | |||||||||||
| (Dollars in millions, except per-share amounts) | October 3, 2021 | September 27, 2020 | |||||||||
| Revenue: | |||||||||||
| Products | $ | 16,033 | $ | 15,849 | |||||||
| Services | 12,144 | 11,595 | |||||||||
| 28,177 | 27,444 | ||||||||||
| Operating costs and expenses: | |||||||||||
| Products | (13,249) | (13,052) | |||||||||
| Services | (10,286) | (9,941) | |||||||||
| G&A | (1,665) | (1,611) | |||||||||
| (25,200) | (24,604) | ||||||||||
| Operating earnings | 2,977 | 2,840 | |||||||||
| Other, net | 95 | 70 | |||||||||
| Interest, net | (331) | (357) | |||||||||
| Earnings before income tax | 2,741 | 2,553 | |||||||||
| Provision for income tax, net | (436) | (388) | |||||||||
| Net earnings | $ | 2,305 | $ | 2,165 | |||||||
| Earnings per share | |||||||||||
| Basic | $ | 8.20 | $ | 7.54 | |||||||
| Diluted | $ | 8.16 | $ | 7.52 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| (Dollars in millions) | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||
| Net earnings | $ | 860 | $ | 834 | $ | 2,305 | $ | 2,165 | ||||||||||||
| (Losses) gains on cash flow hedges | (48) | 110 | (134) | 181 | ||||||||||||||||
| Foreign currency translation adjustments | (107) | 139 | (77) | 60 | ||||||||||||||||
| Change in retirement plans’ funded status | 88 | 76 | 260 | 247 | ||||||||||||||||
| Other comprehensive (loss) income, pretax | (67) | 325 | 49 | 488 | ||||||||||||||||
| Provision for income tax, net | (7) | (45) | (20) | (101) | ||||||||||||||||
| Other comprehensive (loss) income, net of tax | (74) | 280 | 29 | 387 | ||||||||||||||||
| Comprehensive income | $ | 786 | $ | 1,114 | $ | 2,334 | $ | 2,552 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED BALANCE SHEET
| (Unaudited) | |||||||||||
| (Dollars in millions) | October 3, 2021 | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | 3,139 | $ | 2,824 | |||||||
| Accounts receivable | 3,046 | 3,161 | |||||||||
| Unbilled receivables | 8,334 | 8,024 | |||||||||
| Inventories | 5,651 | 5,745 | |||||||||
| Other current assets | 1,516 | 1,789 | |||||||||
| Total current assets | 21,686 | 21,543 | |||||||||
| Noncurrent assets: | |||||||||||
| Property, plant and equipment, net | 5,195 | 5,100 | |||||||||
| Intangible assets, net | 2,022 | 2,117 | |||||||||
| Goodwill | 20,092 | 20,053 | |||||||||
| Other assets | 2,375 | 2,495 | |||||||||
| Total noncurrent assets | 29,684 | 29,765 | |||||||||
| Total assets | $ | 51,370 | $ | 51,308 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt and current portion of long-term debt | $ | 2,183 | $ | 3,003 | |||||||
| Accounts payable | 2,682 | 2,952 | |||||||||
| Customer advances and deposits | 6,167 | 6,276 | |||||||||
| Other current liabilities | 3,572 | 3,733 | |||||||||
| Total current liabilities | 14,604 | 15,964 | |||||||||
| Noncurrent liabilities: | |||||||||||
| Long-term debt | 11,485 | 9,995 | |||||||||
| Other liabilities | 9,560 | 9,688 | |||||||||
| Commitments and contingencies (see Note M) | |||||||||||
| Total noncurrent liabilities | 21,045 | 19,683 | |||||||||
| Shareholders’ equity: | |||||||||||
| Common stock | 482 | 482 | |||||||||
| Surplus | 3,236 | 3,124 | |||||||||
| Retained earnings | 34,800 | 33,498 | |||||||||
| Treasury stock | (19,276) | (17,893) | |||||||||
| Accumulated other comprehensive loss | (3,521) | (3,550) | |||||||||
| Total shareholders’ equity | 15,721 | 15,661 | |||||||||
| Total liabilities and shareholders’ equity | $ | 51,370 | $ | 51,308 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
| Nine Months Ended | |||||||||||
| (Dollars in millions) | October 3, 2021 | September 27, 2020 | |||||||||
| Cash flows from operating activities - continuing operations: | |||||||||||
| Net earnings | $ | 2,305 | $ | 2,165 | |||||||
| Adjustments to reconcile net earnings to net cash from operating activities: | |||||||||||
| Depreciation of property, plant and equipment | 408 | 376 | |||||||||
| Amortization of intangible and finance lease right-of-use assets | 242 | 267 | |||||||||
| Equity-based compensation expense | 96 | 91 | |||||||||
| Deferred income tax benefit | (38) | (112) | |||||||||
| (Increase) decrease in assets, net of effects of business acquisitions: | |||||||||||
| Accounts receivable | 133 | (336) | |||||||||
| Unbilled receivables | (252) | (239) | |||||||||
| Inventories | 94 | (134) | |||||||||
| Increase (decrease) in liabilities, net of effects of business acquisitions: | |||||||||||
| Accounts payable | (291) | (558) | |||||||||
