GD-2012.09.30 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3671

GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-1673581
State or other jurisdiction of incorporation or organization
 
I.R.S. employer identification no.
 
 
 
2941 Fairview Park Drive, Suite 100
Falls Church, Virginia
 
22042-4513
Address of principal executive offices
 
Zip code
(703) 876-3000
Registrant’s telephone number, including area code
    
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ü Accelerated Filer __ Non-Accelerated Filer __ Smaller Reporting Company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü
353,069,806 shares of the registrant’s common stock, $1 par value per share, were outstanding on September 30, 2012.



INDEX

 
 
 
PART I -
PAGE
Item 1 -
 
 
 
 
 
 
Item 2 -
Item 3 -
Item 4 -
 
PART II -
Item 1 -
Item 1A -
Item 2 -
Item 4 -
Item 6 -
 
            



PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
October 2, 2011
 
September 30, 2012
Revenues:
 
 
 
Products
$
5,070

 
$
4,967

Services
2,783

 
2,967

 
7,853

 
7,934

Operating costs and expenses:
 
 
 
Products
3,991

 
4,012

Services
2,372

 
2,507

General and administrative
492

 
510

 
6,855

 
7,029

Operating earnings
998

 
905

Interest, net
(38
)
 
(39
)
Other, net
(8
)
 
(3
)
Earnings before income taxes
952

 
863

Provision for income taxes, net
287

 
263

Earnings from continuing operations
665

 
600

Discontinued operations, net of tax
(13
)
 
—

Net earnings
$
652

 
$
600

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
1.84

 
$
1.71

Discontinued operations
(0.03
)
 
—

Net earnings
$
1.81

 
$
1.71

Diluted:
 
 
 
Continuing operations
$
1.83

 
$
1.70

Discontinued operations
(0.03
)
 
—

Net earnings
$
1.80

 
$
1.70

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


3

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

 
Nine Months Ended
(Dollars in millions, except per-share amounts)
October 2, 2011
 
September 30, 2012
Revenues:
 
 
 
Products
$
15,186

 
$
14,672

Services
8,344

 
8,763

 
23,530

 
23,435

Operating costs and expenses:
 
 
 
Products
12,005

 
11,712

Services
7,143

 
7,418

General and administrative
1,506

 
1,570

 
20,654

 
20,700

Operating earnings
2,876

 
2,735

Interest, net
(103
)
 
(115
)
Other, net
34

 
(8
)
Earnings before income taxes
2,807

 
2,612

Provision for income taxes, net
858

 
814

Earnings from continuing operations
1,949

 
1,798

Discontinued operations, net of tax
(26
)
 
—

Net earnings
$
1,923

 
$
1,798

 
 
 
 
Earnings per share
 
 
 
Basic:
 
 
 
Continuing operations
$
5.31

 
$
5.08

Discontinued operations
(0.07
)
 
—

Net earnings
$
5.24

 
$
5.08

Diluted:
 
 
 
Continuing operations
$
5.26

 
$
5.04

Discontinued operations
(0.07
)
 
—

Net earnings
$
5.19

 
$
5.04

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



4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
(Dollars in millions, except per-share amounts)
October 2, 2011
 
September 30, 2012
Net earnings
$
652

 
$
600

Net gain (loss) on cash flow hedges
(146
)
 
7

Unrealized gains (losses) on securities
(2
)
 
5

Foreign currency translation adjustments
(475
)
 
129

Change in retirement plans' funded status
40

 
56

Other comprehensive income (loss) before tax
(583
)
 
197

Provision (benefit) for income tax, net
(102
)
 
52

Other comprehensive income (loss), net of tax
(481
)
 
145

Comprehensive income
$
171

 
$
745


 
Nine Months Ended
(Dollars in millions, except per-share amounts)
October 2, 2011
 
September 30, 2012
Net earnings
$
1,923

 
$
1,798

Net loss on cash flow hedges
(64
)
 
(34
)
Unrealized gains (losses) on securities
(1
)
 
7

Foreign currency translation adjustments
(61
)
 
91

Change in retirement plans' funded status
93

 
177

Other comprehensive income (loss) before tax
(33
)
 
241

Provision (benefit) for income tax, net
(28
)
 
86

Other comprehensive income (loss), net of tax
(5
)
 
155

Comprehensive income
$
1,918

 
$
1,953

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


5

CONSOLIDATED BALANCE SHEETS

 
 
