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GDDOCIMAGE.GIF
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
[] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 1-3671

GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-1673581
State or other jurisdiction of incorporation or organization
 
IRS Employer Identification No.
 
 
 
 
 
11011 Sunset Hills Road
Reston,
Virginia
 
20190
Address of principal executive offices
 
 
Zip code

Registrant’s telephone number, including area code:
(703)
876-3000

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock
GD
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ü No ___
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No ü
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ü No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ü Accelerated filer __ Non-accelerated filer __ Smaller reporting company __ Emerging growth company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü
The aggregate market value of the voting common equity held by non-affiliates of the registrant was $48,851,568,997 as of June 30, 2019 (based on the closing price of the shares on the New York Stock Exchange).
289,627,333 shares of the registrant’s common stock, $1 par value per share, were outstanding on January 26, 2020.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference information from certain portions of the registrant’s definitive proxy statement for the 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.


1



INDEX
PART I
 
PAGE
Item 1.
3
Item 1A.
19
Item 1B.
23
Item 2.
23
Item 3.
24
Item 4.
24
 
24
PART II
 
 
Item 5.
25
Item 6.
27
Item 7.
28
Item 7A.
50
Item 8.
52
Item 9.
106
Item 9A.
106
Item 9B.
109
PART III
 
 
Item 10.
109
Item 11.
109
Item 12.
109
Item 13.
110
Item 14.
110
PART IV
 
 
Item 15.
110
Item 16.
114
 
115

2



PART I

ITEM 1. BUSINESS
(Dollars in millions, except per-share amounts or unless otherwise noted)

BUSINESS OVERVIEW
General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; information technology (IT) services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) solutions; and shipbuilding and ship repair.
General Dynamics was incorporated in Delaware in 1952. We took actions beginning in the mid-1990s that laid the foundation for modern-day General Dynamics, including acquiring Gulfstream Aerospace Corporation, combat-vehicle businesses, IT services and C4ISR solutions companies, and additional shipyards. In 2018, we continued to position our company for future growth and superior profitability through the acquisition of CSRA, our largest acquisition to date.
Our company consists of 10 business units, which are organized into five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We refer to the latter four segments collectively as our defense segments. We have a balanced business model which gives each business unit the flexibility to stay agile and maintain an intimate understanding of customer requirements. Each business unit is responsible for the execution of its strategy and operational performance. Our corporate leaders set the overall strategy and governance for the company and are responsible for allocating and deploying capital. Our ethos — based on honesty, transparency, trust and alignment — undergirds our culture, our business model and our decision-making. This unique model keeps us focused on our priorities: exceeding customer expectations; executing on backlog; managing costs; implementing continuous improvement; and maximizing earnings, cash and return on invested capital.
Following is additional information on each of our operating segments.
AEROSPACE
Our Aerospace segment is at the forefront of the business-jet industry. The segment consists of our Gulfstream and Jet Aviation business units. We offer a family of Gulfstream aircraft and provide a full range of services for business aircraft produced by Gulfstream and other original equipment manufacturers. We have earned our reputation through:
superior aircraft design, quality, performance, safety and reliability;
technologically advanced flight deck and cabin systems; and
industry-leading customer support.
Gulfstream designs, manufactures and supports the world’s most technologically advanced business-jet aircraft. Our product line encompasses aircraft across a variety of price and performance options from mid- to ultra-large-cabin business jets. The many combinations of range, speed, size and cabin customization generate aircraft best suited for each customer’s unique requirements.
Our disciplined and consistent approach to new product development allows us to repeatedly introduce first-to-market capabilities that set industry standards for safety, performance, quality, speed and comfort.

3



Our continual investment in research and development (R&D) leads to new aircraft that consistently broaden customer offerings while raising the bar for safety and performance. Product enhancement and development efforts include initiatives in advanced avionics, composites, flight-control and vision systems, acoustics, and cabin technologies. As part of its sustainability strategy, Gulfstream, in 2019, made its first customer sales of sustainable aviation fuel.
In 2019, the all-new G600 earned both its type and production certificates from the U.S. Federal Aviation Administration (FAA), and we delivered the first aircraft to customers. The G600 has a range of 6,500 nautical miles at a cruise speed of Mach 0.85 and a maximum operating speed of Mach 0.925. The aircraft has earned 11 city-pair speed records and has low cabin altitude air pressure to reduce travel fatigue. The G600 joins the G500, which achieved its certifications and first customer deliveries in 2018. Both aircraft reflect our consistent, long-term investment in R&D, and both have seen strong customer interest. The G500 and G600 received Aviation Week’s 2020 Platform Laureate Award for extraordinary achievement in business aviation.
The ultra-long-range, ultra-large-cabin G650 and G650ER continue to generate significant customer interest, with more than 400 aircraft of this family currently operating in 40 countries. Since the first G650 entered service in 2012, its capabilities and reliability have led to significant sales and installed base around the globe. In 2019, the G650ER continued to demonstrate superior speed and range capabilities, conducting a record-setting flight from Singapore to Tucson, Arizona, over a distance of 8,379 nautical miles at an average speed of 597 miles per hour (Mach 0.85).
In October, we announced the launch of the ultra-long-range G700, which we expect will enter service in 2022. The G700 is designed to blend our most spacious cabin with the advanced Symmetry flight deck and superior high-speed performance to enable a range of 7,500 nautical miles at Mach 0.85 or 6,400 nautical miles at Mach 0.90. There is already significant customer interest in this new product in both the domestic and international markets.
Gulfstream designs, develops and manufactures aircraft in Savannah, Georgia, including manufacturing of all large-cabin models. The mid-cabin G280 is assembled by a non-U.S. partner. All models are outfitted in Gulfstream’s U.S. facilities. In support of Gulfstream’s growing aircraft portfolio and customer base, we continue to invest in our facilities. At our Savannah campus, we have added new purpose-built manufacturing facilities, increased aircraft service capacity, and opened a customer-support distribution center and a dedicated R&D center.
We offer comprehensive support for the more than 2,800 Gulfstream aircraft in service around the world and operate the largest factory-owned service network in the industry. We operate a 24/7 year-round Customer Support Center and offer on-call Gulfstream aircraft technicians ready to deploy around the world for customer service requirements.
In 2019, we opened a new maintenance, repair and overhaul (MRO) facility in Savannah to accommodate fleet growth, giving Gulfstream more than one-million square feet of dedicated MRO hangar, office and shop space in Savannah. We also significantly expanded our MRO service center in Appleton, Wisconsin, which now has more than 100,000 square feet of hangar space, enough to accommodate 12 G650ER aircraft.
In 2019, Gulfstream and Jet Aviation opened a new 10,000-square-foot terminal and 43,000-square-foot hangar at Van Nuys, the primary business-aviation airport servicing the Los Angeles area. Gulfstream utilizes the space as an MRO service center, its second in the area complementing its Long Beach facility. Van Nuys will serve as the operating base for Gulfstream’s local Field and Airborne Support Team (FAST), a rapid-response unit that specializes in troubleshooting grounded aircraft. Jet Aviation uses the space as a fixed-base operator (FBO) facility and became the first FBO at Van Nuys to offer sustainable aviation fuel.

4



Jet Aviation has been a global leader in business-aviation services for over 50 years, providing comprehensive services and an extensive network of locations for aircraft owners and operators. With approximately 50 airport sites throughout North America, Europe, the Middle East and Asia Pacific, our offerings include maintenance, FBO, aircraft management, charter, staffing and government fleet services. In 2019, we continued to grow our global footprint, conducting acquisitions, expansions or significant renovations in key business-aviation markets including Teterboro, New Jersey; Dallas, Texas; Scottsdale, Arizona; San Juan, Puerto Rico; West Palm Beach, Florida; and the Middle East. With its relentless devotion to customer service, Jet Aviation was named Fixed Base Operator of the Year at the 2019 Aviation Business Awards.
In addition to these capabilities, Jet Aviation manages nearly 300 business aircraft globally on behalf of individual and corporate owners. Jet Aviation also offers custom completions for narrow- and wide-body aircraft. We increased the capacity of Jet Aviation’s wide-body hangar in Basel, Switzerland, to 94,000 square feet, to fulfill the demand for completions and refurbishments.
As a market leader in the business-aviation industry, the Aerospace segment is focused on developing innovative first-to-market technologies and products; providing exemplary service to customers globally; and driving efficiencies in aircraft production, completions and services.
Revenue for the Aerospace segment was 25% of our consolidated revenue in 2019, 23% in 2018 and 26% in 2017. Revenue by major products and services was as follows:
Year Ended December 31
2019
 
2018
 
2017
Aircraft manufacturing and completions
$
7,355

 
$
6,226

 
$
6,320

Aircraft services
2,154

 
2,096

 
1,743

Pre-owned aircraft
292

 
133

 
66

Total Aerospace
$
9,801

 
$
8,455

 
$
8,129

COMBAT SYSTEMS
Our Combat Systems segment offers combat vehicles, weapons systems and munitions for the U.S. government and its non-U.S. partners. We are a platform solutions provider, offering market-leading design, development, production, modernization and sustainment services. With extensive and proven product lines, we deliver tailored solutions for diverse customer-mission needs. Our Combat Systems segment is well-positioned to serve the growing needs of its largest customer, the U.S. Army, as it increases the readiness of its current force and modernizes for the future, while at the same time meeting the growing international demand driven by the global threat environment. We work closely with the U.S. Army Futures Command to meet its critical modernization objectives, currently participating in five of its cross-functional teams. Our large installed base of wheeled and tracked vehicles around the world and expertise gained from innovative research, engineering and production programs position us well for modernization programs, support and sustainment services, and future development programs.
Our Combat Systems segment consists of three business units: European Land Systems, Land Systems, and Ordnance and Tactical Systems. The segment’s product lines include:
wheeled combat and tactical vehicles;
main battle tanks and tracked combat vehicles;

weapons systems, armament and munitions; and
maintenance, logistics support and sustainment services.

5



Wheeled combat and tactical vehicles: The segment provides a full range of vehicles to a global customer base, which includes vehicles in over 20 countries.
The Stryker is an eight-wheeled, medium-weight combat vehicle that combines mobility and survivability. Over 3,300 Strykers have been fielded to date. Strykers come in 11 different variants, with approximately 70% commonality across the fleet. We continue to innovate and demonstrate ways the Stryker can be modified to address the Army’s evolving operational needs.
In 2018, the Army made the decision to upgrade all nine Stryker brigades to the Stryker A1 configuration. We are currently under contract for two of the brigades, with estimated completion in 2021. The Stryker A1 builds upon the combat-proven double-V-hull (DVH) configuration, providing significantly higher rates of survivability against mines and improvised explosive devices. In addition to the DVH survivability, the Stryker A1 provides a 50% power upgrade with a 450-horsepower engine, 60,000-pound suspension to improve cross-country mobility, 910-amp alternator for power and growth margin, and an improved digital, in-vehicle network. It is among the most versatile, mobile and safe personnel carriers in the Army inventory.
The Stryker Maneuver Short-Range Air Defense vehicle (M-SHORAD) program integrates an air defense mission package onto a reconfigured Stryker A1 vehicle. The M-SHORAD vehicle is another variation we quickly developed to address the Army’s requirement to counter closer-in air and missile defense threats. We also produce the Stryker Infantry Carrier Vehicle Dragoon (ICVD), which delivers greater firepower via a 30mm weapon system. First delivered in 2017, the Army announced in 2019 that it would outfit three brigades with the medium caliber weapons system. We continue to work on high-energy laser and mobile command post options. We expect the Stryker platform to continue to demonstrate its versatility well into the future.
In 2019, the Royal Thai Army took delivery of the first set of Stryker fighting vehicles purchased through a foreign military sale contract for $175 that includes 60 Stryker vehicles with equipment and support. Thailand is the first country to receive Stryker vehicles under export.
We also have a market-leading position in light armored vehicles (LAVs) with more than 13,000 vehicles in service around the world. Our LAVs combine advanced technologies and combat-proven survivability. We are upgrading the Canadian Army’s fleet of LAVs to increase mobility, survivability and lethality, as well as enhance the vehicle’s surveillance suite. Additionally, in 2019 we were awarded a contract from Canada for 360 combat support LAVs in eight variants for $1.3 billion. We also provide, under a contract with the Canadian government, wheeled armored vehicles for export and associated logistics through 2024.
We deliver high-mobility, versatile Pandur and Piranha armored vehicles to non-U.S. customers. The Pandur family of vehicles serves as a common platform for various armament and equipment configurations. The Piranha is a multi-role vehicle well-suited for a variety of combat operations. We are producing Piranha vehicles for Denmark, Romania and Switzerland, and upgrading Piranha vehicles for Ireland. We continue to work closely with the Spanish government to achieve a contract award to produce 348 8x8 vehicles based on the Piranha 5 vehicle in six variants and provide associated logistical support. There are over 3,000 Pandurs and 11,000 Piranhas in service worldwide.
Outside the United States, the Duro and Eagle vehicles offer a range of options and weight classes. We are upgrading Duro tactical vehicles for the Swiss Army and producing Eagle 5 armored wheeled vehicles for the Royal Danish Army. Additionally, we provide a portfolio of mobile bridge systems with payloads ranging from 100 kilograms to 100 tons, which can be deployed within minutes to enable heavy vehicles, including Abrams tanks, to cross various sizes of water barriers.
Main battle tanks and tracked combat vehicles: The segment’s powerful tracked vehicles provide key combat capabilities to customers around the world. The Abrams main battle tank offers a proven, decisive