| Customer advances and deposits | 228 | (906) | |||||||||
| Other current liabilities | (202) | 360 | |||||||||
| Other liabilities | (455) | 3 | |||||||||
| Other, net | 321 | 319 | |||||||||
| Net cash provided by operating activities | 2,589 | 1,296 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (502) | (622) | |||||||||
| Other, net | 1 | 33 | |||||||||
| Net cash used by investing activities | (501) | (589) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayment of fixed-rate notes | (2,500) | (2,000) | |||||||||
| Proceeds from commercial paper, gross (maturities greater than 3 months) | 1,997 | 420 | |||||||||
| Proceeds from fixed-rate notes | 1,497 | 3,960 | |||||||||
| Purchases of common stock | (1,491) | (501) | |||||||||
| Dividends paid | (983) | (925) | |||||||||
| Repayment of floating-rate notes | (500) | (500) | |||||||||
| Repayment of commercial paper, gross (maturities greater than 3 months) | — | (420) | |||||||||
| Other, net | 223 | (134) | |||||||||
| Net cash used by financing activities | (1,757) | (100) | |||||||||
| Net cash used by discontinued operations | (16) | (40) | |||||||||
| Net increase in cash and equivalents | 315 | 567 | |||||||||
| Cash and equivalents at beginning of period | 2,824 | 902 | |||||||||
| Cash and equivalents at end of period | $ | 3,139 | $ | 1,469 | |||||||
| Supplemental cash flow information: | |||||||||||
| Income tax payments, net | $ | (502) | $ | (345) | |||||||
| Interest payments | $ | (329) | $ | (261) |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Par | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||||||||||
| July 4, 2021 | $ | 482 | $ | 3,194 | $ | 34,273 | $ | (19,181) | $ | (3,447) | $ | 15,321 | |||||||||||||||||||||||
| Net earnings | — | — | 860 | — | — | 860 | |||||||||||||||||||||||||||||
| Cash dividends declared | — | — | (333) | — | — | (333) | |||||||||||||||||||||||||||||
| Equity-based awards | — | 42 | — | 22 | — | 64 | |||||||||||||||||||||||||||||
| Shares purchased | — | — | — | (117) | — | (117) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (74) | (74) | |||||||||||||||||||||||||||||
| October 3, 2021 | $ | 482 | $ | 3,236 | $ | 34,800 | $ | (19,276) | $ | (3,521) | $ | 15,721 | |||||||||||||||||||||||
| June 28, 2020 | $ | 482 | $ | 3,050 | $ | 32,294 | $ | (17,809) | $ | (3,711) | $ | 14,306 | |||||||||||||||||||||||
| Net earnings | — | — | 834 | — | — | 834 | |||||||||||||||||||||||||||||
| Cash dividends declared | — | — | (316) | — | — | (316) | |||||||||||||||||||||||||||||
| Equity-based awards | — | 32 | — | 4 | — | 36 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 280 | 280 | |||||||||||||||||||||||||||||
| September 27, 2020 | $ | 482 | $ | 3,082 | $ | 32,812 | $ | (17,805) | $ | (3,431) | $ | 15,140 |
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Par | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||||||||||
| December 31, 2020 | $ | 482 | $ | 3,124 | $ | 33,498 | $ | (17,893) | $ | (3,550) | $ | 15,661 | |||||||||||||||||||||||
| Net earnings | — | — | 2,305 | — | — | 2,305 | |||||||||||||||||||||||||||||
| Cash dividends declared | — | — | (1,003) | — | — | (1,003) | |||||||||||||||||||||||||||||
| Equity-based awards | — | 112 | — | 93 | — | 205 | |||||||||||||||||||||||||||||
| Shares purchased | — | — | — | (1,476) | — | (1,476) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 29 | 29 | |||||||||||||||||||||||||||||
| October 3, 2021 | $ | 482 | $ | 3,236 | $ | 34,800 | $ | (19,276) | $ | (3,521) | $ | 15,721 | |||||||||||||||||||||||
| December 31, 2019 | $ | 482 | $ | 3,039 | $ | 31,633 | $ | (17,358) | $ | (3,818) | $ | 13,978 | |||||||||||||||||||||||
| Cumulative-effect adjustment* | — | — | (37) | — | — | (37) | |||||||||||||||||||||||||||||
| Net earnings | — | — | 2,165 | — | — | 2,165 | |||||||||||||||||||||||||||||
| Cash dividends declared | — | — | (949) | — | — | (949) | |||||||||||||||||||||||||||||
| Equity-based awards | — | 43 | — | 54 | — | 97 | |||||||||||||||||||||||||||||
| Shares purchased | — | — | — | (501) | — | (501) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 387 | 387 | |||||||||||||||||||||||||||||
| September 27, 2020 | $ | 482 | $ | 3,082 | $ | 32,812 | $ | (17,805) | $ | (3,431) | $ | 15,140 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
*Reflects the cumulative effect of Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share amounts or unless otherwise noted)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services.
Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the unaudited Consolidated Financial Statements. Some prior-year amounts have been reclassified among financial statement accounts or disclosures to conform to the current-year presentation.
Consistent with industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts may not be realized within one year.
Further discussion of our significant accounting policies is contained in the other notes to these financial statements.
Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These rules and regulations permit some of the information and footnote disclosures included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are typically 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three- and nine-month periods ended October 3, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three- and nine-month periods ended October 3, 2021, and September 27, 2020.
These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Property, Plant and Equipment, Net. Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. Net PP&E consisted of the following:
| October 3, 2021 | December 31, 2020 | ||||||||||
| PP&E | $ | 11,104 | $ | 10,714 | |||||||
| Accumulated depreciation | (5,909) | (5,614) | |||||||||
| PP&E, net | $ | 5,195 | $ | 5,100 |
Accounting Standards Updates. There are accounting standards that have been issued by the Financial Accounting Standards Board but are not yet effective. 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 78% and 79% of our revenue for the three- and nine-month periods ended October 3, 2021, and 77% and 78% of our revenue for the three- and nine-month periods ended September 27, 2020, respectively. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.
Revenue from goods and services transferred to customers at a point in time accounted for 22% and 21% of our revenue for the three- and nine-month periods ended October 3, 2021, and 23% and 22% of our revenue for the three- and nine-month periods ended September 27, 2020, respectively. 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 October 3, 2021, we had $88.1 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 45% of our remaining performance obligations as revenue by year-end 2022, an additional 30% by year-end 2024 and the balance thereafter.
Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. Accounting for long-term contracts and programs involves the use of various
techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||
| Revenue | $ | 148 | $ | 126 | $ | 308 | $ | 270 | ||||||||||||
| Operating earnings | 134 | 84 | 273 | 169 | ||||||||||||||||
| Diluted earnings per share | $ | 0.38 | $ | 0.23 | $ | 0.76 | $ | 0.46 |
No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and nine-month periods ended October 3, 2021, or September 27, 2020.
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:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||
| Aircraft manufacturing | $ | 1,462 | $ | 1,507 | $ | 3,906 | $ | 4,204 | ||||||||||||
| Aircraft services and completions | 604 | 468 | 1,669 | 1,436 | ||||||||||||||||
| Total Aerospace | 2,066 | 1,975 | 5,575 | 5,640 | ||||||||||||||||
| Nuclear-powered submarines | 1,741 | 1,704 | 5,139 | 4,972 | ||||||||||||||||
| Surface ships | 594 | 461 | 1,707 | 1,433 | ||||||||||||||||
| Repair and other services | 302 | 240 | 810 | 717 | ||||||||||||||||
| Total Marine Systems | 2,637 | 2,405 | 7,656 | 7,122 | ||||||||||||||||
| Military vehicles | 1,099 | 1,179 | 3,533 | 3,428 | ||||||||||||||||
| Weapons systems, armament and munitions | 480 | 496 | 1,451 | 1,444 | ||||||||||||||||
| Engineering and other services | 166 | 126 | 480 | 391 | ||||||||||||||||
| Total Combat Systems | 1,745 | 1,801 | 5,464 | 5,263 | ||||||||||||||||
| Information technology (IT) services | 2,058 | 2,029 | 6,214 | 5,901 | ||||||||||||||||
| C4ISR* solutions | 1,062 | 1,221 | 3,268 | 3,518 | ||||||||||||||||
| Total Technologies | 3,120 | 3,250 | 9,482 | 9,419 | ||||||||||||||||
| Total revenue | $ | 9,568 | $ | 9,431 | $ | 28,177 | $ | 27,444 |
*Command, control, communications, computers, intelligence, surveillance and reconnaissance
Revenue by contract type was as follows:
| Three Months Ended October 3, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| Fixed-price | $ | 1,847 | $ | 1,930 | $ | 1,515 | $ | 1,349 | $ | 6,641 | |||||||||||||||||||
| Cost-reimbursement | — | 705 | 216 | 1,279 | 2,200 | ||||||||||||||||||||||||
| Time-and-materials | 219 | 2 | 14 | 492 | 727 | ||||||||||||||||||||||||
| Total revenue | $ | 2,066 | $ | 2,637 | $ | 1,745 | $ | 3,120 | $ | 9,568 | |||||||||||||||||||
| Three Months Ended September 27, 2020 | |||||||||||||||||||||||||||||
| Fixed-price | $ | 1,821 | $ | 1,641 | $ | 1,552 | $ | 1,500 | $ | 6,514 | |||||||||||||||||||
| Cost-reimbursement | — | 763 | 231 | 1,324 | 2,318 | ||||||||||||||||||||||||
| Time-and-materials | 154 | 1 | 18 | 426 | 599 | ||||||||||||||||||||||||
| Total revenue | $ | 1,975 | $ | 2,405 | $ | 1,801 | $ | 3,250 | $ | 9,431 |
| Nine Months Ended October 3, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| Fixed-price | $ | 4,996 | $ | 5,524 | $ | 4,752 | $ | 3,993 | $ | 19,265 | |||||||||||||||||||
| Cost-reimbursement | — | 2,130 | 667 | 4,005 | 6,802 | ||||||||||||||||||||||||
| Time-and-materials | 579 | 2 | 45 | 1,484 | 2,110 | ||||||||||||||||||||||||
| Total revenue | $ | 5,575 | $ | 7,656 | $ | 5,464 | $ | 9,482 | $ | 28,177 | |||||||||||||||||||
| Nine Months Ended September 27, 2020 | |||||||||||||||||||||||||||||
| Fixed-price | $ | 5,148 | $ | 4,926 | $ | 4,524 | $ | 4,293 | $ | 18,891 | |||||||||||||||||||
| Cost-reimbursement | — | 2,188 | 690 | 3,942 | 6,820 | ||||||||||||||||||||||||
| Time-and-materials | 492 | 8 | 49 | 1,184 | 1,733 | ||||||||||||||||||||||||
| Total revenue | $ | 5,640 | $ | 7,122 | $ | 5,263 | $ | 9,419 | $ | 27,444 |
Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.
Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.
Revenue by customer was as follows:
| Three Months Ended October 3, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| Department of Defense (DoD) | $ | 73 | $ | 2,584 | $ | 937 | $ | 1,715 | $ | 5,309 | |||||||||||||||||||
| Non-DoD | — | 1 | 2 | 1,241 | 1,244 | ||||||||||||||||||||||||
| Foreign Military Sales (FMS) | 23 | 51 | 63 | 7 | 144 | ||||||||||||||||||||||||
| Total U.S. government | 96 | 2,636 | 1,002 | 2,963 | 6,697 | ||||||||||||||||||||||||
| U.S. commercial | 1,201 | — | 55 | 51 | 1,307 | ||||||||||||||||||||||||
| Non-U.S. government | 46 | 1 | 670 | 101 | 818 | ||||||||||||||||||||||||
| Non-U.S. commercial | 723 | — | 18 | 5 | 746 | ||||||||||||||||||||||||
| Total revenue | $ | 2,066 | $ | 2,637 | $ | 1,745 | $ | 3,120 | $ | 9,568 | |||||||||||||||||||
| Three Months Ended September 27, 2020 | |||||||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| DoD | $ | 41 | $ | 2,333 | $ | 942 | $ | 1,823 | $ | 5,139 | |||||||||||||||||||
| Non-DoD | — | 1 | 3 | 1,200 | 1,204 | ||||||||||||||||||||||||
| FMS | 23 | 51 | 87 | 8 | 169 | ||||||||||||||||||||||||
| Total U.S. government | 64 | 2,385 | 1,032 | 3,031 | 6,512 | ||||||||||||||||||||||||
| U.S. commercial | 1,123 | 17 | 76 | 64 | 1,280 | ||||||||||||||||||||||||
| Non-U.S. government | 59 | 2 | 678 | 139 | 878 | ||||||||||||||||||||||||
| Non-U.S. commercial | 729 | 1 | 15 | 16 | 761 | ||||||||||||||||||||||||
| Total revenue | $ | 1,975 | $ | 2,405 | $ | 1,801 | $ | 3,250 | $ | 9,431 |
| Nine Months Ended October 3, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| DoD | $ | 203 | $ | 7,496 | $ | 2,807 | $ | 5,220 | $ | 15,726 | |||||||||||||||||||
| Non-DoD | — | 5 | 7 | 3,782 | 3,794 | ||||||||||||||||||||||||
| FMS | 60 | 148 | 212 | 27 | 447 | ||||||||||||||||||||||||
| Total U.S. government | 263 | 7,649 | 3,026 | 9,029 | 19,967 | ||||||||||||||||||||||||
| U.S. commercial | 3,040 | 2 | 163 | 144 | 3,349 | ||||||||||||||||||||||||
| Non-U.S. government | 286 | 3 | 2,224 | 294 | 2,807 | ||||||||||||||||||||||||
| Non-U.S. commercial | 1,986 | 2 | 51 | 15 | 2,054 | ||||||||||||||||||||||||
| Total revenue | $ | 5,575 | $ | 7,656 | $ | 5,464 | $ | 9,482 | $ | 28,177 | |||||||||||||||||||
| Nine Months Ended September 27, 2020 | |||||||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| DoD | $ | 254 | $ | 6,882 | $ | 2,760 | $ | 5,155 | $ | 15,051 | |||||||||||||||||||