 
(Unaudited)
(Dollars in millions)
December 31, 2011
 
September 30, 2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
2,649

 
$
2,874

Accounts receivable
4,452

 
4,339

Contracts in process
5,168

 
5,031

Inventories
2,310

 
2,661

Other current assets
789

 
688

Total current assets
15,368

 
15,593

Noncurrent assets:
 
 
 
Property, plant and equipment, net
3,284

 
3,345

Intangible assets, net
1,813

 
1,734

Goodwill
13,576

 
13,986

Other assets
842

 
845

Total noncurrent assets
19,515

 
19,910

Total assets
$
34,883

 
$
35,503

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
23

 
$
1,001

Accounts payable
2,895

 
2,540

Customer advances and deposits
5,011

 
5,523

Other current liabilities
3,216

 
3,129

Total current liabilities
11,145

 
12,193

Noncurrent liabilities:
 
 
 
Long-term debt
3,907

 
2,924

Other liabilities
6,599

 
6,114

Commitments and contingencies (See Note K)


 


Total noncurrent liabilities
10,506

 
9,038

Shareholders' equity:
 
 
 
Common stock
482

 
482

Surplus
1,888

 
1,971

Retained earnings
18,917

 
20,170

Treasury stock
(5,743
)
 
(6,194
)
Accumulated other comprehensive loss
(2,312
)
 
(2,157
)
Total shareholders' equity
13,232

 
14,272

Total liabilities and shareholders' equity
$
34,883

 
$
35,503

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


6

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended
(Dollars in millions)
October 2, 2011
 
September 30, 2012
Cash flows from operating activities:
 
 
 
Net earnings
$
1,923

 
$
1,798

Adjustments to reconcile net earnings to net cash provided by operating activities –
 
 
 
Depreciation of property, plant and equipment
259

 
286

Amortization of intangible assets
176

 
172

Stock-based compensation expense
96

 
104

Excess tax benefit from stock-based compensation
(22
)
 
(24
)
Deferred income tax provision
63

 
53

Discontinued operations, net of tax
26

 
—

(Increase) decrease in assets, net of effects of business acquisitions –
 
 
 
Accounts receivable
(143
)
 
139

Contracts in process
(252
)
 
91

Inventories
(346
)
 
(340
)
Increase (decrease) in liabilities, net of effects of business acquisitions –
 
 
 
Accounts payable
(171
)
 
(368
)
Customer advances and deposits
(7
)
 
257

Other current and noncurrent liabilities
(257
)
 
(184
)
Other, net
(129
)
 
(77
)
Net cash provided by operating activities
1,216

 
1,907

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(1,143
)
 
(426
)
Capital expenditures
(273
)
 
(286
)
Purchases of held-to-maturity securities
(428
)
 
(260
)
Sales of held-to-maturity securities
—

 
211

Maturities of held-to-maturity securities
322

 
54

Purchases of available-for-sale securities
(350
)
 
(201
)
Maturities of available-for-sale securities
227

 
96

Other, net
188

 
144

Net cash used by investing activities
(1,457
)
 
(668
)
Cash flows from financing activities:
 
 
 
Purchases of common stock
(1,449
)
 
(602
)
Dividends paid
(504
)
 
(533
)
Proceeds from option exercises
186

 
121

Proceeds from fixed-rate notes
1,497

 
—

Repayment of fixed-rate notes
(750
)
 
—

Net proceeds from commercial paper
200

 
—

Other, net
(6
)
 
2

Net cash used by financing activities
(826
)
 
(1,012
)
Net cash used by discontinued operations
(6
)
 
(2
)
Net increase (decrease) in cash and equivalents
(1,073
)
 
225

Cash and equivalents at beginning of period
2,613

 
2,649

Cash and equivalents at end of period
$
1,540

 
$
2,874

Supplemental cash flow information:
 
 
 
Cash payments for:
 
 
 