6



edge in combat. We are maximizing the effectiveness and lethality of the U.S. Army’s M1A2 Abrams tank fleet with the System Enhancement Package Version 3 (SEPv3), which provides technological advancements in communications, power generation, fuel efficiency and armor. In 2019, we were awarded a contract for $714 from the Army to upgrade 174 M1A1 Abrams main battle tanks to the state-of-the-art M1A2 SEPv3 configuration. This brings the total number of M1A2 SEPv3 tanks ordered by the Army since 2018 to 274, or more than three brigades of tanks. We are currently under contract to develop further upgrades for the SEPv4 configuration. Additionally, we are upgrading Abrams tanks for several non-U.S. partners.
We are delivering 12 medium-weight, large-caliber prototype vehicles for the Army’s Mobile Protected Firepower program, providing a new opportunity to field vehicles in Infantry Brigade Combat Team (IBCT) formations using our newest combat-proven capabilities suite. The vehicles are highly lethal, survivable and mobile.
We are producing the British Army’s AJAX armored fighting vehicle, a next-generation, medium-weight tracked combat vehicle. The segment will also provide in-service support for the AJAX vehicle fleet. With six variants, the AJAX family of vehicles offers advanced electronic architecture and proven technology for an unparalleled balance of survivability, lethality and mobility, along with high reliability for a vehicle in its weight class. Work on the AJAX program is transitioning from engineering to test and then to full production. We expect to be in steady-state production through 2024.
Weapons systems, armament and munitions: Complementing these military-vehicle offerings, the segment designs, develops and produces a comprehensive array of sophisticated weapons systems. For ground forces, we manufacture M2/M2-A1 heavy machine guns and MK19/MK47 grenade launchers. The segment also produces legacy and next-generation weapons systems for shipboard applications. For airborne platforms, we produce weapons such as high-speed Gatling guns for all U.S. fighter aircraft, including the Joint Strike Fighter.
Our munitions portfolio covers the full breadth of naval, air and ground forces applications across all calibers and weapons platforms for the U.S. government and its non-U.S. partners. In North America, the segment maintains a market-leading position in the supply of Hydra-70 rockets, large-caliber tank ammunition, medium-caliber ammunition, mortar and artillery projectiles, tactical missile aerostructures, high-performance warheads, military propellants, and conventional bombs and bomb cases.
The Combat Systems segment emphasizes operational excellence and continuous improvement in a dynamic threat environment with ever-evolving customer needs. We are focused on innovation, affordability and speed to market to deliver increased survivability, performance and lethality on the battlefield.
Revenue for the Combat Systems segment was 18% of our consolidated revenue in 2019, 17% in 2018 and 19% in 2017. Revenue by major products and services was as follows:
Year Ended December 31
2019
 
2018
 
2017
Military vehicles
$
4,620

 
$
4,027

 
$
3,731

Weapons systems, armament and munitions
1,906

 
1,798

 
1,633

Engineering and other services
481

 
416

 
585

Total Combat Systems
$
7,007

 
$
6,241

 
$
5,949


7



INFORMATION TECHNOLOGY
Our Information Technology segment provides a wide spectrum of services and capabilities, including artificial intelligence, cloud computing, cyber, software development, systems engineering, IT modernization and data analytics. We put these technologies to work across thousands of projects, combining in-depth technical expertise with deep mission knowledge for a broad spectrum of customers in the defense, intelligence and federal civilian markets.
With a network of more than 90 global partners, we develop solutions that keep our customers at the leading edge of technology in support of their missions. Our highly skilled workforce is central to our diverse portfolio of services and comprises over 30,000 employees, including technologists, mission experts and cleared personnel. This portfolio aligns to three broad capability categories:
IT services;
IT infrastructure modernization; and
professional services.
IT services: We manage global IT enterprise operations for our customers, including in the classified domain. We provide technology consulting, solution design, system integration, operations and maintenance, cloud services, applications development, and cyber defense for enterprise systems.
At the Pentagon, we provide cybersecurity services that include end-point security, network security and incident handling. For the Centers for Medicare & Medicaid Services (CMS), we provide IT hosting and operating services and maintenance in support of claims processing for more than 49 million Medicare beneficiaries.
In 2019, we received several key contracts to provide intelligence services to classified customers. We were also awarded a contract for $325 by the U.S. Department of Homeland Security (DHS) to provide priority telecommunications services to the Cybersecurity and Infrastructure Security Agency’s Emergency Communications Division to maintain continuity of government operations during emergencies. We provide telecommunication expertise and priority voice, data, video and information services during natural disasters, acts of terrorism and war. These critical services maintain real-time emergency communications for thousands of users across the federal government, facilitating the continuity of operations and emergency response.
IT infrastructure modernization: We provide IT infrastructure modernization services for our defense and national security customers, including designing, building and operating global enterprise IT infrastructures; system design and engineering; data center consolidation; and cloud strategy, migration and operation.
We are working with the Department of Defense (DoD) to migrate its applications to the cloud. This program — milCloud 2.0 — provides a hybrid cloud solution designed specifically for the warfighter that offers ease of use, improved performance, enhanced security and greater affordability. Additionally, we provide engineering and technical services in support of our national security customers, protecting mission-critical systems and information from domestic and foreign adversaries with advanced cybersecurity capabilities.
In 2019, we were selected by the Department of Health and Human Services (HHS) to provide advanced technologies to support increased efficiencies in its workforce. This will include artificial intelligence, machine learning, natural language processing and robotic process automation. We also support DHS with migration and consolidation of data center operations while introducing new technologies to improve security and mission performance.

8



Professional services: Our portfolio of professional services includes logistics and supply chain management; training and simulation; and life sciences, medical research and specialized mission support services.
In 2019, we won a $2 billion contract to continue managing the U.S. State Department’s global supply chain that ensures the secure transportation and delivery of millions of assets to worldwide posts including those in high-threat environments. Through this contract, we also secure U.S. posts abroad and help the government respond to natural disasters with logistics and transportation services. In our defense portfolio, we provide turnkey training and simulation services for the U.S. Army’s Aviation Center of Excellence in Fort Rucker, Alabama, the largest helicopter flight training program in the world.
In 2019, we won a contract for $44 to continue conducting research on traumatic brain injury, symptom diagnostics, treatment, rehabilitation methods and the effect of repetitive exposure to sub-concussive blasts from weapons. We have supported this contract through a network of 21 sites since 2014. These include military treatment facilities, major trauma rehabilitation sites within the Department of Veterans Affairs, U.S. Special Operations Command and the Defense Health Agency headquarters in Fairfax, Virginia.
Revenue for the Information Technology segment was $8.4 billion in 2019, $8.3 billion in 2018 and $4.4 billion in 2017, which represented 21%, 23% and 14% of our consolidated revenue in each of the respective years.
MISSION SYSTEMS
Our Mission Systems segment is a global provider of mission-critical products and systems. We offer solutions across all domains and produce a unique combination of products and capabilities that are purpose-built for essential C4ISR and cybersecurity applications. Our technology and products are often built into platforms and integrated systems on which our customers rely. The Mission Systems segment has more than 100 locations worldwide and employs more than 13,000 engineering and technical professionals dedicated to solving the toughest security and technology challenges facing the United States and its partners. The segment’s portfolio includes prime contract programs in which we deliver innovative defense-electronics hardware and integrated systems as well as subcontract efforts in support of large-scale land, air, sea and space platforms. Additionally, our Mission Systems and Information Technology segments are often partners, building on complementary skills to pursue business opportunities in the defense and intelligence markets. This ability to offer an integrated solution can provide a more economical outcome for the customer than separate procurements from varied vendors.
The Mission Systems segment is organized into three core capabilities:
ground systems and products;
space, intelligence and cyber systems; and
naval, air and electronic systems.
Ground systems and products: Our Mission Systems segment is a leading manufacturer and integrator of tactical, secure communications systems for a diverse customer base, both U.S. and non-U.S. We design, build, deploy and support mission command applications; assured position, navigation and timing components; and other communications equipment and networking solutions for the U.S. defense community and non-U.S. partners. We also provide communications equipment, sensors and software for public-safety applications and to the federal government. Additionally, we provide data collection and processing products, command and control applications, and computing and communications equipment.

9



We are the prime contractor for the U.S. Army’s mobile communications backbone, which provides secure voice, video and data capabilities to soldiers on-the-move, and the ability to rapidly insert new technologies into the system.
We continue to work closely with our Army customer to evolve its capabilities to meet the threats of the future. In 2019, we were awarded an indefinite delivery, indefinite quantity (IDIQ) contract to provide electronic and cyber warfare capabilities by leading a nationwide team of cyber technology companies to integrate technologies from multiple domains to achieve desired cyber effects.
In 2019, we partnered with the Army to field a new and improved Global Positioning System (GPS) capability, known as Mounted Assured Positioning, Navigation and Timing System (MAPS) Gen 1, onto Strykers based in Germany. MAPS Gen 1 allows U.S. forces to operate in an environment where GPS signals are degraded or denied, and could eventually extend to thousands of vehicles across Europe.
With a 50-year legacy in radio frequency communications and networks, we offer a range of radio products and systems for military, government and commercial customers, as well as long-term evolution broadband communications networks for first responders. We provide CM-300/350 V2 digital radios to the FAA, used by air traffic control centers, commercial airports, military air stations and range installations for reliable ground-to-air communications. In 2019, Mission Systems introduced the URC-300 radio. The URC-300 is built with a software-based architecture, enabling customization and future enhancements as new technology becomes available.
We also provide many capabilities to non-U.S. agencies and commercial customers. We developed, deployed, and continue to modernize and support fully integrated, secure combat voice and data networks for the armies of Canada and the United Kingdom. These efforts, which we have supported for almost 30 years, are ongoing through the Morpheus program, which aims to modernize the United Kingdom’s communications and command-and-control systems across three armed services by evolving the Bowman network into a more open, agile architecture.
Space, intelligence and cyber systems: Mission Systems engineers space payloads for advanced missions, builds and manages spaceborne and ground-based communications systems, and provides mission-data tracking equipment and processing capabilities for our customers. Additionally, we design and develop high-performance sensors to gather intelligence data from across the land, air, sea, space and cyber domains, and provide geospatial intelligence products and services to meet the needs of our customers in the global defense, civilian and commercial markets.
In 2019, the U.S. Navy’s Mobile User Objective System (MUOS), completed the Multiservice Operational Test and Evaluation (MOT&E) making it ready for operational use. Under a Navy contract with a maximum potential contract value of $732 awarded in 2019, we will sustain the integrated ground systems for this next-generation narrowband satellite communications system.
We also offer a variety of cyber products and software, including our family of encryption products, to protect and defend our customers’ critical information. We continually evolve our TACLANE family of network encryptors, the most widely deployed National Security Agency (NSA)-certified Type 1 in-line network encryptors, and our ProtecD@R family of data-at-rest encryptors. In 2019, our TACLANE-Nano compact Type 1 encryptor for mobile users was certified by the NSA to protect information classified up to the top secret/sensitive compartmented information (TS/SCI) level. In addition, we offer trusted multi-level and cross-domain technologies that our customers use to securely access information at various levels of security with speed and efficiency.
With an eye toward developing next-generation, emerging technologies, we acquired a company in 2019 with extensive expertise in AI that specializes in deploying deep learning algorithms on small, power-

10



efficient appliances and mobile devices. This new investment brings a wealth of artificial intelligence and machine learning knowledge, experience and capabilities to our customers across all domains.
Naval, air and electronic systems: We provide platform integration services for maritime and aviation platforms and for strategic weapons systems and advanced electronic systems, including computing systems, displays and data management, for both U.S. and non-U.S. customers.
We have a 50-year legacy of providing advanced fire-control systems for all of the Navy’s submarine programs, both attack and ballistic missile. We are developing and integrating commercial off-the-shelf software and hardware upgrades to improve the tactical control capabilities for several submarine classes.
The segment’s combat and seaframe control systems serve as the technology backbone for the Navy’s Independence-variant Littoral Combat Ship (LCS) and the Expeditionary Fast Transport (EPF) ships. In 2019, we completed the integration of a new over-the-horizon missile capability onto the USS Gabrielle Giffords (LCS 10). As the Independence-variant LCS systems integrator, we are responsible for the design, integration and testing of the navigation, command, control, computing, communication, seaframe control and combat management systems on each ship.
We also design and manufacture unmanned underwater vehicles (UUVs) for U.S. and non-U.S. military and commercial customers. We have integrated more than 100 sensors across our family of Bluefin Robotics UUVs and continue to develop new capabilities for unmanned operations throughout constrained waterways and the open ocean. In 2019, our Knifefish surface mine countermeasure UUV received approval to enter low-rate initial production, paving the way for the Navy to procure five systems (10 total Knifefish UUVs). In 2019, we extended the Bluefin product line with the release of the Bluefin-12 UUV. This advanced, mission-ready UUV offers embedded intelligence and increased mission modularity to complete users’ evolving, long-endurance and high-consequence missions.
Our Digital Modular Radio (DMR) is the first software-defined radio to become a communications system standard for the Navy. The DMR is a four-channel radio that serves as the Navy’s communications hub for surface ships, submarines and shore-site communications. As a multi-channel radio, it simultaneously communicates with a wide spectrum of tactical radios and can communicate information at different security levels.
For airborne platforms, we offer high-assurance mission and display systems, signal and sensor processing, and command-and-control solutions. Our mission computers provide pilots with advanced situational awareness and combat systems control. Our avionics, radomes, or encrypted communication systems are present on nearly every U.S. military aircraft in service today, including the F-35, F-16, F/A-18, F-22, P-3, P-8 and AV-8B.
Revenue for the Mission Systems segment was $4.9 billion in 2019, $4.7 billion in 2018 and $4.5 billion in 2017, which represented 13% of our consolidated revenue in 2019 and 2018 and 15% in 2017.
MARINE SYSTEMS
Our Marine Systems segment is a market-leading designer and builder of nuclear-powered submarines, surface combatants, and auxiliary and combat-logistics ships for the U.S. Navy, and Jones Act ships for commercial customers. We also provide repair services for nearly all classes of Navy ships. With shipyards on both U.S. coasts, our Marine Systems segment consists of three business units: Bath Iron Works, Electric Boat and NASSCO. The segment’s platforms and capabilities include:
nuclear-powered submarines;
surface combatants;