| Non-DoD | — | 3 | 9 | 3,531 | 3,543 | ||||||||||||||||||||||||
| FMS | 93 | 151 | 275 | 34 | 553 | ||||||||||||||||||||||||
| Total U.S. government | 347 | 7,036 | 3,044 | 8,720 | 19,147 | ||||||||||||||||||||||||
| U.S. commercial | 2,935 | 77 | 217 | 211 | 3,440 | ||||||||||||||||||||||||
| Non-U.S. government | 133 | 7 | 1,959 | 403 | 2,502 | ||||||||||||||||||||||||
| Non-U.S. commercial | 2,225 | 2 | 43 | 85 | 2,355 | ||||||||||||||||||||||||
| Total revenue | $ | 5,640 | $ | 7,122 | $ | 5,263 | $ | 9,419 | $ | 27,444 |
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 nine-month period ended October 3, 2021, were not materially impacted by any other factors.
Revenue recognized for the three- and nine-month periods ended October 3, 2021, and September 27, 2020, that was included in the contract liability balance at the beginning of each year was $612 and $3 billion, and $767 and $3.2 billion, respectively. This revenue represented primarily the sale of business jet aircraft.
C. GOODWILL AND INTANGIBLE ASSETS
Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:
| Aerospace | Marine Systems | Combat Systems | Technologies | Total Goodwill | |||||||||||||||||||||||||
| December 31, 2020 (a) | $ | 3,065 | $ | 297 | $ | 2,786 | $ | 13,905 | $ | 20,053 | |||||||||||||||||||
| Acquisitions (b) | 33 | — | 61 | — | 94 | ||||||||||||||||||||||||
| Other (c) | (85) | — | (3) | 33 | (55) | ||||||||||||||||||||||||
| October 3, 2021 (a) | $ | 3,013 | $ | 297 | $ | 2,844 | $ | 13,938 | $ | 20,092 |
(a)Goodwill in the Technologies reporting unit was net of $1.8 billion of accumulated impairment losses.
(b)Included adjustments during the purchase price allocation period.
(c)Consisted primarily of adjustments for foreign currency translation.
Intangible Assets. Intangible assets consisted of the following:
| Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| October 3, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Contract and program intangible assets (b) | $ | 3,287 | $ | (1,554) | $ | 1,733 | $ | 3,399 | $ | (1,600) | $ | 1,799 | |||||||||||
| Trade names and trademarks | 494 | (231) | 263 | 516 | (229) | 287 | |||||||||||||||||
| Technology and software | 72 | (49) | 23 | 134 | (106) | 28 | |||||||||||||||||
| Other intangible assets | 66 | (63) | 3 | 161 | (158) | 3 | |||||||||||||||||
| Total intangible assets | $ | 3,919 | $ | (1,897) | $ | 2,022 | $ | 4,210 | $ | (2,093) | $ | 2,117 |
(a)Changes in gross carrying amounts consisted primarily of adjustments for write-offs of fully amortized intangible assets, acquired intangible assets and foreign currency translation.
(b)Consisted of acquired backlog and probable follow-on work and associated customer relationships.
Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $59 and $170 for the three- and nine-month periods ended October 3, 2021, and $65 and $196 for the three- and nine-month periods ended September 27, 2020, respectively.
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 2021 and 2020 due to share repurchases. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs).
Basic and diluted weighted average shares outstanding were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||
| Basic weighted average shares outstanding | 278,596 | 286,452 | 281,147 | 287,136 | ||||||||||||||||
| Dilutive effect of stock options and restricted stock/RSUs* | 1,809 | 775 | 1,287 | 927 | ||||||||||||||||
| Diluted weighted average shares outstanding | 280,405 | 287,227 | 282,434 | 288,063 |
- Excludes outstanding options to purchase shares of common stock that had exercise prices in excess of the average market price of our common stock during the period and, therefore, the effect of including these options would be antidilutive. These options totaled 1,547 and 5,015 for the three- and nine-month periods ended October 3, 2021, and 7,551 and 7,034 for the three- and nine-month periods ended September 27, 2020, respectively.
E. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
-
Level 1 - quoted prices in active markets for identical assets or liabilities.
-
Level 2 - inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly.
-
Level 3 - unobservable inputs significant to the fair value measurement.