Income taxes
$
804

 
$
805

Interest
$
112

 
$
135

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

7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share amounts or unless otherwise noted)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the Consolidated Financial Statements.
Consistent with defense industry practice, we classify assets and liabilities related to long-term production contracts as current, even though some of these amounts may not be realized within one year. In addition, some prior-year amounts have been reclassified among financial statement accounts to conform to the current-year presentation.
Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These rules and regulations permit some of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three- and nine-month periods ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
In our opinion, the unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three- and nine-month periods ended October 2, 2011, and September 30, 2012.
These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Revenue Recognition. We account for revenues and earnings using the percentage-of-completion method. Under this method, contract costs and revenues are recognized as the work progresses, either as the products are produced or as services are rendered. We estimate the profit on a contract as the difference between the total estimated revenue and costs to complete a contract and recognize that profit over the life of the contract. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the loss in the quarter it is identified.
We review and update our contract estimates regularly. We recognize changes in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of a revision in estimate is recognized prospectively over the remaining contract term. The net increase in our operating earnings (and earnings per share) from the quarterly impact of revisions in contract estimates totaled $113 ($0.22) and $299 ($0.56) for the three- and nine-months periods ended October 2, 2011, and $45 ($0.09) and $203 ($0.39) for the three- and nine-months periods ended September 30, 2012, respectively. In the third quarter and first nine months of 2012, no revisions on any one contract were material to our Consolidated Financial Statements.
Subsequent Events. We have evaluated material events and transactions that have occurred after the balance sheet date and concluded that no subsequent events have occurred that require adjustment to or disclosure in this Form 10-Q.


8

B. ACQUISITIONS, INTANGIBLE ASSETS AND GOODWILL
In the first nine months of 2012, we acquired six businesses for an aggregate of $426, funded by cash on hand:
Aerospace
•
A fixed-base operator at Houston Hobby Airport that provides fuel, catering, maintenance, repair and overhaul services to private aircraft (on February 29).
Combat Systems
•
The defense operations of Gayston Corporation, a business that supplies precision metal components used in several munitions program (on August 27).
Marine Systems
•
The Ship Repair and Coatings Division of Earl Industries, an East Coast ship-repair company that supports the U.S. Navy fleet in Norfolk, Virginia and Mayport, Florida (on July 31).
Information Systems and Technology
•
IPWireless, Inc., a provider of 3G and 4G Long Term Evolution (LTE) wireless broadband network equipment and solutions for public safety and military customers (on June 8).
•
Open Kernel Labs, Inc., a provider of virtualization software for securing wireless communications, applications and content for mobile devices and automotive in-vehicle infotainment systems (on August 17).
•
Fidelis Security Systems, Inc., a company that provides cyber security tools that offer real-time network visibility, analysis and control (on August 27).
In 2011, we acquired six businesses for an aggregate of $1.6 billion, funded by cash on hand:
Combat Systems
•
Force Protection, Inc., a provider of wheeled vehicles, survivability solutions and vehicle sustainment services for the armed forces of the United States and its allies (on December 19).
Marine Systems
•
Metro Machine Corp., a surface-ship repair business in Norfolk, Virginia, that supports the U.S. Navy fleet (on October 31).
Information Systems and Technology
•
A provider of enterprise services and cloud computing to the U.S. Department of Defense (on July 15).
•
A provider of secure wireless networking equipment for the U.S. military and other government customers (on July 22).
•
A provider of information assurance and security software (on August 12).
•
Vangent, Inc., a provider of health information technology services and business systems to federal agencies (on September 30).
The operating results of these acquisitions have been included with our reported results since their respective closing dates. The purchase prices of these acquisitions have been allocated preliminarily to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.

9

Intangible assets consisted of the following:

 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
December 31, 2011
 
September 30, 2012
Contract and program intangible assets*
$
2,393

$
(1,060
)
$
1,333

 
$
2,407

$
(1,207
)
$
1,200

Trade names and trademarks
477

(70
)
407

 
481

(80
)
401

Technology and software
175

(110
)
65

 
251

(125
)
126

Other intangible assets
174

(166
)
8

 
174

(167
)
7

Total intangible assets
$
3,219

$
(1,406
)
$
1,813

 
$
3,313

$
(1,579
)
$
1,734

* Consists of acquired backlog and probable follow-on work and related customer relationships.
The amortization lives (in years) of our intangible assets on September 30, 2012, were as follows:

 
Range of
Weighted Average
 
Amortization Life
Amortization Life
Contract and program intangible assets
7-30
17
Trade names and trademarks
30
30
Technology and software
7-13
9
Other intangible assets
7-15
11
Total intangible assets
 
19
We amortize intangible assets on a straight-line basis unless the pattern of usage of the benefits indicates an alternate method is more representative of the usage of the asset. Amortization expense was $60 and $176 for the three- and nine-month periods ended October 2, 2011, and $57 and $172 for the three- and nine-month periods ended September 30, 2012. We expect to record amortization expense of $231 in 2012 and over the next five years as follows:

2013
$
196

2014
173

2015
168

2016
140

2017
124


10

The changes in the carrying amount of goodwill by reporting unit for the nine months ended September 30, 2012, were as follows:

 
Aerospace
 
Combat Systems
 
Marine Systems
 
Information Systems and Technology
 
Total Goodwill
December 31, 2011
$
2,644

 
$
2,839

 
$
229

 
$
7,864

 
$
13,576

Acquisitions (a)
14

 
87

 
38

 
227

 
366

Other (b)
(5
)
 
40

 
1

 
8

 
44

September 30, 2012
$
2,653

 
$
2,966

 
$
268

 
$
8,099

 
$
13,986

(a)
Includes adjustments during the purchase price allocation period.
(b)
Consists primarily of adjustments for foreign currency translation.

C. EARNINGS AND DIVIDENDS PER SHARE
Earnings per Share. We compute basic earnings per share using net earnings for the period and the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted shares and restricted stock units (RSUs). Basic and diluted weighted average shares outstanding were as follows (in thousands):

 
Three Months Ended
Nine Months Ended
 
October 2, 2011
September 30, 2012
October 2, 2011
September 30, 2012
Basic weighted average shares outstanding
359,710

350,470

366,783

354,168

Dilutive effect of stock options and restricted stock/RSUs
3,175

2,356

3,438

2,351

Diluted weighted average shares outstanding
362,885

352,826

370,221

356,519

Dividends. Dividends declared per share were $0.47 and $1.41 for the three- and nine-month periods ended October 2, 2011, and $0.51 and $1.53 for the three- and nine-month periods ended September 30, 2012. Cash dividends paid were $171 and $504 for the three- and nine-month periods ended October 2, 2011, and $180 and $533 for the three- and nine-month periods ended September 30, 2012.

D. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; short- and long-term debt; and derivative financial instruments. We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2011, or September 30, 2012.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:

11


•
Level 1 – quoted prices in active markets for identical assets or liabilities;
•
Level 2 – inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly; and
•
Level 3 – unobservable inputs significant to the fair value measurement.
The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt (commercial paper) on the Consolidated Balance Sheets approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on December 31, 2011, and September 30, 2012, and the basis for determining their fair values:

 
Carrying
Value
 
Fair
Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
(a)
Financial assets (liabilities) (b)
December 31, 2011
Marketable securities:
 
 
 
 
 
 
 
Available-for-sale
$
70

 
$
70

 
$
8

 
$
62

Held-to-maturity
178

 
175

 
—

 
175

Other investments
145

 
145

 
89

 
56

Derivatives
34

 
34

 
—

 
34

Long-term debt,
     including current portion
(3,930
)
 
(4,199
)
 
—

 
(4,199
)
 
 
 
 
 
 
 
 
 
September 30, 2012
Marketable securities:
 
 
 
 
 
 
 
Available-for-sale
$
7

 
$
7

 
$
—

 
$
7

Held-to-maturity (c)
170

 
170

 
—

 
170

Other investments
150

 
150

 
95

 
55

Derivatives
16

 
16

 
—

 
16

Long-term debt,
     including current portion
(3,925
)
 
(4,160
)
 
—

 
(4,160
)
(a)Determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets and liabilities.
(b)We had no Level 3 financial instruments on December 31, 2011, or September 30, 2012.
(c)We sold $211 of held-to-maturity securities in the first nine months of 2012. The net carrying amount of these securities on the date of sale was $210.

E. CONTRACTS IN PROCESS
Contracts in process represent recoverable costs and, where applicable, accrued profit related to long-term contracts that have been inventoried until the customer is billed, and consisted of the following:
 
December 31, 2011
 
September 30, 2012
Contract costs and estimated profits
$
18,807

 
$
20,550

Other contract costs
959

 
1,074

 
19,766

 
21,624

Advances and progress payments
(14,598
)
 
(16,593
)
Total contracts in process
$
5,168

 
$
5,031


12

Contract costs consist primarily of labor, material, overhead and general and administrative (G&A) expenses. Contract costs also may include estimated contract recoveries for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. We record revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable. Assumed recoveries for negotiated settlements and claims for unanticipated contract costs included in contracts in process were not material on December 31, 2011, or September 30, 2012.
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 expect to recover these costs through ongoing business, including existing backlog and probable follow-on contracts. 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. We expect to bill substantially all of our contracts-in-process balance as of September 30, 2012, during the next 12 months, with the exception of these other contract costs.