11



auxiliary and combat-logistics ships;
commercial product carriers and containerships;
design and engineering support services; and
maintenance, modernization and lifecycle support services.
We have a long history as one of the Navy’s primary shipbuilders, constructing and maintaining the ships of today’s fleet while designing and developing next-generation platforms. More than 90% of our segment’s revenue is for Navy engineering, construction and lifecycle support awarded under large, multi-year contracts. We maintain the most sophisticated marine engineering center in the world, designing and testing concepts to support future capabilities. Our ability to design, build and maintain our nation’s most technologically sophisticated warships is a critical element of the U.S. defense industrial base.
The largest business unit in our Marine Systems segment is Electric Boat, the lead shipyard on all Navy nuclear-powered submarine programs, including both the Virginia-class attack submarine and the future Columbia-class ballistic-missile submarine. Designed to meet diverse global mission requirements, these submarines operate with highly advanced capabilities and stealth in both littoral and open-ocean environments.
The Navy procures Virginia-class submarines in multi-boat blocks, currently at a two-per-year rate, through a teaming arrangement between Electric Boat and an industry partner. We have delivered 18 Virginia-class submarines from the first three blocks. There are 10 boats from Block IV currently under contract and scheduled for delivery through 2024. Over the life of the Virginia-class submarine program, we have driven delivery timelines from 88 months in Block I to a current average rate of 68 months, while doubling the build rate of construction to two ships per year and consistently increasing ship capability.
In 2019, the Navy awarded Electric Boat a $22.2 billion contract, the largest shipbuilding contract in the Navy’s history, for construction of the fifth block of Virginia-class submarines. Electric Boat will serve as the prime contractor for construction of nine submarines, including eight with the Virginia Payload Module (VPM), and an option for a tenth submarine with the VPM that, if exercised, will bring the total contract value to $24.1 billion. In addition to significant upgrades in performance, the VPM included in this block is an 84-foot hull section that adds four additional payload tubes, more than tripling the strike capacity of these submarines and providing unique capabilities to support special missions. With the Block V contract, there are now 19 Virginia-class submarines in our backlog scheduled for delivery through 2029.
Electric Boat is the designer and builder of the Navy’s Columbia-class ballistic-missile submarine, a 12-boat program that the Navy considers its top priority. These submarines will provide strategic deterrent capabilities for decades and are scheduled to come online when the current Ohio-class ballistic-missile submarine fleet reaches the end of its service life beginning in 2027. We are slated to begin construction of the lead boat in the fourth quarter of 2020 and deliver it to the Navy in support of the Ohio-class retirements. In 2019, we broke ground on a 200,000-square-foot assembly building in Groton, Connecticut, that is the centerpiece of a $1.7 billion expansion to support Columbia- and Virginia-class construction.
We have developed a comprehensive resource master plan to ensure that we will have a fully trained workforce in place to support the increased demand for skilled trades for both the Columbia- and Virginia-class programs. We continue to invest in our facilities, optimizing the timing between investments and returns, while coordinating closely with the Navy. We are also working with our network of more than 3,000 suppliers — mostly small businesses — to provide for concurrent production of the Virginia- and Columbia-class submarine programs.
Bath Iron Works builds the Arleigh Burke-class (DDG-51) guided-missile destroyers and manages modernization and lifecycle support for the class. The Navy restarted the program in 2010 after a four-year

12



break in construction. Bath Iron Works delivered the first ship in the restart program to the Navy in 2017. We have a total of 11 ships in backlog scheduled for delivery through 2026. In 2019, the Navy awarded Bath Iron Works a contract to continue providing planning yard services for DDG-51s, to include design, material kitting, logistics, planning and execution.
Bath Iron Works is the hull, mechanical and electrical (HME) prime contractor for the Navy’s Zumwalt-class (DDG-1000) guided-missile destroyer program. We delivered the first ship in 2016 and the second ship in 2018. We expect to deliver our work on the third and final ship of this class in 2020.
NASSCO is building Expeditionary Sea Base (ESB) auxiliary support ships, a variant of the Expeditionary Transfer Dock (ESD) ships, for the Navy. ESBs serve as afloat forward-staging bases, providing a persistent platform for mine warfare, special operations warfare or Marine Corps missions. Equipped with a 52,000-square-foot flight deck and accommodations for up to 250 personnel, these ships can support diverse missions, including airborne mine countermeasures, maritime security operations, non-combatant evacuation operations and humanitarian assistance/disaster relief missions. The Navy awarded NASSCO the first design and build contract for the ESD/ESB in 2011. In 2019, we delivered the fifth vessel of the program to the Navy and were awarded a contract for the construction of the sixth and seventh ships, as well as an option for an eighth. Work on the two new ships will continue into 2023.
NASSCO was competitively awarded an exclusive design and construction contract in 2016 for the lead ship in the Navy’s new class of fleet replenishment oilers, the John Lewis-class (T-AO-205), along with options for five additional ships. Designed to transfer fuel to Navy surface ships operating at sea, the oilers can carry 162,000 barrels of fuel and also offer significant dry cargo capacity and aviation capabilities. We expect to deliver the first ship of this class, the future USNS John Lewis, in 2021. Three options have been fully exercised to date, as well as funding for engineering and long-lead materials for the fourth option, with deliveries planned into 2024.
In addition to our new construction work for the Navy, the Marine Systems segment has extensive experience in all phases of commercial ship construction. We have designed and built crude oil and product tankers and container and cargo ships for commercial customers since the 1960s. These ships satisfy our commercial customers’ Jones Act requirement that ships carrying cargo between U.S. ports be built in U.S. shipyards. NASSCO is the only major Jones Act shipyard on the West Coast of the United States. NASSCO pioneered green ship technology, designing and delivering the world’s first liquefied natural gas (LNG)-powered containerships starting in 2015 to decrease emissions and increase fuel efficiency.
In 2019, we delivered an 870-foot-long, 51,400-deadweight-metric-ton, combination containership/roll-on, roll-off (ConRo) vessel — the largest ConRo vessel ever built in the United States — to a commercial customer. The LNG-ready ship is the first of a two-ship contract.
Our Marine Systems segment provides comprehensive ship and submarine maintenance, modernization and lifecycle support services to extend the service life of these ships. NASSCO conducts full-service maintenance and surface-ship repair operations in Navy fleet concentration areas in San Diego, California; Norfolk, Virginia; Mayport, Florida; and Bremerton, Washington. Electric Boat provides submarine maintenance and modernization services in a variety of U.S. locations, and Bath Iron Works provides lifecycle support services for Navy surface ships in both U.S. and overseas ports. In support of allied navies, we offer program management, planning, engineering and design support for submarine and surface-ship construction programs.
To promote operating efficiency, innovation and affordability for our customers, we make strategic investments in our business, often in cooperation with the Navy. We leverage our design and engineering expertise across shipyards to improve program execution and generate cost savings. This knowledge sharing

13



enables us to use resources more efficiently and drive process improvements. Through robust and disciplined planning, we are positioned to support our customers well into the future.
Revenue for the Marine Systems segment was 23% of our consolidated revenue in 2019, 24% in 2018 and 26% in 2017. Revenue by major products and services was as follows:
Year Ended December 31
2019
 
2018
 
2017
Nuclear-powered submarines
$
6,254

 
$
5,712

 
$
5,175

Surface ships
1,912

 
1,872

 
1,607

Repair and other services
1,017

 
918

 
1,222

Total Marine Systems
$
9,183

 
$
8,502

 
$
8,004


CUSTOMERS
In 2019, 66% of our consolidated revenue was from the U.S. government, 16% was from U.S. commercial customers, 9% was from non-U.S. commercial customers and the remaining 9% was from non-U.S. government customers.
U.S. GOVERNMENT
Our primary customer is the U.S. Department of Defense (DoD). We also contract with other U.S. government customers, including the intelligence community and the Departments of Homeland Security and Health and Human Services. Our revenue from the U.S. government was as follows:
Year Ended December 31
2019
 
2018
 
2017
DoD
$
19,864

 
$
17,674

 
$
15,441

Non-DoD
5,254

 
5,306

 
2,904

Foreign Military Sales (FMS)*
689

 
626

 
676

Total U.S. government
$
25,807

 
$
23,606

 
$
19,021

% of total revenue
66
%
 
65
%
 
61
%
* In addition to our direct non-U.S. sales, we sell to non-U.S. governments through the FMS program. Under the FMS program, we contract with and are paid by the U.S. government, and the U.S. government assumes the risk of collection from the non-U.S. government customer.
Our U.S. government revenue is derived from 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.
Of our U.S. government revenue, fixed-price contracts accounted for 59% in 2019, 56% in 2018 and 54% in 2017; cost-reimbursement contracts accounted for 35% in 2019, 38% in 2018 and 42% in 2017; and time-and-materials contracts accounted for 6% in 2019 and 2018 and 4% in 2017.
For information on the advantages and disadvantages of each of these contract types, see Note C to the Consolidated Financial Statements in Item 8.

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U.S. COMMERCIAL
Our U.S. commercial revenue was $6.2 billion in 2019, $5 billion in 2018 and $4.5 billion in 2017, which represented 16%, 14% and 15% of our consolidated revenue in each of the respective years. The majority of this revenue is for business-jet aircraft and related services where our customer base consists of individuals and public and privately held companies across a wide range of industries.
NON-U.S.
Our revenue from non-U.S. government and commercial customers was $7.4 billion in 2019, $7.6 billion in 2018 and $7.5 billion in 2017, which represented 18%, 21% and 24% of our consolidated revenue in each of the respective years.
We conduct business with customers around the world. Our non-U.S. defense subsidiaries maintain long-term relationships with their customers and have established themselves as principal regional suppliers and employers, providing a broad portfolio of products and services.
Our non-U.S. commercial revenue consists primarily of business-jet aircraft exports and worldwide aircraft services. While the installed base of aircraft is concentrated in North America, orders from customers outside North America represent a significant portion of our aircraft business with approximately 50% of the Aerospace segment’s total backlog on December 31, 2019.

COMPETITION
Several factors determine our ability to compete successfully in the defense and business-aviation markets. While customers’ evaluation criteria vary, the principal competitive elements include:
the technical excellence, reliability, safety and cost competitiveness of our products and services;
our ability to innovate and develop new products and technologies that improve mission performance and adapt to dynamic threats;
successful program execution and on-time delivery of complex, integrated systems;
our global footprint and accessibility to customers;
the reputation and customer confidence derived from past performance; and
the successful management of customer relationships.
DEFENSE MARKET COMPETITION
The U.S. government contracts with numerous domestic and non-U.S. companies for products and services. We compete against other contractors as well as smaller companies that specialize in a particular technology or capability. Outside the United States, we compete with global defense contractors’ exports and the offerings of private and state-owned defense manufacturers. Our Combat Systems segment competes with a large number of U.S. and non-U.S. businesses. Our Information Technology and Mission Systems segments compete with many companies, from large government contracting and commercial technology companies to small niche competitors with specialized technologies or expertise. Our Marine Systems segment has one primary competitor with which it also partners on the Virginia-class and Columbia-class submarine programs. The operating cycle of many of our major programs can result in sustained periods of program continuity when we perform successfully.
We are involved in teaming and subcontracting relationships with some of our competitors. Competitions for major defense and other government contracting programs often require companies to form teams to bring together a spectrum of capabilities to meet the customer’s requirements. Opportunities associated with

15



these programs include roles as the program’s integrator, overseeing and coordinating the efforts of all participants on a team, or as a provider of a specific component or subsystem.
BUSINESS-JET AIRCRAFT MARKET COMPETITION
The Aerospace segment has several competitors for each of its Gulfstream products. Key competitive factors include aircraft safety, reliability and performance; comfort and in-flight productivity; service quality, global footprint and responsiveness; technological and new-product innovation; and price. We believe that Gulfstream competes effectively in all of these areas.
The Aerospace segment competes worldwide in the business-jet aircraft services market primarily on the basis of quality, price and timeliness. While competition for each type of service varies somewhat, the segment faces a number of competitors of varying sizes for each of its offerings.

BACKLOG
Our total backlog represents the estimated remaining value of work to be performed under firm contracts and includes funded and unfunded portions. For additional discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
Summary backlog information for each of our segments follows:
 
 
 
 
 
2019 Total
Backlog Not
Expected to Be
Completed in 2020
December 31
2019
 
2018
 
 
Funded
 
Unfunded
 
Total
 
Funded
 
Unfunded
 
Total
 
Aerospace
$
13,168

 
$
181

 
$
13,349

 
$
11,208

 
$
167

 
$
11,375

 
$
7,800

Combat Systems
14,474

 
439

 
14,913

 
16,174

 
424

 
16,598

 
8,617

Information
    Technology
4,839

 
4,294

 
9,133

 
4,717

 
3,248

 
7,965

 
2,795

Mission Systems
5,037

 
326

 
5,363

 
4,890

 
445

 
5,335

 
1,899

Marine Systems
20,012

 
24,175

 
44,187

 
18,837

 
7,761

 
26,598

 
34,690

Total backlog
$
57,530

 
$
29,415

 
$
86,945

 
$
55,826

 
$
12,045

 
$
67,871

 
$
55,801


RESEARCH AND DEVELOPMENT
To foster innovative product development and evolution, we conduct sustained R&D activities as part of our normal business operations. Most of our Aerospace segment’s R&D activities support Gulfstream’s product enhancement and development programs. In our U.S. defense operations, we conduct customer-sponsored R&D activities under government contracts and company-sponsored R&D activities, investing in technologies and capabilities that provide innovative solutions for our customers. In accordance with government regulations, we recover a portion of company-sponsored R&D expenditures through overhead charges to U.S. government contracts. For more information on our company-sponsored R&D activities, including our expenditures for the past three years, see Note A to the Consolidated Financial Statements in Item 8.


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INTELLECTUAL PROPERTY
We develop technology, manufacturing processes and systems-integration practices. In addition to owning a large portfolio of proprietary intellectual property, we license some intellectual property rights to and from others. The U.S. government holds licenses to many of our patents developed in the performance of U.S. government contracts, and it may use or authorize others to use the inventions covered by these patents. Although these intellectual property rights are important to the operation of our business, no existing patent, license or other intellectual property right is of such importance that its loss or termination would have a material impact on our business.

EMPLOYEES
On December 31, 2019, our subsidiaries had 102,900 employees, approximately one-fifth of whom work under collective agreements with various labor unions and worker representatives. Agreements covering approximately 10% of total employees are due to expire in 2020. Historically, we have renegotiated these labor agreements without any significant disruption to operating activities.

RAW MATERIALS, SUPPLIERS AND SEASONALITY
We depend on suppliers and subcontractors for raw materials, components and subsystems. Our U.S. government customer is a supplier on some of our programs. These supply networks can experience price fluctuations and capacity constraints, which can put pressure on our costs. Effective management and oversight of suppliers and subcontractors is an important element of our successful performance. We sometimes rely on only one or two sources of supply that, if disrupted, could impact our ability to meet our customer commitments. We attempt to mitigate risks with our suppliers by entering into long-term agreements and leveraging company-wide agreements to achieve economies of scale and by negotiating flexible pricing terms in our customer contracts. We have not experienced, and do not foresee, significant difficulties in obtaining the materials, components or supplies necessary for our business operations.
Our business is not seasonal in nature. The receipt of contract awards, the availability of funding from the customer, the incurrence of contract costs and unit deliveries are all factors that influence the timing of our revenue. In the United States, these factors are influenced by the federal government’s budget cycle based on its October-to-September fiscal year.