We did not have any significant non-financial assets or liabilities measured at fair value on October 3, 2021, or December 31, 2020.
Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable on the unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on October 3, 2021, and December 31, 2020, 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) | October 3, 2021 | ||||||||||||||||||||||||||||
| Measured at fair value: | |||||||||||||||||||||||||||||
| Marketable securities held in trust: | |||||||||||||||||||||||||||||
| Cash and equivalents | $ | 4 | $ | 4 | $ | — | $ | 4 | $ | — | |||||||||||||||||||
| Available-for-sale debt securities | 133 | 133 | — | 133 | — | ||||||||||||||||||||||||
| Equity securities | 62 | 62 | 62 | — | — | ||||||||||||||||||||||||
| Other investments | 12 | 12 | — | — | 12 | ||||||||||||||||||||||||
| Cash flow hedge assets | 361 | 361 | — | 361 | — | ||||||||||||||||||||||||
| Cash flow hedge liabilities | (94) | (94) | — | (94) | — | ||||||||||||||||||||||||
| Measured at amortized cost: | |||||||||||||||||||||||||||||
| Short- and long-term debt principal | (13,785) | (14,861) | — | (14,861) | — |
| 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 hedge assets | 498 | 498 | — | 498 | — | ||||||||||||||||||||||||
| Cash flow hedge liabilities | (79) | (79) | — | (79) | — | ||||||||||||||||||||||||
| Measured at amortized cost: | |||||||||||||||||||||||||||||
| Short- and long-term debt principal | (13,117) | (14,606) | — | (14,606) | — |
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 hedges 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
Net Deferred Tax Liability. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax liability consisted of the following:
| October 3, 2021 | December 31, 2020 | ||||||||||
| Deferred tax asset | $ | 39 | $ | 37 | |||||||
| Deferred tax liability | (457) | (461) | |||||||||
| Net deferred tax liability | $ | (418) | $ | (424) |
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 and is currently reviewing our 2020 tax year.
For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50% chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.
Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on October 3, 2021, 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. 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:
| October 3, 2021 | December 31, 2020 | ||||||||||
| Unbilled revenue | $ | 39,224 | $ | 36,657 | |||||||
| Advances and progress billings | (30,890) | (28,633) | |||||||||
| Net unbilled receivables | $ | 8,334 | $ | 8,024 |
On October 3, 2021, and December 31, 2020, net unbilled receivables included $3 billion and $3.4 billion, respectively, associated with two large international contracts in our Combat Systems segment. We had experienced payment delays on a wheeled vehicle contract in 2018 and 2019 before finalizing a contract amendment in 2020 with the customer that included a revised payment schedule. Under the amended contract, we received progress payments of $1 billion in 2020 and $1.5 billion in the first nine months of 2021 reducing the program’s unbilled balance to $1.9 billion. The remaining scheduled progress payments will liquidate the net unbilled receivables balance over the next few years. A separate tracked vehicle contract has experienced an unbilled receivable build-up over the past year while we work to resolve technical issues on the program. As a result, the balance on this program has grown to $1.1 billion.
H. INVENTORIES
The majority of our inventories are for business jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value.
Inventories consisted of the following:
| October 3, 2021 | December 31, 2020 | ||||||||||
| Work in process | $ | 3,916 | $ | 3,990 | |||||||
| Raw materials | 1,610 | 1,712 | |||||||||
| Finished goods | 26 | 30 | |||||||||
| Pre-owned aircraft | 99 | 13 | |||||||||
| Total inventories | $ | 5,651 | $ | 5,745 |
I. DEBT
Debt consisted of the following:
| October 3, 2021 | December 31, 2020 | |||||||||||||
| Fixed-rate notes due: | Interest rate: | |||||||||||||
| May 2021 | 3.000% | $ | — | $ | 2,000 | |||||||||
| July 2021 | 3.875% | — | 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 | 750 | |||||||||||
| May 2025 | 3.500% | 750 | 750 | |||||||||||
| June 2026 | 1.150% | 500 | — | |||||||||||
| August 2026 | 2.125% | 500 | 500 | |||||||||||
| April 2027 | 3.500% | 750 | 750 | |||||||||||
| November 2027 | 2.625% | 500 | 500 | |||||||||||
| May 2028 | 3.750% | 1,000 | 1,000 | |||||||||||
| April 2030 | 3.625% | 1,000 | 1,000 | |||||||||||
| June 2031 | 2.250% | 500 | — | |||||||||||
| April 2040 | 4.250% | 750 | 750 | |||||||||||
| June 2041 | 2.850% | 500 | — | |||||||||||
| November 2042 | 3.600% | 500 | 500 | |||||||||||
| April 2050 | 4.250% | 750 | 750 | |||||||||||
| Floating-rate notes due: | ||||||||||||||
| May 2021 | 3-month LIBOR + 0.38% | — | 500 | |||||||||||
| Commercial paper | 0.252% | 2,000 | — | |||||||||||
| Other | Various | 285 | 117 | |||||||||||
| Total debt principal | 13,785 | 13,117 | ||||||||||||
| Less unamortized debt issuance costs and discounts | 117 | 119 | ||||||||||||
| Total debt | 13,668 | 12,998 | ||||||||||||
| Less current portion | 2,183 | 3,003 | ||||||||||||
| Long-term debt | $ | 11,485 | $ | 9,995 |
In May 2021, we issued $1.5 billion of fixed-rate notes. The proceeds, together with cash on hand and commercial paper issuances, were used to repay fixed- and floating-rate notes totaling $2.5 billion that matured in May 2021 and for general corporate purposes. In July 2021, we repaid an additional $500 of fixed-rate notes at the scheduled maturity.