REGULATORY MATTERS
U.S. GOVERNMENT CONTRACTS
U.S. government contracts are subject to procurement laws and regulations. The Federal Acquisition Regulation (FAR) and the Cost Accounting Standards (CAS) govern the majority of our contracts. The FAR mandates uniform policies and procedures for U.S. government acquisitions and purchased services. Also, individual agencies can have acquisition regulations that provide implementing language for the FAR or that supplement the FAR. For example, the DoD implements the FAR through the Defense Federal Acquisition Regulation Supplement (DFARS). For all federal government entities, the FAR regulates the phases of any product or service acquisition, including:
acquisition planning;
competition requirements;
contractor qualifications;

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protection of source selection and vendor information; and
acquisition procedures.
In addition, the FAR addresses the allowability of our costs, while the CAS addresses the allocation of those costs to contracts. The FAR and CAS subject us to audits and other government reviews covering issues such as cost, performance, internal controls and accounting practices relating to our contracts.
NON-U.S. REGULATORY
Our non-U.S. operations are subject to the applicable government regulations and procurement policies and practices, as well as U.S. policies and regulations. We are also subject to regulations governing investments, exchange controls, repatriation of earnings and import-export control.
BUSINESS-JET AIRCRAFT
The Aerospace segment is subject to FAA regulation in the United States and other similar aviation regulatory authorities internationally, including the Civil Aviation Administration of Israel (CAAI), the European Aviation Safety Agency (EASA) and the Civil Aviation Administration of China (CAAC). For an aircraft to be manufactured and sold, the model must receive a type certificate from the appropriate aviation authority, and each aircraft must receive a certificate of airworthiness. Aircraft outfitting and completions also require approval by the appropriate aviation authority, which is often accomplished through a supplemental type certificate. Aviation authorities can require changes to a specific aircraft or model type before granting approval. Maintenance facilities and charter operations must be licensed by aviation authorities as well.
ENVIRONMENTAL
We are subject to a variety of federal, state, local and foreign environmental laws and regulations. These laws and regulations cover the discharge, treatment, storage, disposal, investigation and remediation of materials, substances and wastes identified in the laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and at 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. As a PRP, we are potentially liable to the government or third parties for the cost of remediating contamination. In cases where we have been designated a PRP, we generally seek to mitigate these environmental liabilities through available insurance coverage and by pursuing appropriate cost-recovery actions. In the unlikely event that we are required to fully fund the remediation of a site, the current statutory framework would allow us to pursue contributions from other PRPs. We regularly assess our compliance status and management of environmental matters.
Operating and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of our operations. Historically, these costs have not been material. Environmental costs are often recoverable under our contracts with the U.S. government. Based on information currently available and current U.S. government policies relating to cost recovery, we do not expect continued compliance with environmental regulations to have a material impact on our results of operations, financial condition or cash flows. For additional information relating to the impact of environmental matters, see Note O to the Consolidated Financial Statements in Item 8.

AVAILABLE INFORMATION
We file reports and other information with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports and information include an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and

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proxy statements. Free copies of these items are made available on our website (www.gd.com) as soon as practicable. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information.
In addition to the information contained in this Form 10-K, information about the company can be found on our website and our Investor Relations website (investorrelations.gd.com). Our Investor Relations website contains a significant amount of information about the company, including financial information, our corporate governance principles and practices, and other information for investors. We encourage investors to visit our website, as we frequently update and post new information about our company, and it is possible that this information could be deemed to be material information.
References to our website and the SEC’s website in this Form 10-K do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the websites. The information should not be considered a part of this Form 10-K, unless otherwise expressly incorporated by reference.

ITEM 1A. RISK FACTORS
An investment in our common stock or debt securities is subject to risks and uncertainties. Investors should consider the following factors, in addition to the other information contained in this Annual Report on Form 10-K, before deciding whether to purchase our securities.
Investment risks can be market-wide as well as unique to a specific industry or company. The market risks faced by an investor in our stock are similar to the uncertainties faced by investors in a broad range of industries. There are some risks that apply more specifically to our business.
Our revenue is concentrated with the U.S. government. This customer relationship involves some specific risks. In addition, our sales to non-U.S. customers expose us to different financial and legal risks. Despite the varying nature of our government and commercial operations and the markets they serve, each segment shares some common risks, such as the ongoing development of high-technology products and the price, availability and quality of commodities and subsystems.
The U.S. government provides a significant portion of our revenue. In 2019, approximately 65% of our consolidated revenue was from the U.S. government. Levels of U.S. defense spending are driven by threats to national security. Competing demands for federal funds can pressure various areas of spending. Decreases in U.S. government defense and other spending or changes in spending allocation or priorities could result in one or more of our programs being reduced, delayed or terminated, which could impact our financial performance.
For additional information relating to U.S. budget matters, see the Business Environment section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
U.S. government contracts are not always fully funded at inception, and any funding is subject to disruption or delay. Our U.S. government revenue is funded by agency budgets that operate on an October-to-September fiscal year. Early each calendar year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is the result of months of policy and program reviews throughout the executive branch. For the remainder of the year, the Appropriations and Authorization Committees of the Congress review the President’s budget proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies.

19



There are two primary risks associated with the U.S. government budget cycle. First, the annual process may be delayed or disrupted. If the annual budget is not approved by the beginning of the government fiscal year, portions of the U.S. government can shut down or operate under a continuing resolution that maintains spending at prior-year levels, which can impact funding for our programs and timing of new awards. Second, the Congress typically appropriates funds on a fiscal-year basis, even though contract performance may extend over many years. Future revenue under existing multi-year contracts is conditioned on the continuing availability of congressional appropriations. Changes in appropriations in subsequent years may impact the funding available for these programs. Delays or changes in funding can impact the timing of available funds or lead to changes in program content.
Our U.S. government contracts are subject to termination rights by the customer. U.S. government contracts generally permit the government to terminate a contract, in whole or in part, for convenience. If a contract is terminated for convenience, a contractor usually is entitled to receive payments for its allowable costs incurred and the proportionate share of fees or earnings for the work performed. The government may also terminate a contract for default in the event of a breach by the contractor. If a contract is terminated for default, the government in most cases pays only for the work it has accepted. The termination of multiple or large programs could have a material adverse effect on our future revenue and earnings.
Government contractors operate in a highly regulated environment and are subject to audit by the U.S. government. Numerous U.S. government agencies routinely audit and review government contractors. These agencies review a contractor’s performance under its contracts and compliance with applicable laws, regulations and standards. The U.S. government also reviews the adequacy of, and compliance with, internal control systems and policies, including the contractor’s purchasing, property, estimating, material, earned value management and accounting systems. In some cases, audits may result in delayed payments or contractor costs not being reimbursed or subject to repayment. If an audit or investigation were to result in allegations against a contractor of improper or illegal activities, civil or criminal penalties and administrative sanctions could result, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, reputational harm could result if allegations of impropriety were made. In some cases, audits may result in disputes with the respective government agency that can result in negotiated settlements, arbitration or litigation. Moreover, new laws, regulations or standards, or changes to existing ones, can increase our performance and compliance costs and reduce our profitability.
Our Aerospace segment is subject to changing customer demand for business aircraft. The business-jet market is driven by the demand for business-aviation products and services by corporate, individual and government customers in the United States and around the world. The Aerospace segment’s results also depend on other factors, including general economic conditions, the availability of credit, pricing pressures and trends in capital goods markets. In addition, if customers default on existing contracts and the contracts are not replaced, the segment’s anticipated revenue and profitability could be reduced materially.
Earnings and margin depend on our ability to perform on our contracts. When agreeing to contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting for our contracts and programs requires assumptions and estimates about these conditions and events. These projections and estimates assess:
the productivity and availability of labor;
the complexity of the work to be performed;
the cost and availability of materials and components; and
schedule requirements.

20



If there is a significant change in one or more of these circumstances, estimates or assumptions, or if the risks under our contracts are not managed adequately, the profitability of contracts could be adversely affected. This could affect earnings and margin materially.
Earnings and margin depend in part on subcontractor and vendor performance. We rely on other companies to provide materials, components and subsystems for our products. Subcontractors also perform some of the services that we provide to our customers. We depend on these subcontractors and vendors to meet our contractual obligations in full compliance with customer requirements and applicable law. Misconduct by subcontractors, such as a failure to comply with procurement regulations or engaging in unauthorized activities, may harm our future revenue and earnings. We manage our supplier base carefully to avoid or minimize customer issues. We sometimes rely on only one or two sources of supply that, if disrupted, could have an adverse effect on our ability to meet our customer commitments. Our ability to perform our obligations may be materially adversely affected if one or more of these suppliers is unable to provide the agreed-upon materials, perform the agreed-upon services in a timely and cost-effective manner, or engages in misconduct or other improper activities.
Sales and operations outside the United States are subject to different risks that may be associated with doing business in foreign countries. In some countries there is increased chance for economic, legal or political changes, and procurement procedures may be less robust or mature, which may complicate the contracting process. Our non-U.S. operations may be sensitive to and impacted by changes in a foreign government’s national policies and priorities, political leadership and budgets, which may be influenced by changes in threat environments, geopolitical uncertainties, volatility in economic conditions and other economic and political factors. Changes and developments in any of these matters or factors may occur suddenly and could impact funding for programs or delay purchasing decisions or customer payments. Non-U.S. transactions can involve increased financial and legal risks arising from foreign exchange rate variability and differing legal systems. Our non-U.S. operations are subject to U.S. and foreign laws and regulations, including laws and regulations relating to import-export controls, technology transfers, the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws, and the International Traffic in Arms Regulations (ITAR). An unfavorable event or trend in any one or more of these factors or a failure to comply with U.S. or foreign laws could result in administrative, civil or criminal liabilities, including suspension or debarment from government contracts or suspension of our export privileges, and could materially adversely affect revenue and earnings associated with our non-U.S. operations.
In addition, some non-U.S. government customers require contractors to enter into letters of credit, performance or surety bonds, bank guarantees and other similar financial arrangements. We may also be required to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, that require us to satisfy investment or other requirements or face penalties. Offset requirements may extend over several years and could require us to team with local companies to fulfill these requirements. If we do not satisfy these financial or offset requirements, our future revenue and earnings may be materially adversely affected.
Our future success depends in part on our ability to develop new products and technologies and maintain a qualified workforce to meet the needs of our customers. Many of the products and services we provide involve sophisticated technologies and engineering, with related complex manufacturing and system-integration processes. Our customers’ requirements change and evolve regularly. Accordingly, our future performance depends in part on our ability to continue to develop, manufacture and provide innovative products and services and bring those offerings to market quickly at cost-effective prices. Some new products, particularly in our Aerospace segment, must meet extensive and time-consuming regulatory requirements that are often outside our control and may result in unanticipated delays. Additionally, due

21



to the highly specialized nature of our business, we must hire and retain the skilled and qualified personnel necessary to perform the services required by our customers. To the extent that the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting or training costs in order to attract and retain such employees. If we were unable to develop new products that meet customers’ changing needs and satisfy regulatory requirements in a timely manner or successfully attract and retain qualified personnel, our future revenue and earnings may be materially adversely affected.
We have made and expect to continue to make investments, including acquisitions and joint ventures, that involve risks and uncertainties. When evaluating potential acquisitions and joint ventures, we make judgments regarding the value of business opportunities, technologies, and other assets and the risks and costs of potential liabilities based on information available to us at the time of the transaction. Whether we realize the anticipated benefits from these transactions depends on multiple factors, including our integration of the businesses involved; the performance of the underlying products, capabilities or technologies; market conditions following the acquisition; and acquired liabilities, including some that may not have been identified prior to the acquisition. These factors could materially adversely affect our financial results.
Changes in business conditions may cause goodwill and other intangible assets to become impaired. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized and remains on our balance sheet indefinitely unless there is an impairment or a sale of a portion of the business. Goodwill is subject to an impairment test on an annual basis or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. We face some uncertainty in our business environment due to a variety of challenges, including changes in government spending. We may experience unforeseen circumstances that adversely affect the value of our goodwill or intangible assets and trigger an evaluation of the amount of the recorded goodwill and intangible assets. Future write-offs of goodwill or other intangible assets as a result of an impairment in the business could materially adversely affect our results of operations and financial condition.
Our business could be negatively impacted by cybersecurity events and other disruptions. We face various cybersecurity threats, including threats to our information technology (IT) infrastructure and attempts to gain access to our proprietary or classified information, denial-of-service attacks, as well as threats to the physical security of our facilities and employees, and threats from terrorist acts. We also design and manage IT systems and products that contain IT systems for various customers. We generally face the same security threats for these systems as for our own internal systems. In addition, we face cyber threats from entities that may seek to target us through our customers, vendors, subcontractors and other third parties with whom we do business. Accordingly, we maintain information security staff, policies and procedures for managing risk to our information systems, and conduct employee training on cybersecurity to mitigate persistent and continuously evolving cybersecurity threats. However, there can be no assurance that any such actions will be sufficient to prevent cybersecurity breaches, disruptions, unauthorized release of sensitive information or corruption of data.
We have experienced cybersecurity threats such as viruses and attacks targeting our IT systems. Such prior events have not had a material impact on our financial condition, results of operations or liquidity. However, future threats could, among other things, cause harm to our business and our reputation; disrupt our operations; expose us to potential liability, regulatory actions and loss of business; challenge our eligibility for future work on sensitive or classified systems for government customers; and impact our results of operations materially. Due to the evolving nature of these security threats, the potential impact

22



of any future incident cannot be predicted. Our insurance coverage may not be adequate to cover all the costs related to cybersecurity attacks or disruptions resulting from such events.

FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “outlook,” “estimates,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples include projections of revenue, earnings, operating margin, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog. In making these statements we rely on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we consider appropriate under the circumstances. We believe our estimates and judgments are reasonable based on information available to us at the time. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation, the risk factors discussed in this Form 10-K.
All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to General Dynamics or any person acting on our behalf are qualified by the cautionary statements in this section. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report. These factors may be revised or supplemented in subsequent reports on SEC Forms 10-Q and 8-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES
We operate in a number of offices, manufacturing plants, laboratories, warehouses and other facilities in the United States and abroad. We believe our facilities are adequate for our present needs and, given planned improvements and construction, expect them to remain adequate for the foreseeable future.
On December 31, 2019, our segments had primary operations at the following locations:
Aerospace – Scottsdale, Arizona; Burbank, Lincoln, Long Beach and Van Nuys, California; West Palm Beach, Florida; Brunswick, Pooler and Savannah, Georgia; Cahokia, Illinois; Bedford and Westfield, Massachusetts; Las Vegas, Nevada; Teterboro, New Jersey; New York, New York; Tulsa, Oklahoma; San Juan, Puerto Rico; Dallas and Houston, Texas; Dulles, Virginia; Appleton, Wisconsin; Brisbane, Cairns, Darwin, Perth and Sydney, Australia; Vienna, Austria; Beijing, Hong Kong and Shanghai, China; Berlin, Dusseldorf and Munich, Germany; Jakarta, Indonesia; Kuala Lumpur, Malaysia; Valetta, Malta; Mexicali, Mexico; Amsterdam and Rotterdam, the Netherlands; Manila, Philippines; Singapore; Basel,

23



Geneva and Zurich, Switzerland; Bangkok, Thailand; Dubai and Fujairah, United Arab Emirates; Farnborough and Luton, United Kingdom.
Combat Systems – Anniston, Alabama; East Camden and Hampton, Arkansas; Crawfordsville, St. Petersburg and Tallahassee, Florida; Marion, Illinois; Saco, Maine; Sterling Heights, Michigan; Joplin, Missouri; Lincoln, Nebraska; Lima, Ohio; Eynon, Red Lion and Scranton, Pennsylvania; Ladson, South Carolina; Garland, Texas; Williston, Vermont; Auburn and Sumner, Washington; Vienna, Austria; La Gardeur, London, St. Augustin and Valleyfield, Canada; Berlin, Kaiserslautern, Neubrandenburg and Woldegk, Germany; Granada, Madrid, Sevilla and Trubia, Spain; Kreuzlingen and Tägerwilen, Switzerland; Merthyr Tydfil and Oakdale, United Kingdom.
Information Technology – Daleville, Alabama; Pawcatuck, Connecticut; Bossier City, Louisiana; Annapolis Junction and Columbia, Maryland; Westwood, Massachusetts; Rensselaer, New York; Fayetteville, North Carolina; Arlington, Chesapeake, Sterling and several locations in Fairfax County, Virginia.
Mission Systems – Cullman, Alabama; Scottsdale, Arizona; San Jose, California; Orlando, Florida; Annapolis Junction, Maryland; Dedham, Pittsfield and Taunton, Massachusetts; Bloomington, Minnesota; Florham Park, New Jersey; Catawba, Conover and Greensboro, North Carolina; Kilgore, Plano and Wortham, Texas; Fairfax and Marion, Virginia; Calgary, Halifax and Ottawa, Canada; Tallinn, Estonia; Oakdale and St. Leonards, United Kingdom.
Marine Systems – San Diego, California; Groton, New London and Stonington, Connecticut; Jacksonville, Florida; Bath and Brunswick, Maine; North Kingstown, Rhode Island; Norfolk and Portsmouth, Virginia; Bremerton, Washington; Mexicali, Mexico.
A summary of floor space by segment on December 31, 2019, follows:
(Square feet in millions)
Company-owned
Facilities
 
Leased
Facilities
 
Government-owned
Facilities
 
Total
Aerospace
6.3

 
8.9

 

 
15.2

Combat Systems
6.1

 
4.3

 
5.5

 
15.9

Information Technology
0.2

 
4.7

 

 
4.9

Mission Systems
3.5

 
3.7

 
0.9

 
8.1

Marine Systems
8.2

 
3.8

 

 
12.0

Total square feet
24.3

 
25.4

 
6.4

 
56.1


ITEM 3. LEGAL PROCEEDINGS
For information relating to legal proceedings, see Note O to the Consolidated Financial Statements in Item 8.
 
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
All of our executive officers are appointed annually. None of our executive officers were selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions of our executives held for at least the past five years as of February 10, 2020, were as follows (references are to positions with General Dynamics Corporation, unless otherwise noted):
Name, Position and Office
Age
 
 
Jason W. Aiken - Senior Vice President and Chief Financial Officer since January 2014; Vice President of the company and Chief Financial Officer of Gulfstream Aerospace Corporation, September 2011 - December 2013; Vice President and Controller, April 2010 - August 2011; Staff Vice President, Accounting, July 2006 - March 2010

47
 
 
Christopher J. Brady - Vice President of the company and President of General Dynamics Mission Systems since January 2019; Vice President, Engineering of General Dynamics Mission Systems, January 2015 - December 2018; Vice President, Engineering of General Dynamics C4 Systems, May 2013 - December 2014; Vice President, Assured Communications Systems of General Dynamics C4 Systems, August 2004 - May 2013

57
 
 
Mark L. Burns - Vice President of the company and President of Gulfstream Aerospace Corporation since July 2015; Vice President of the company since February 2014; President, Product Support of Gulfstream Aerospace Corporation, June 2008 - June 2015
60
 
 
Gregory S. Gallopoulos - Senior Vice President, General Counsel and Secretary since January 2010; Vice President and Deputy General Counsel, July 2008 - January 2010; Managing Partner of Jenner & Block LLP, January 2005 - June 2008
60
 
 

24



M. Amy Gilliland - Senior Vice President of the company since April 2015; President of General Dynamics Information Technology since September 2017; Deputy for Operations of General Dynamics Information Technology, April 2017 - September 2017; Senior Vice President, Human Resources and Administration, April 2015 - March 2017; Vice President, Human Resources, February 2014 - March 2015; Staff Vice President, Strategic Planning, January 2013 - February 2014; Staff Vice President, Investor Relations, June 2008 - January 2013
45
 
 
Kevin M. Graney - Vice President of the company and President of Electric Boat Corporation since October 2019; Vice President of the company and President of NASSCO, January 2017 - October 2019; Vice President and General Manager of NASSCO, November 2013 - January 2017
55
 
 
Kimberly A. Kuryea - Senior Vice President, Human Resources and Administration since April 2017; Vice President and Controller, September 2011 - March 2017; Chief Financial Officer of General Dynamics Advanced Information Systems, November 2007 - August 2011; Staff Vice President, Internal Audit, March 2004 - October 2007
52
 
 
Christopher Marzilli - Executive Vice President, Information Technology and Mission Systems since January 2019; Vice President of the company and President of General Dynamics Mission Systems, January 2015 - December 2018; Vice President of the company and President of General Dynamics C4 Systems, January 2006 - December 2014; Senior Vice President and Deputy General Manager of General Dynamics C4 Systems, November 2003 - January 2006
60
 
 
William A. Moss - Vice President and Controller since April 2017; Staff Vice President, Internal Audit, May 2015 - March 2017; Staff Vice President, Accounting, August 2010 - May 2015
56
 
 
Phebe N. Novakovic - Chairman and Chief Executive Officer since January 2013; President and Chief Operating Officer, May 2012 - December 2012; Executive Vice President, Marine Systems, May 2010 - May 2012; Senior Vice President, Planning and Development, July 2005 - May 2010; Vice President, Strategic Planning, October 2002 - July 2005
62
 
 
Mark C. Roualet - Executive Vice President, Combat Systems, since March 2013; Vice President of the company and President of General Dynamics Land Systems, October 2008 - March 2013; Senior Vice President and Chief Operating Officer of General Dynamics Land Systems, July 2007 - October 2008
61
 
 
Robert E. Smith - Executive Vice President, Marine Systems, since July 2019; Vice President of the company and President of Jet Aviation, January 2014 - July 2019; Vice President and Chief Financial Officer of Jet Aviation, July 2012 - January 2014
52
 
 
Gary L. Whited - Vice President of the company and President of General Dynamics Land Systems since March 2013; Senior Vice President of General Dynamics Land Systems, September 2011 - March 2013; Vice President and Chief Financial Officer of General Dynamics Land Systems, June 2006 - September 2011
59

PART II
 
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the trading symbol “GD.”
On January 26, 2020, there were approximately 10,000 holders of record of our common stock.
For information regarding securities authorized for issuance under our equity compensation plans, see Note Q to the Consolidated Financial Statements contained in Item 8.

25



We did not make any unregistered sales of equity securities in 2019.
The following table provides information about our fourth-quarter purchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
Period
 
Total Number of Shares
 
Average Price per Share
Shares Delivered or Withheld Pursuant to Restricted Stock Vesting*
9/30/19-10/27/19
 
36

 
$
184.36

10/28/19-11/24/19
 
412

 
183.36

11/25/19-12/31/19
 

 

 
 
448

 
$
183.44

* Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the statutory tax withholding due upon vesting of the restricted shares.
On December 5, 2018, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding common stock on the open market. We did not repurchase any shares in the fourth quarter of 2019. On December 31, 2019, 6.4 million shares remained authorized by our board of directors for repurchase.
For additional information relating to our purchases of common stock during the past three years, see Note M to the Consolidated Financial Statements in Item 8.
The following performance graph compares the cumulative total return to shareholders on our common stock, assuming reinvestment of dividends, with similar returns for the Standard & Poor’s® 500 Index and the Standard & Poor’s® Aerospace & Defense Index, both of which include General Dynamics.

Cumulative Total Return
Based on Investments of $100 Beginning December 31, 2014
(Assumes Reinvestment of Dividends)
CHART-D5E9B093DB785B86985.JPG

26



ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from the Consolidated Financial Statements and other company information for each of the five years presented. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the Consolidated Financial Statements and the Notes thereto in Item 8.
(Dollars and shares in millions, except per-share and employee amounts)
 
 
 
 
 
 

 
 
 
 
 
2019
 
2018
 
2017
 
2016
 
2015
Summary of Operations
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
39,350

 
$
36,193

 
$
30,973

 
$
30,561

 
$
31,781

Operating earnings
 
4,648

 
4,457

 
4,236

 
3,744

 
4,494

Operating margin
 
11.8
%
 
12.3
%
 
13.7
%
 
12.3
%
 
14.1
%
Interest, net
 
(460
)
 
(356
)
 
(103
)
 
(91
)
 
(83
)
Provision for income tax, net
 
(718
)
 
(727
)
 
(1,165
)
 
(977
)
 
(1,183
)
Earnings from continuing operations
 
3,484

 
3,358

 
2,912

 
2,679

 
3,036

Return on sales (a)
 
8.9
%
 
9.3
%
 
9.4
%
 
8.8
%
 
9.6
%
Discontinued operations, net of tax
 

 
(13
)
 

 
(107
)
 

Net earnings
 
3,484

 
3,345

 
2,912

 
2,572

 
3,036

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
11.98

 
11.22

 
9.56

 
8.64

 
9.29

Net earnings
 
11.98

 
11.18

 
9.56

 
8.29

 
9.29

Cash Flows
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
2,981

 
$
3,148

 
$
3,876

 
$
2,163

 
$
2,607

Net cash (used) provided by investing activities
 
(994
)
 
(10,234
)
 
(788
)
 
(391
)
 
200

Net cash (used) provided by financing activities
 
(1,997
)
 
5,086

 
(2,399
)
 
(2,169
)
 
(4,367
)
Net cash used by discontinued operations
 
(51
)
 
(20
)
 
(40
)
 
(54
)
 
(43
)
Cash dividends declared per common share
 
4.08

 
3.72

 
3.36

 
3.04

 
2.76

Financial Position
 
 
 
 
 
 
 
 
 
 
Cash and equivalents
 
$
902

 
$
963

 
$
2,983

 
$
2,334

 
$
2,785

Total assets
 
48,841

 
45,408

 
35,046

 
33,172

 
32,538

Short- and long-term debt
 
11,930

 
12,417

 
3,982

 
3,888

 
3,399

Shareholders’ equity
 
13,577

 
11,732

 
11,435

 
10,301

 
10,440

Debt-to-equity (b)
 
87.9
%
 
105.8
%
 
34.8
%
 
37.7
%
 
32.6
%
Debt-to-capital (c)
 
46.8
%
 
51.4
%
 
25.8
%
 
27.4
%
 
24.6
%
Book value per share (d)
 
46.88

 
40.64

 
38.52

 
34.06

 
33.36

Other Information
 
 
 
 
 
 
 
 
 
 
Free cash flow from operations (e)
 
$
1,994

 
$
2,458

 
$
3,448

 
$
1,771

 
$
2,038

Return on equity (f)
 
27.2
%
 
28.1
%
 
26.6
%
 
25.6
%
 
27.7
%
Return on invested capital (e)
 
14.0
%
 
15.4
%
 
16.8
%
 
16.3
%
 
18.1
%
Funded backlog
 
57,530

 
55,826

 
52,031

 
51,783

 
53,449

Total backlog
 
86,945

 
67,871

 
63,175

 
62,206

 
67,786

Shares outstanding
 
289.6

 
288.7

 
296.9

 
302.4

 
313.0

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
288.3

 
295.3

 
299.2

 
304.7

 
321.3

Diluted
 
290.8

 
299.2

 
304.6

 
310.4

 
326.7

Employees
 
102,900

 
105,600

 
98,600

 
98,800

 
99,900

(a)
Return on sales is calculated as earnings from continuing operations divided by revenue.
(b)
Debt-to-equity ratio is calculated as total debt divided by total equity as of year end.
(c)
Debt-to-capital ratio is calculated as total debt divided by the sum of total debt plus total equity as of year end.
(d)
Book value per share is calculated as total equity divided by total outstanding shares as of year end.
(e)
See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a reconciliation of net cash provided by operating activities to free cash flow from operations and the calculation of return on invested capital (ROIC), both of which are non-GAAP management metrics.
(f)
Return on equity is calculated by dividing earnings from continuing operations by our average equity during the year.


27



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share amounts or unless otherwise noted)
A discussion regarding our financial condition and results of operations for 2019 compared with 2018 is presented below. A discussion regarding our financial condition and results of operations for 2018 compared with 2017 can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.
For an overview of our operating segments, including a discussion of our major products and services, see the Business discussion contained in Item 1. The following discussion should be read in conjunction with our Consolidated Financial Statements included in Item 8.

BUSINESS ENVIRONMENT
With approximately 65% of our revenue from the U.S. government, government spending levels, particularly defense spending, influence our financial performance. Over the past several years, U.S. defense spending has been mandated by the Budget Control Act of 2011 (BCA). The BCA establishes spending caps over a 10-year period through 2021, including a sequester mechanism that would impose additional defense cuts if an annual defense appropriations bill is enacted above the spending cap.
On August 2, 2019, the Bipartisan Budget Act of 2019 (BBA) was signed into law, which raised discretionary spending limits established by the BCA for fiscal year (FY) 2020 and FY 2021. On December 20, 2019, the FY 2020 defense appropriations bill was signed into law. It totaled $691 billion and included $619 billion in the base budget in compliance with the BBA spending caps and $72 billion for overseas contingency operations, representing an increase of approximately 3% over the total FY 2019 spending level.
The long-term outlook for our U.S. defense business is influenced by the U.S. military’s funding priorities, the diversity of our programs and customers, our insight into customer requirements stemming from our incumbency on core programs, our ability to evolve our products to address a fast-changing threat environment and our proven track record of successful contract execution.
International demand for military equipment and information technologies presents opportunities for our non-U.S. operations and exports from our North American businesses. While the revenue potential can be significant, there are risks to doing business in foreign countries, including changing budget priorities and overall spending pressures unique to each country.
In our Aerospace segment, we continue to experience strong demand across our product portfolio. We expect our investment in the development of new aircraft products and technologies to support the Aerospace segment’s long-term growth. Similarly, we believe the aircraft services business will be a source of steady revenue growth as the global business-jet fleet continues to grow.


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RESULTS OF OPERATIONS
INTRODUCTION
An understanding of our accounting practices is necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results.
In the Aerospace segment, we record revenue on contracts for new aircraft when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. Revenue associated with the segment’s custom completions of narrow-body and wide-body aircraft and the segment’s services businesses is recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, progress on aircraft completions, and the level and type of aircraft services performed during the period.
The majority of the Aerospace segment’s operating costs relates to new aircraft production on firm orders and consists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at aircraft delivery based on the estimated average unit cost in a production lot. While changes in the estimated average unit cost for a production lot impact the level of operating costs, the amount of operating costs reported in a given period is based largely on the number and type of aircraft delivered. Operating costs in the Aerospace segment’s completions and services businesses are recognized generally as incurred.
For new aircraft, operating earnings and margin are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft, and the mix of ultra-large-cabin, large-cabin and mid-cabin aircraft deliveries. Aircraft mix can also refer to the stage of program maturity for our aircraft models. A new aircraft model typically has lower margins in its initial production lots, and then margins generally increase as we realize efficiencies in the production process. Additional factors affecting the segment’s earnings and margin include the volume, mix and profitability of completions and services work performed, the volume of and market for pre-owned aircraft, and the level of general and administrative (G&A) and net research and development (R&D) costs incurred by the segment.
In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual contracts. Because costs are used as a measure of progress, year-over-year variances in cost result in corresponding variances in revenue, which we generally refer to as volume.
Operating earnings and margin in the defense segments are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value (or vice versa) that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- versus lower-margin work. Higher or lower margins can result from a

29



number of factors, including contract type (e.g., fixed-price/cost-reimbursable) and type of work (e.g., development/production). Contract mix can also refer to the stage of program maturity for our long-term production contracts. New long-term production contracts typically have lower margins initially, and then margins generally increase as we achieve learning curve improvements or realize other cost reductions.

CONSOLIDATED OVERVIEW
2019 IN REVIEW
Record-high operating performance:
Revenue of $39.4 billion with growth in all of our segments.
Operating earnings of $4.6 billion, an increase of 4.3% from 2018.
Earnings from continuing operations per diluted share of $11.98, an increase of 6.8% from 2018.
Record-high backlog of $86.9 billion increased $19.1 billion, or 28.1%, from 2018, supporting our long-term growth expectations:
Net orders for Gulfstream aircraft increased over 57% from 2018 and reflected significant demand for the new G700 aircraft.
Several significant contract awards received in 2019 in our defense segments, including $22.2 billion for Block V of the Virginia-class submarine program in our Marine Systems segment, the largest shipbuilding contract in the U.S. Navy’s history.
Year Ended December 31
2019
 
2018
 
Variance
Revenue
$
39,350

 
$
36,193

 
$
3,157

 
8.7
%
Operating costs and expenses
(34,702
)
 
(31,736
)
 
(2,966
)
 
9.3
%
Operating earnings
4,648

 
4,457

 
191

 
4.3
%
Operating margin
11.8
%
 
12.3
%
 
 
 
 
Our consolidated revenue increased 8.7% in 2019 driven by deliveries of the new G500 and G600 aircraft in our Aerospace segment and new contracts from the U.S. government for military vehicles in our Combat Systems segment and submarines in our Marine Systems segment.
Operating margin decreased in 2019 due primarily to the transition from mature products and contracts to newer ones, which typically have lower initial margins.

REVIEW OF OPERATING SEGMENTS
Following is a discussion of operating results and outlook for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note S to the Consolidated Financial Statements in Item 8.

30



AEROSPACE
Year Ended December 31
2019
 
2018
 
Variance
Revenue
$
9,801

 
$
8,455

 
$
1,346

 
15.9
%
Operating earnings
1,532

 
1,490

 
42

 
2.8
%
Operating margin
15.6
%
 
17.6
%
 
 
 
 
Gulfstream aircraft deliveries (in units)
147

 
121

 
26

 
21.5
%
Operating Results
The increase in the Aerospace segment’s revenue in 2019 consisted of the following:
Aircraft manufacturing
$
1,120

Aircraft services and completions
67

Pre-owned aircraft
159

Total increase
$
1,346

Aircraft manufacturing revenue increased primarily from the initial deliveries of the new large-cabin G600 aircraft, which entered into service in the third quarter of 2019, and additional deliveries of the large-cabin G500 aircraft, which entered into service in the third quarter of 2018. The increase in aircraft services and completions revenue was driven by higher demand for maintenance work and the acquisition in the second quarter of 2018 of Hawker Pacific, a leading provider of aircraft services across the Asia-Pacific region and the Middle East. Additionally, we had fifteen pre-owned aircraft sales in 2019 compared with seven in 2018.
The increase in the segment’s operating earnings in 2019 consisted of the following:
Aircraft manufacturing
$
50

Aircraft services and completions
38

Pre-owned aircraft
(13
)
G&A/other expenses
(33
)
Total increase
$
42

Aircraft manufacturing operating earnings were up due to additional deliveries in 2019, driven by the introduction into service of the G600 and increased production of the G500. The growth in revenue outpaced the earnings growth due to lower margins associated with the G500, which are typical of a new aircraft model. We expect the operating margins associated with both the G500 and G600 to increase over time as manufacturing learning curve improvements are achieved.
Net G&A/other expenses were up in 2019 due to nonrecurring costs associated with a reduction in our employee workforce in the fourth quarter of 2019 related primarily to streamlining support and administrative functions. This increase was offset partially by lower R&D expense in 2019, which has been trending downward 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. In total, the Aerospace segment’s operating margin decreased 200 basis points to 15.6%.

31



2020 Outlook
We expect the Aerospace segment’s 2020 revenue to be around $10 billion with operating margin in the 15.7% to 15.8% range.
COMBAT SYSTEMS
Year Ended December 31
2019
 
2018
 
Variance
Revenue
$
7,007

 
$
6,241

 
$
766

 
12.3
%
Operating earnings
996

 
962

 
34

 
3.5
%
Operating margin
14.2
%
 
15.4
%
 
 

 
 

Operating Results
The increase in the Combat Systems segment’s revenue in 2019 consisted of the following:
U.S. military vehicles
$
480

Weapons systems and munitions
228

International military vehicles
58

Total increase
$
766

Revenue was up across the Combat Systems segment in 2019. Revenue from U.S. military vehicles increased due primarily to higher volume on the Army’s Abrams M1A2 System Enhancement Package Version 3 (SEPv3) tank and new Mobile Protected Firepower (MPF) vehicle programs. Weapons systems and munitions revenue was up from increased volume on several products, including Hydra-70 rockets and other artillery for the Army and missile subcomponents. Revenue from international military vehicles increased on higher tank program volume.
The Combat Systems segment’s operating margin decreased 120 basis points compared with 2018 driven by new contracts with initially lower margins in our U.S. military vehicles business and an unfavorable settlement in the first quarter of 2019 relating to a lease at a former operating site outside the United States.
2020 Outlook
We expect the Combat Systems segment’s 2020 revenue to be about $7.3 billion with operating margin of approximately 14.3%.
INFORMATION TECHNOLOGY
Year Ended December 31
2019
 
2018
 
Variance
Revenue
$
8,422

 
$
8,269

 
$
153

 
1.9
%
Operating earnings
628

 
608

 
20

 
3.3
%
Operating margin
7.5
%
 
7.4
%
 
 
 
 

32



Operating Results
The increase in the Information Technology segment’s revenue in 2019 consisted of the following:
Defense
$
311

Federal civilian
(97
)
Intelligence and homeland security
(61
)
Total increase
$
153

Revenue increased due to an additional quarter of CSRA volume as the business was acquired in the second quarter of 2018. This increase was offset partially by lower revenue in our federal civilian business as a result of the sale of the segment’s public-facing contact-center business in the fourth quarter of 2018 and other portfolio shaping following the CSRA acquisition. Revenue in our intelligence and homeland security business was lower due to the timing of completion of several legacy programs in 2018 versus the start-up of new programs. Operating margin increased 10 basis points compared with 2018 due largely to acquisition-related synergies.
2020 Outlook
We expect the Information Technology segment’s 2020 revenue to be between $8.4 and $8.5 billion with operating margin of approximately 7.6%.
MISSION SYSTEMS
Year Ended December 31
2019
 
2018
 
Variance
Revenue
$
4,937

 
$
4,726

 
$
211

 
4.5
%
Operating earnings
683

 
659

 
24

 
3.6
%
Operating margin
13.8
%
 
13.9
%
 
 
 
 
Operating Results
The increase in the Mission Systems segment’s revenue in 2019 consisted of the following:
Naval, air and electronic systems
$
137

Ground systems and products
58

Space, intelligence and cyber systems
16

Total increase
$
211

Revenue was up across the Mission Systems segment in 2019. Increased volume on combat and seaframe control systems for the U.S. Navy’s Independence-variant Littoral Combat Ships (LCSs) and fire-control systems for the Navy’s submarine programs drove the increase in the naval, air and electronic systems business. Ground systems and products revenue was up due to higher demand for computing and communications equipment. The Mission Systems segment’s operating margin decreased slightly in 2019 due primarily to mix.
2020 Outlook
We expect the Mission Systems segment’s 2020 revenue to be between $5 and $5.1 billion with operating margin of approximately 14.1%.

33



MARINE SYSTEMS
Year Ended December 31
2019
 
2018
 
Variance
Revenue
$
9,183

 
$
8,502

 
$
681

 
8.0
%
Operating earnings
785

 
761

 
24

 
3.2
%
Operating margin
8.5
%
 
9.0
%
 
 
 
 
Operating Results
The increase in the Marine Systems segment’s revenue in 2019 consisted of the following:
U.S. Navy ship construction
$
717

U.S. Navy ship engineering, repair and other services
68

Commercial ship construction
(104
)
Total increase
$
681

Revenue from U.S. Navy ship construction was up due to higher volume on Block V of the Virginia-class submarine program, the Columbia-class submarine program and the Arleigh Burke-class (DDG-51) destroyer program, offset somewhat by lower Virginia-class Block III volume. Revenue from U.S. Navy ship engineering, repair and other services increased driven by a higher volume of surface ship repair work. These increases were offset partially by lower commercial ship construction volume at our NASSCO shipyard.
The Marine Systems segment’s operating margin decreased 50 basis points in 2019 due primarily to mix shift in our submarine and auxiliary ship workloads to newer contracts with lower initial margins.
2020 Outlook
We expect the Marine Systems segment’s 2020 revenue to be approximately $9.8 billion with operating margin of around 8.6%.
CORPORATE
Corporate operating results consisted of the following:
Year Ended December 31
2019
 
2018
Operating income (expense)
$
24

 
$
(23
)
Corporate operating results in 2018 included one-time transaction-related charges of approximately $45 associated with the costs to complete the CSRA acquisition. Excluding these charges, Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense.
We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) in other income (expense) in the Consolidated Statement of Earnings. In our defense segments, pension and other post-retirement benefit costs are recoverable contract costs. Therefore, the non-service cost components are included in the operating results of these segments, but an offset is reported in Corporate. This amount exceeded our stock option expense in 2019 and 2018.


34



OTHER INFORMATION
PRODUCT AND SERVICE REVENUE AND OPERATING COSTS
Year Ended December 31
2019
 
2018
 
Variance
Revenue:
 
 
 
 
 
 
 
Products
$
23,130

 
$
20,149

 
$
2,981

 
14.8
%
Services
16,220

 
16,044

 
176

 
1.1
%
Operating Costs:
 
 
 
 
 
 
 
Products
$
(18,569
)
 
$
(15,894
)
 
$
(2,675
)
 
16.8
%
Services
(13,722
)
 
(13,584
)
 
(138
)
 
1.0
%
The increase in product revenue in 2019 consisted of the following:
Aircraft manufacturing
$
1,120

Ship construction
609

Military vehicle production
473

C4ISR products*
327

Weapons systems and munitions
228

Other, net
224

Total increase
$
2,981

* C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions in our Mission Systems segment
Aircraft manufacturing revenue increased due primarily to the initial deliveries of the new large-cabin G600 aircraft and additional deliveries of the large-cabin G500 aircraft. Ship construction revenue increased due to higher volume on Block V of the Virginia-class submarine program, the Columbia-class submarine program and the DDG-51 destroyer program, offset a bit by lower commercial ship construction volume. Military vehicle production revenue increased due primarily to higher volume on the U.S. Army’s Abrams SEPv3 tank and new MPF vehicle programs. C4ISR products revenue was up due primarily to increased volume on combat and seaframe control systems for U.S. Navy surface ships and computing and communications equipment. Product operating costs increased at a higher rate than revenue due primarily to mix changes from mature programs to new production programs.
The increase in service revenue in 2019 consisted of the following:
IT services
$
153

Other, net
23

Total increase
$
176

IT services revenue increased due to the CSRA acquisition in the second quarter of 2018, offset partially by the sale of a public-facing contact-center business in our Information Technology segment in the fourth quarter of 2018. Service operating costs increased consistent with the change in volume described above.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.1% in 2019 and 6.2% in 2018. We expect G&A expenses as a percentage of revenue in 2020 to be generally consistent with 2019.