On October 3, 2021, we had $2 billion of commercial paper outstanding with a dollar-weighted average interest rate of 0.252%. 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 2022, 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 SEC that allows us to access the debt markets.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on October 3, 2021.
J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
| October 3, 2021 | December 31, 2020 | ||||||||||
| Salaries and wages | $ | 1,041 | $ | 1,007 | |||||||
| Lease liabilities | 334 | 330 | |||||||||
| Dividends payable | 333 | 316 | |||||||||
| Retirement benefits | 295 | 306 | |||||||||
| Workers’ compensation | 275 | 338 | |||||||||
| Other | 1,294 | 1,436 | |||||||||
| Total other current liabilities | $ | 3,572 | $ | 3,733 | |||||||
| Retirement benefits | $ | 4,731 | $ | 5,182 | |||||||
| Lease liabilities | 1,311 | 1,404 | |||||||||
| Customer deposits on commercial contracts | 1,223 | 872 | |||||||||
| Other | 2,295 | 2,230 | |||||||||
| Total other liabilities | $ | 9,560 | $ | 9,688 |
K. SHAREHOLDERS’ EQUITY
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 June 2, 2021, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the nine-month period ended October 3, 2021, we repurchased 8.5 million of our outstanding shares for $1.5 billion. On October 3, 2021, 13.8 million shares remained authorized by our board of directors for repurchase, representing 5% of our total shares outstanding. We repurchased 3.4 million shares for $501 in the nine-month period ended September 27, 2020.
Dividends per Share. Our board of directors declared dividends of $1.19 and $3.57 per share for the three- and nine-month periods ended October 3, 2021, and $1.10 and $3.30 per share for the three- and
nine-month periods ended September 27, 2020, respectively. We paid cash dividends of $332 and $983 for the three- and nine-month periods ended October 3, 2021, and $315 and $925 for the three- and nine-month periods ended September 27, 2020, respectively.
Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of accumulated other comprehensive loss (AOCL) consisted of the following:
| (Losses) Gains on Cash Flow Hedges | Foreign Currency Translation Adjustments | Changes in Retirement Plans’ Funded Status | AOCL | ||||||||||||||
| December 31, 2020 | $ | 272 | $ | 641 | $ | (4,463) | $ | (3,550) | |||||||||
| Other comprehensive income, pretax | (134) | (77) | 260 | 49 | |||||||||||||
| Provision for income tax, net | 36 | — | (56) | (20) | |||||||||||||
| Other comprehensive income, net of tax | (98) | (77) | 204 | 29 | |||||||||||||
| October 3, 2021 | $ | 174 | $ | 564 | $ | (4,259) | $ | (3,521) |
| December 31, 2019 | $ | 2 | $ | 288 | $ | (4,108) | $ | (3,818) | |||||||||
| Other comprehensive income, pretax | 181 | 60 | 247 | 488 | |||||||||||||
| Provision for income tax, net | (49) | — | (52) | (101) | |||||||||||||
| Other comprehensive income, net of tax | 132 | 60 | 195 | 387 | |||||||||||||
| September 27, 2020 | $ | 134 | $ | 348 | $ | (3,913) | $ | (3,431) |
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 N for these amounts, which are included in our net periodic pension and other post-retirement benefit cost.
L. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk, primarily from foreign currency exchange 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.
Commodity Price Risk. We are subject to rising labor and commodity price risk, primarily on long-term, fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from these risks. Some of the protective terms included in our contracts are considered derivative financial instruments but are not accounted for separately, because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On October 3, 2021, and December 31, 2020, we held $3.1 billion and $2.8 billion 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 October 3, 2021, and December 31, 2020, we held marketable securities in trust of $199 and $211, 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. On October 3, 2021, we had notional forward exchange contracts outstanding of $7.5 billion. On December 31, 2020, we had notional forward exchange and interest rate swap contracts outstanding of $9.4 billion. These derivative financial instruments are cash flow hedges, and are reflected at fair value on the Consolidated Balance Sheet in other current assets and liabilities. See Note E for additional details.
Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in AOCL until the underlying transaction is reflected in earnings. Alternatively, gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in earnings. All gains and losses from derivative financial instruments recognized in the Consolidated Statement of Earnings are presented in the same line item as the underlying transaction, either operating costs and expenses or interest expense.
Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations for the three- and nine-month periods ended October 3, 2021, and September 27, 2020. Net gains and losses reclassified to earnings from AOCL related to qualified hedges were also not material to our results of operations for the three- and nine-month periods ended October 3, 2021, and September 27, 2020, and we do not expect the amount of these gains and losses that will be reclassified to earnings during the next 12 months to be material.
We had no material derivative financial instruments designated as fair value or net investment hedges on October 3, 2021, and December 31, 2020.
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 for the three- and nine-month periods ended October 3, 2021, and September 27, 2020. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the nine-month periods ended October 3, 2021, and September 27, 2020.
M. COMMITMENTS AND CONTINGENCIES
Litigation
In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to
allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter which had been filed under seal in U.S. district court. Also in 2016, the Suspending and Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and 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. In the third quarter of 2021, the court dismissed the relator’s complaint with prejudice and, in October 2021, the relator filed a notice of appeal to the United States Court of Appeals. 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 billion on October 3, 2021. 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 October 3, 2021, the estimated change in fair market values from the date of the commitments was not material.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheet.
The changes in the carrying amount of warranty liabilities for the nine-month periods ended October 3, 2021, and September 27, 2020, were as follows:
| Nine Months Ended | October 3, 2021 | September 27, 2020 | |||||||||
| Beginning balance | $ | 660 | $ | 619 | |||||||
| Warranty expense | 73 | 72 | |||||||||
| Payments | (94) | (72) | |||||||||
| Adjustments | (14) | 39 | |||||||||
| Ending balance | $ | 625 | $ | 658 |
N. 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
For our defined benefit plans, net periodic benefit credit for the three- and nine-month periods ended October 3, 2021, and September 27, 2020, consisted of the following:
| Pension Benefits | Other Post-retirement Benefits | |||||||||||||||||||
| Three Months Ended | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||
| Service cost | $ | 30 | $ | 29 | $ | 2 | $ | 2 | ||||||||||||
| Interest cost | 90 | 123 | 5 | 7 | ||||||||||||||||
| Expected return on plan assets | (241) | (234) | (9) | (9) | ||||||||||||||||
| Net actuarial loss | 91 | 77 | — | — | ||||||||||||||||
| Prior service credit | (5) | (4) | — | (1) | ||||||||||||||||
| Net periodic benefit credit | $ | (35) | $ | (9) | $ | (2) | $ | (1) | ||||||||||||
| Nine Months Ended | ||||||||||||||||||||
| Service cost | $ | 89 | $ | 88 | $ | 7 | $ | 7 | ||||||||||||
| Interest cost | 270 | 369 | 14 | 21 | ||||||||||||||||
| Expected return on plan assets | (723) | (703) | (27) | (27) | ||||||||||||||||
| Net actuarial loss (gain) | 274 | 217 | — | (2) | ||||||||||||||||
| Prior service credit | (15) | (13) | — | (1) | ||||||||||||||||
| Net periodic benefit credit | $ | (105) | $ | (42) | $ | (6) | $ | (2) |
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 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. To the extent there is a non-service component of net periodic benefit credit for our defined benefit plans, it is reported in other income (expense) in the Consolidated Statement of Earnings.
O. 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 | |||||||||||||
| Three Months Ended | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||
| Aerospace | $ | 2,066 | $ | 1,975 | $ | 262 | $ | 283 | ||||||
| Marine Systems | 2,637 | 2,405 | 229 | 223 | ||||||||||
| Combat Systems | 1,745 | 1,801 | 276 | 270 | ||||||||||
| Technologies | 3,120 | 3,250 | 327 | 314 | ||||||||||
| Corporate* | — | — | (14) | (18) | ||||||||||
| Total | $ | 9,568 | $ | 9,431 | $ | 1,080 | $ | 1,072 | ||||||
| Nine Months Ended | ||||||||||||||
| Aerospace | $ | 5,575 | $ | 5,640 | $ | 677 | $ | 682 | ||||||
| Marine Systems | 7,656 | 7,122 | 639 | 607 | ||||||||||
| Combat Systems | 5,464 | 5,263 | 786 | 732 | ||||||||||
| Technologies | 9,482 | 9,419 | 941 | 859 | ||||||||||
| Corporate* | — | — | (66) | (40) | ||||||||||
| Total | $ | 28,177 | $ | 27,444 | $ | 2,977 | $ | 2,840 |
- Corporate operating results consist primarily of equity-based compensation expense.
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