35



INTEREST, NET
Net interest expense was $460 in 2019 and $356 in 2018. The increase was 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 to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including interest rates. We expect 2020 net interest expense to be approximately $410, reflecting our next scheduled debt maturity of $2.5 billion in the second quarter of 2020.
OTHER, NET
Net other income was $14 in 2019 compared with expense of $16 in 2018. The 2018 expense included approximately $30 of transaction costs associated with the CSRA acquisition. Excluding these transaction costs, other represents primarily the non-service cost components of pension and other post-retirement benefits, which were net income items in both periods.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 17.1% in 2019 and 17.8% in 2018. The decrease in our effective tax rate in 2019 is due primarily to increased R&D tax credits and favorable 2019 regulatory developments associated with implementing the Tax Cuts and Jobs Act (tax reform), which was enacted on December 22, 2017, and was generally effective in 2018. For further discussion, including a reconciliation of our effective tax rate from the statutory federal rate, see Note F to the Consolidated Financial Statements in Item 8. For 2020, we anticipate a full-year effective tax rate of approximately 17.5%.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
CHART-2D19C84F9BC7517A925.JPG
Our total backlog, including funded and unfunded portions, was $86.9 billion on December 31, 2019, up 28.1% from $67.9 billion at the end of 2018. Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note C to the Consolidated Financial Statements in Item 8. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $126.2 billion on December 31, 2019, up 22.1% from $103.4 billion at the end of 2018.

36




AEROSPACE
CHART-15FBE110DC0553F484F.JPG
Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace segment ended 2019 with backlog of $13.3 billion compared with $11.4 billion at year-end 2018.
Orders in 2019 reflected strong demand across our product and services portfolio. We received orders for all models of Gulfstream aircraft, including additional orders for the G500, G600 and G650 aircraft and strong order activity for the new G700 aircraft, which is scheduled to enter service in 2022. The segment’s book-to-bill ratio (orders divided by revenue) was 1.23-to-1 in 2019.
Beyond total backlog, estimated potential contract value represents primarily options and other agreements with existing customers to purchase new aircraft and long-term aircraft services agreements. On December 31, 2019, estimated potential contract value in the Aerospace segment was $3 billion compared with $3.1 billion at year-end 2018.
Demand for Gulfstream aircraft remains strong across customer types and geographic regions, generating orders from public and privately held companies, individuals, and governments around the world. Geographically, U.S. customers represented more than 50% of the segment’s orders in 2019 and approximately 45% of the segment’s backlog on December 31, 2019, demonstrating continued strong domestic demand.

DEFENSE SEGMENTS
Our total estimated contract value in our defense segments is comprised of the following components:
Total backlog represents the estimated remaining sales value of work to be performed under firm contracts.
The funded portion of total backlog includes items that have been authorized and appropriated by the U.S. Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments.

37



The unfunded portion of total backlog includes the amounts that we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.
Estimated potential contract value includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.
Total backlog in our defense segments was $73.6 billion on December 31, 2019, up 30.3% from $56.5 billion at the end of 2018 driven by the award of Block V of the Virginia-class submarine program from the U.S. Navy for the construction of nine submarines. Estimated potential contract value in our defense segments was $36.3 billion on December 31, 2019, up 12% from $32.4 billion at year-end 2018.
COMBAT SYSTEMS
CHART-286643A6C7CF5952911.JPG
The Combat Systems segment’s total backlog was $14.9 billion at the end of 2019, compared with $16.6 billion at year-end 2018 as the segment continued to perform on many long-term contracts awarded in prior years. The segment’s backlog includes the work remaining on two significant multi-year contracts awarded in 2014:
$3.5 billion to provide wheeled armored vehicles and logistics support to an international customer through 2024.
$2.6 billion from the U.K Ministry of Defence to produce AJAX armored fighting vehicles scheduled for delivery to the British Army through 2024 and related in-service support.

38



The segment has a variety of additional international military vehicle production programs in backlog, notably:
$1.3 billion from the Canadian government to produce armored combat support vehicles (ACSVs) and provide associated support services.
$525 to produce Piranha armored vehicles for several non-U.S. customers, including $215 to produce more than 300 armored personnel carriers for the Danish Defense Acquisition and Logistics Organization.
$310 for LAVs for several non-U.S. customers, including $155 for the upgrade and modernization of LAV III combat vehicles for the Canadian Army.
$195 to upgrade Duro tactical vehicles for the Swiss government.
One of the U.S. Army’s top priorities is readiness of its platform products through critical modernization efforts, including upgrades for both the Abrams main battle tank and Stryker wheeled combat-vehicle programs. These initiatives generated significant order activity for the segment in 2019.
The segment received $875 of orders for Abrams main battle tank modernization, upgrade and sustainment programs for the U.S. Army and U.S. partners in 2019, ending the year with backlog of $2.3 billion. For the Army, backlog included $1.4 billion to produce M1A2 SEPv3 tanks, deliver M1A2 SEP components, and provide associated program support, and $260 to design and develop SEPv4 prototypes with upgraded sensors. Backlog included $475 to modernize Abrams main battle tanks for U.S. partners. An additional $250 for Abrams tank programs is included in our estimated potential contract value at year end.
The Army’s Stryker wheeled combat-vehicle program represented $525 of the segment’s backlog on December 31, 2019, with vehicles scheduled for delivery through 2021. The segment received $400 of Stryker orders in 2019, including awards to upgrade vehicles with integrated short-range air defense capabilities and provide support and engineering services.
The backlog at year end also included $185 to develop and deliver 12 prototype vehicles for the Mobile Protected Firepower (MPF) program, which will increase the firepower for the Army’s Infantry Brigade Combat Teams (IBCTs).
The Combat Systems segment’s backlog on December 31, 2019, also included $2.7 billion for weapons systems and munitions programs, including $210 to produce Hydra-70 rockets for the Army.
The segment’s estimated potential contract value was $4.3 billion on December 31, 2019, up slightly from $4.2 billion at year-end 2018.

39



INFORMATION TECHNOLOGY
CHART-E4B0946CAB815E6D974.JPG
The Information Technology segment’s backlog consists of thousands of contracts and task orders, and approximately 15-20% of its portfolio is recompeted each year. The segment’s total backlog was $9.1 billion at the end of 2019, up 14.7% from $8 billion at year-end 2018. This amount does not include $19 billion of estimated potential contract value associated with its anticipated share of IDIQ contracts and unexercised options on December 31, 2019, an increase of 11.4% from year-end 2018. Funding from IDIQ contracts and exercised options added $5.7 billion to the segment’s backlog in 2019, approximately 60% of the segment’s orders.
In 2019, the segment achieved a book-to-bill ratio of 1-to-1 or higher for the fifth consecutive year driven by several significant contract awards during the year, including the following:
$1 billion from the U.S. Department of State to provide global security engineering and supply chain management services. The program has a maximum potential contract value of over $2 billion.
$330 to provide operations and maintenance support services for a Department of Homeland Security (DHS) data center.
$230 from the National Geospatial-Intelligence Agency (NGA) for network storage and data center services.
$215 from the U.S. Department of State to provide business process support services for the Bureau of Consular Affairs’ Global Support Strategy (GSS) program for visa services.
$170 from the U.S. Air Force for the Battlefield Information Collection and Exploitation System (BICES) program to provide information sharing support to coalition operations.
The segment’s backlog at year-end 2019 also included the following key programs:
$1.1 billion to support the operations and enhancement of several state health insurance programs, along with an additional $420 of estimated potential contract value. The segment received $885 of orders for these programs during the year.

40



$830 to provide classified IT infrastructure services to an agency of the Department of Defense (DoD) with an additional $1.1 billion of estimated potential contract value remaining.
$130 to provide turnkey training and simulation services for the U.S. Army’s Aviation Center of Excellence in Fort Rucker, Alabama. An additional $370 of estimated potential contract value remains under the contract.
MISSION SYSTEMS
CHART-308741E5CAE150B7A13.JPG
The Mission Systems segment’s backlog consists of thousands of contracts and task orders. The segment’s total backlog was $5.4 billion at the end of 2019, up slightly from $5.3 billion at year-end 2018. This amount does not include $7.5 billion of estimated potential contract value associated with its anticipated share of IDIQ contracts and unexercised options on December 31, 2019. Funding of IDIQ contracts and exercised options added $2.3 billion to the segment’s backlog in 2019, over 45% of the segment’s orders.
In 2019, the segment achieved a book-to-bill ratio of 1-to-1 or higher for the fifth consecutive year driven by several significant contract awards during the year, including the following:
$530 from the U.S. Army for computing and communications equipment under the CHS-5 program. $1.7 billion of estimated potential contract value remains under this IDIQ contract.
$185 from the Army for its mobile communications network.
$150 for design and logistics services to sustain the United Kingdom’s legacy Bowman tactical communication and information system.
The segment’s backlog at year-end 2019 also included the following key programs:
$735 for the Canadian Maritime Helicopter Project (MHP) to provide integrated mission systems, training and support for Canadian marine helicopters.
$495 for combat and seaframe control systems for the U.S. Navy’s Independence-variant LCSs.
$250 to provide fire-control system modifications for ballistic-missile (SSBN) submarines.
$155 to design and develop the next-generation tactical communication and information system in the initial phase of the United Kingdom’s Morpheus program.

41



MARINE SYSTEMS 
CHART-25A4F7FEEE5755CCB8B.JPG
The Marine Systems segment’s backlog consists of very long-term submarine and surface ship construction programs, as well as numerous engineering and repair contracts. The segment’s book-to-bill ratio was 2.9-to-1 in 2019, resulting in backlog growth of 66.1% from $26.6 billion at year-end 2018 to $44.2 billion at the end of 2019. Estimated potential contract value was $5.5 billion on December 31, 2019, up 47.3% from $3.7 billion at year-end 2018. The increases in backlog and estimated potential contract value are due primarily to the award of Block V of the Virginia-class submarine program.
The Virginia-class submarine program was the company’s largest defense program in 2019 and the largest program in the company’s backlog. Backlog for the Virginia-class submarine program increased $18.1 billion from year-end 2018 driven by a $22.2 billion contract from the Navy in the fourth quarter of 2019 for the construction of nine submarines in Block V of the program and spare materials. The contract includes $3.2 billion of previously-awarded orders for advance materials, resulting in a net increase to backlog of $19 billion. The contract includes an option for a tenth submarine that if exercised would bring the total contract value to $24.1 billion.
For the Columbia-class ballistic-missile submarine, we are the designer and builder. The Navy considers this its top-priority program. Backlog on December 31, 2019, included $5 billion for design and prototype development, advance construction, and long-lead materials procurement. Construction of the lead boat is scheduled to begin in the fourth quarter of 2020.
The Marine Systems segment’s backlog on December 31, 2019, included construction of ESB auxiliary support ships. The segment has delivered five ships in the program, and construction is underway on the sixth ship. In 2019, the segment received a $1.1 billion award from the Navy for the design and construction of the sixth and seventh ships and an option totaling approximately $550 for an additional ship.

42



On December 31, 2019, the Marine Systems segment’s backlog included the following major ship construction programs:
Program
Backlog (in Billions)
 
Number of Ships
 
Delivery Date of Final Ship in Backlog
Virginia-class submarine
$
26.9

 
19
 
2029
DDG-51 destroyer
7.0

 
11
 
2026
T-AO-205 fleet replenishment oiler
1.4

 
5
 
2024
ESB auxiliary support ship
1.0

 
2
 
2023
Complementing these ship construction programs, ship and submarine maintenance, repair and other services represented approximately $1.5 billion of the Marine Systems segment’s backlog on December 31, 2019, including $1.2 billion for surface-ship repair operations.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We place a strong emphasis on cash flow generation. This focus gives us the flexibility for capital deployment while preserving a strong balance sheet to position us for future opportunities. Cash generated by operating activities in 2019 and 2018 was deployed to pay dividends, fund capital expenditures and business acquisitions, and repurchase our common stock.
Year Ended December 31
2019
 
2018
Net cash provided by operating activities
$
2,981

 
$
3,148

Net cash used by investing activities
(994
)
 
(10,234
)
Net cash (used) provided by financing activities
(1,997
)
 
5,086

Net cash used by discontinued operations
(51
)
 
(20
)
Net decrease in cash and equivalents
(61
)
 
(2,020
)
Cash and equivalents at beginning of year
963

 
2,983

Cash and equivalents at end of year
902

 
963

Short- and long-term debt
(11,930
)
 
(12,417
)
Net debt
$
(11,028
)
 
$
(11,454
)
Debt-to-equity (a)
87.9
%
 
105.8
%
Debt-to-capital (b)
46.8
%
 
51.4
%
(a)
Debt-to-equity ratio is calculated as total debt divided by total equity as of year end.
(b)
Debt-to-capital ratio is calculated as total debt divided by the sum of total debt plus total equity as of year end.
We expect to continue to generate funds in excess of our short- and long-term liquidity needs. We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy. The following is a discussion of our major operating, investing and financing activities in 2019 and 2018, as classified on the Consolidated Statement of Cash Flows in Item 8.


43



OPERATING ACTIVITIES
We generated cash from operating activities of $3 billion in 2019 and $3.1 billion in 2018. The primary driver of cash inflows in both years was net earnings. However, cash flows in both years were affected negatively by growth in operating working capital (OWC), particularly the timing of payments on a large international wheeled armored vehicle contract in our Combat Systems segment. For additional information about the growth in our unbilled receivables balance, see Note H to the Consolidated Financial Statements in Item 8. Cash flows in 2019 were also affected negatively by net OWC growth in our Aerospace segment driven by our position in the development, production and cash collection cycles of our Gulfstream aircraft models. Additionally, cash flows in 2018 reflected a discretionary pension plan contribution of $255.

INVESTING ACTIVITIES
Cash used for investing activities was $994 in 2019 and $10.2 billion in 2018. Our investing activities include cash paid for capital expenditures and business acquisitions; proceeds from asset sales; and purchases, sales and maturities of marketable securities.
Capital Expenditures. The primary use of cash for investing activities in 2019 was capital expenditures. Capital expenditures were $987 in 2019 and $690 in 2018. The increase reflects ongoing investments to support growth at our shipyards. We expect capital expenditures to be approximately 2.5% of revenue in 2020.
Business Acquisitions. In 2019, we acquired three businesses for an aggregate of approximately $20. In 2018, we acquired six businesses for an aggregate of $10.1 billion, including $9.7 billion for CSRA.
Other, Net. Investing activities also include proceeds from asset sales. In 2019, we completed the sale of a business in our Information Technology segment that was classified as held for sale on the Consolidated Balance Sheet on December 31, 2018. In 2018, we completed the sale of three businesses in our Information Technology 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.

FINANCING ACTIVITIES
Cash used by financing activities was $2 billion in 2019 compared with cash provided by financing activities of $5.1 billion in 2018. Our financing activities include payment of dividends, repurchases of common stock, and debt and commercial paper repayments. Net cash from financing activities also includes proceeds received from debt and commercial paper issuances and employee stock options exercises.
Dividends. On March 6, 2019, our board of directors declared an increased quarterly dividend of $1.02 per share, the 22nd consecutive annual increase. Previously, the board had increased the quarterly dividend to $0.93 per share in March 2018. Cash dividends paid were $1.2 billion in 2019 and $1.1 billion in 2018.
Share Repurchases. Our board of directors from time to time authorizes management’s repurchase of outstanding shares of our common stock on the open market. We repurchased 1.1 million of our outstanding shares for $184 in 2019 and 10.1 million shares for $1.8 billion in 2018. On December 31, 2019, 6.4 million shares remained authorized by our board of directors for repurchase, approximately 2% of our total shares outstanding.

44



Debt and Commercial Paper Issuances and Repayments. In 2019, we repaid $850 of commercial paper, resulting in no commercial paper outstanding on December 31, 2019, but we maintain the ability to access the commercial paper market in the future. In 2018, we issued $7.5 billion of fixed- and floating-rate notes to finance the acquisition of CSRA. Additionally, in 2018, we paid $450 to satisfy obligations under CSRA’s accounts receivable purchase agreement.
Fixed- and floating-rate notes totaling $2.5 billion mature in May 2020. We currently plan to repay these notes using a combination of cash on hand and the issuance of commercial paper. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, and our credit facilities, see Note K to the Consolidated Financial Statements in Item 8.
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 2020, a $1 billion multi-year facility expiring in November 2020 and a $2 billion multi-year facility expiring in March 2023. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. Our credit facilities are guaranteed by several of our 100%-owned subsidiaries. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

NON-GAAP FINANCIAL MEASURES
We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations and return on invested capital (ROIC) to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures.
Free Cash Flow. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the Consolidated Statement of Cash Flows in Item 8:
Year Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
Net cash provided by operating activities
$
2,981

 
$
3,148

 
$
3,876

 
$
2,163

 
$
2,607

Capital expenditures
(987
)
 
(690
)
 
(428
)
 
(392
)
 
(569
)
Free cash flow from operations
$
1,994

 
$
2,458

 
$
3,448

 
$
1,771

 
$
2,038

Cash flows as a percentage of earnings
   from continuing operations:
 
 
 
 
 
 
 
 
 
   Net cash provided by operating activities
86
%
 
94
%
 
133
%
 
81
%
 
86
%
   Free cash flow from operations
57
%
 
73
%
 
118
%
 
66
%
 
67
%


45



Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as earnings from continuing operations plus after-tax interest and amortization expense, calculated using the statutory federal income tax rate. Average invested capital is defined as the sum of the average debt and shareholders’ equity excluding accumulated other comprehensive loss. ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of company performance.
ROIC is calculated as follows:
Year Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
Earnings from continuing operations
$
3,484

 
$
3,358

 
$
2,912

 
$
2,679

 
$
3,036

After-tax interest expense
373

 
295

 
76

 
64

 
64

After-tax amortization expense
287

 
258

 
51

 
57

 
75

Net operating profit after taxes
$
4,144

 
$
3,911

 
$
3,039

 
$
2,800

 
$
3,175

Average invested capital
$
29,620

 
$
25,367

 
$
18,099

 
$
17,168

 
$
17,579

Return on invested capital
14.0
%
 
15.4
%
 
16.8
%
 
16.3
%
 
18.1
%

ADDITIONAL FINANCIAL INFORMATION
OFF-BALANCE SHEET ARRANGEMENTS
On December 31, 2019, we had no material off-balance sheet arrangements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present information about our contractual obligations and commercial commitments on December 31, 2019:
 
 
 
Payments Due by Period
Contractual Obligations
Total Amount Committed
 
Less Than 1 Year
 
1-3 Years
 
4-5 Years
 
More Than 5 Years
Debt (a)
$
13,504

 
$
3,229

 
$
4,424

 
$
2,017

 
$
3,834

Operating leases
1,864

 
302

 
473

 
299

 
790

Finance leases
443

 
91

 
166

 
55

 
131

Purchase obligations (b)
43,187

 
19,598

 
16,610

 
5,183

 
1,796

Other long-term liabilities (c)
26,019

 
5,167

 
3,053

 
2,608

 
15,191

 
$
85,017

 
$
28,387

 
$
24,726

 
$
10,162

 
$
21,742

(a)Includes scheduled interest payments. See Note K to the Consolidated Financial Statements in Item 8 for a discussion of long-term debt.
(b)Includes amounts committed under legally enforceable agreements for goods and services with defined terms as to quantity, price and timing of delivery. This amount includes $34.8 billion of purchase obligations for products and services to be delivered under firm government contracts under which we would expect full recourse under normal contract termination clauses.
(c)Represents other long-term liabilities on our Consolidated Balance Sheet, including the current portion of these liabilities. The projected timing of cash flows associated with these obligations is based on management’s estimates, which are based largely on historical experience. This amount also includes all liabilities under our defined-benefit retirement plans. See Note R to the Consolidated Financial Statements in Item 8 for information regarding these liabilities and the plan assets available to satisfy them.

46



 
 
 
Amount of Commitment Expiration by Period
Commercial Commitments
Total Amount Committed
 
Less Than 1 Year
 
1-3 Years
 
4-5 Years
 
More Than 5 Years
Letters of credit and guarantees*
$
1,463

 
$
861

 
$
249

 
$
324

 
$
29

Aircraft trade-in options*
380

 
65

 
148

 
167

 

 
$
1,843

 
$
926

 
$
397

 
$
491

 
$
29

* See Note O to the Consolidated Financial Statements in Item 8 for a discussion of letters of credit and aircraft trade-in options.

APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates including most pervasively those related to various assumptions and projections for our long-term contracts and programs. Other significant estimates include those related to goodwill and intangible assets, income taxes, pension and other post-retirement benefits, workers’ compensation, warranty obligations and litigation contingencies. We employ judgment in making our estimates, but they are based on historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. We believe our judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented.
In our opinion, the following policies are critical and require the use of significant judgment in their application:
Revenue. 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. Our performance obligations are satisfied over time as work progresses or at a point in time.
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.
The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.
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

47



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. The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by $271 ($0.74) in 2019 and $345 ($0.91) in 2018. No adjustment on any one contract was material to our Consolidated Financial Statements in 2019 or 2018.
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. 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. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
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 asset 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 asset over its estimated fair value as determined by discounted projected cash flows.
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%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. Our reporting units are consistent with our operating segments in Note S to the Consolidated Financial Statements in Item 8. 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

48



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 use a two-step process to first identify potential goodwill impairment for a reporting unit by comparing its fair value to its carrying value and then, if necessary, measure the amount of the impairment loss.
Our estimate of fair value is based primarily on the discounted projected cash flows of the underlying operations and requires the use of judgment by management. The process requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal value growth rates applied to the final year of projected cash flows. Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis. To assess the reasonableness of our discounted projected cash flows, we compare the sum of our reporting units’ fair value to our market capitalization and calculate an implied control premium (the excess of the market capitalization over the sum of the reporting units’ fair values). Additionally, we evaluate the reasonableness of each reporting unit’s fair value by comparing the fair value to comparable peer companies and recent comparable market transactions.
As of December 31, 2019, we completed qualitative assessments for our Aerospace, Combat Systems, Mission Systems and Marine 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 did not present indicators of impairment for these reporting units as of December 31, 2019.
As of December 31, 2019, we completed a quantitative assessment for our Information Technology reporting unit, and the results indicated that no impairment existed. The Information Technology reporting unit’s estimated fair value exceeded its carrying value by approximately 25%, reflecting the size of the CSRA acquisition relative to the Information Technology reporting unit and its recent acquisition date. Given that the net book value of this business was recorded at its fair value at the acquisition date in 2018, the reporting unit’s carrying value, by default, continues to closely approximate its fair value as of December 31, 2019. As the carrying value and fair value of the Information Technology reporting unit are closely aligned, a material change in the fair value or carrying value could put the reporting unit at risk of goodwill impairment. For example, if the synergies from the acquisition or funding in the U.S. government budget for our contracts fall significantly below our projections, the fair value of the reporting unit would be negatively impacted. Similarly, an increase in interest rates would lower our discounted cash flows and negatively impact the fair value of the reporting unit. We believe the projections and assumptions we used in estimating fair value are reasonable, but it is possible actual experience could differ, impacting our fair value estimate.
Commitments and Contingencies. We are subject to litigation and other legal proceedings arising either from the normal course of business or under provisions relating to the protection of the environment. Estimating liabilities and costs associated with these matters requires the use of judgment. We record a charge against earnings when a liability associated with claims or pending or threatened litigation is probable and when our exposure is reasonably estimable. The ultimate resolution of our exposure related to these matters may change as further facts and circumstances become known.

49



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. This assessment requires that we make assumptions about future contract costs, the extent of cost recovery under our contracts and the amount of future contract activity. These estimates are based on our best judgment. 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.
Retirement Plans. Our defined-benefit pension and other post-retirement benefit costs and obligations depend on several assumptions and estimates. The key assumptions include interest rates used to discount estimated future liabilities and projected long-term rates of return on plan assets. 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 use the spot rate approach to identify individual spot rates along the yield curve that correspond with the timing of each projected service cost and discounted benefit obligation payment.
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. For 2019, we decreased the expected long-term rates of return on assets in our primary U.S. other post-retirement benefit plans by 100 basis points, following an assessment of the historical and expected long-term returns of our various asset classes.
These retirement plan assumptions are based on our best judgment, including consideration of current and future market conditions. In the event any of the assumptions change, pension and other post-retirement benefit cost could increase or decrease. For further discussion about our retirement plan assumptions, see Note R to the Consolidated Financial Statements in Item 8.
As discussed under Other Contract Costs, our contractual arrangements with the U.S. government provide for the recovery of benefit costs for our government retirement plans. We have elected to defer recognition of the benefit costs until such costs can be allocated to contracts. Therefore, the impact of annual changes in financial reporting assumptions on the retirement benefit cost for these plans does not immediately affect our operating results.
Accounting Standards Updates. See Note A to the Consolidated Financial Statements in Item 8 for information regarding accounting standards we adopted in 2019 and other new accounting standards that have been issued by the Financial Accounting Standards Board (FASB) but are not effective until after December 31, 2019.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. See Note N to the Consolidated Financial Statements in Item 8 for a discussion of these risks. The following quantifies the market risk exposure arising from hypothetical changes in foreign currency exchange rates and interest rates.

50



We had notional forward exchange and interest rate swap contracts outstanding of $5 billion and $5.8 billion on December 31, 2019 and 2018, respectively. A 10% unfavorable rate movement in our portfolio of forward exchange and interest rate swap contracts would have resulted in the following hypothetical, incremental pretax gains (losses):
(Dollars in millions)
2019
 
2018
Recognized
$
60

 
$
61

Unrecognized
(161
)
 
(135
)
Foreign Currency Risk. Our exchange-rate sensitivity relates primarily to changes in the Canadian dollar, euro, Swiss franc and British pound exchange rates. These losses and gains would be offset by corresponding gains and losses in the remeasurement of the underlying transactions being hedged. We believe these foreign currency forward exchange contracts and the offsetting underlying commitments, when taken together, do not create material market risk.
Interest Rate Risk. Our financial instruments subject to interest rate risk include variable-rate commercial paper and fixed- and floating-rate long-term debt obligations. On December 31, 2019, we had $10.5 billion par value of fixed-rate debt and $1 billion of floating-rate notes. Our fixed-rate debt obligations are not putable, and we do not trade these securities in the market. A 10% unfavorable interest rate movement would not have a material impact on the fair value of our fixed-rate debt. As described in Note K to the Consolidated Financial Statements in Item 8, we entered into derivative financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest risk.
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, 2019, we held $902 in cash and equivalents, but held no marketable securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified supplemental executive retirement plans. On December 31, 2019, these marketable securities totaled $207 and were reflected at fair value on the Consolidated Balance Sheet in other current and noncurrent assets.

51



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENT OF EARNINGS

 
Year Ended December 31
(Dollars in millions, except per-share amounts)
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Products
$
23,130

 
$
20,149

 
$
19,016

Services
16,220

 
16,044

 
11,957

 
39,350

 
36,193

 
30,973

Operating costs and expenses:
 
 
 
 
 
Products
(18,569
)
 
(15,894
)
 
(14,773
)
Services
(13,722
)
 
(13,584
)
 
(9,958
)
General and administrative (G&A)
(2,411
)
 
(2,258
)
 
(2,006
)
 
(34,702
)
 
(31,736
)
 
(26,737
)
Operating earnings
4,648

 
4,457

 
4,236

Interest, net
(460
)
 
(356
)
 
(103
)
Other, net
14

 
(16
)
 
(56
)
Earnings from continuing operations before income tax
4,202

 
4,085

 
4,077

Provision for income tax, net
(718
)
 
(727
)
 
(1,165
)
Earnings from continuing operations
3,484

 
3,358

 
2,912

Discontinued operations, net of tax provision of $13 in 2018

 
(13
)
 

Net earnings
$
3,484

 
$
3,345

 
$
2,912

 
 
 
 
 
 
Earnings per share
 
 
 
 
 
Basic:
 
 
 
 
 
Continuing operations
$
12.09

 
$
11.37

 
$
9.73

Discontinued operations