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

 
December 31, 2011
 
September 30, 2012
Work in process
$
1,202

 
$
1,457

Raw materials
1,031

 
1,065

Finished goods
77

 
82

Pre-owned aircraft
—

 
57

Total inventories
$
2,310

 
$
2,661


G. DEBT
Debt consisted of the following:
 
 
December 31, 2011
 
September 30, 2012
Fixed-rate notes due:
Interest Rate
 
 
 
May 2013
4.250%
$
1,000

 
$
1,000

February 2014
5.250%
998

 
999

January 2015
1.375%
499

 
499

August 2015
5.375%
400

 
400

July 2016
2.250%
499

 
500

July 2021
3.875%
499

 
499

Other
Various
35

 
28

Total debt
 
3,930

 
3,925

Less current portion
 
23

 
1,001

Long-term debt
 
$
3,907

 
$
2,924


13

Fixed-rate Notes. On September 30, 2012, we had outstanding $3.9 billion aggregate principal amount of fixed-rate notes. The fixed-rate notes are fully and unconditionally guaranteed by several of our 100-percent-owned subsidiaries. See Note N for condensed consolidating financial statements. We have the option to redeem the notes prior to their maturity in whole or part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.
Commercial Paper. On September 30, 2012, we had no commercial paper outstanding, but we maintain the ability to access the market. We have $2 billion in bank credit facilities that provide backup liquidity to our commercial paper program. These credit facilities include a $1 billion multi-year facility expiring in July 2013 and a $1 billion multi-year facility expiring in July 2016. These facilities are required by rating agencies to support our commercial paper issuances. We may renew or replace, in whole or in part, these credit facilities prior to their expiration. Our commercial paper issuances and the bank credit facilities are guaranteed by several of our 100-percent-owned subsidiaries.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all material covenants on September 30, 2012.

H. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:

 
December 31, 2011
 
September 30, 2012
Salaries and wages
$
845

 
$
794

Workers' compensation
575

 
570

Retirement benefits
275

 
283

Deferred income taxes
131

 
134

Other (a)
1,390

 
1,348

Total other current liabilities
$
3,216

 
$
3,129

 
 
 
 
Retirement benefits
$
4,627

 
$
4,328

Customer deposits on commercial contracts 
1,132

 
895

Deferred income taxes
170

 
178

Other (b)
670

 
713

Total other liabilities
$
6,599

 
$
6,114

(a)Consists primarily of dividends payable, environmental remediation reserves, warranty reserves, liabilities of discontinued operations and insurance-related costs.
(b)Consists primarily of liabilities for warranty reserves and workers' compensation.
 
I. INCOME TAXES
Deferred Tax Assets. Our net deferred tax asset was included on the Consolidated Balance Sheets in other assets and liabilities as follows:

 
December 31, 2011
 
September 30, 2012
Current deferred tax asset
$
269

 
$
43

Current deferred tax liability
(131
)
 
(134
)
Noncurrent deferred tax asset
310

 
390

Noncurrent deferred tax liability
(170
)
 
(178
)
Net deferred tax asset
$
278

 
$
121


14

Tax Uncertainties. For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense. The Internal Revenue Service (IRS) has examined all of our consolidated federal income tax returns through 2010.
We participate in the IRS’s Compliance Assurance Process, a real-time audit of our tax return. We have recorded liabilities for tax uncertainties for the years that remain open to review. We do not expect the resolution of tax matters for these years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.
Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on September 30, 2012, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. We further believe that there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will significantly vary over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

J. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivatives for trading or speculative purposes.
Foreign Currency Risk. Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale contracts, designed to offset and minimize our risk. The one year average maturity of these instruments matches the duration of the activities that are at risk.
Interest Rate Risk. Our financial instruments subject to interest rate risk include fixed-rate long-term debt obligations and variable-rate commercial paper. However, the risk associated with these instruments is not material.
Commodity Price Risk. We are subject to risk of rising labor and commodity prices, primarily on long-term fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Some of the protective terms included in our contracts are considered derivatives but are not accounted for separately because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On September 30, 2012, we held $3.1 billion in cash and equivalents and marketable securities. Our marketable securities had an average duration of two months and an average credit rating of AA-. Historically, we have not experienced material gains or losses on these instruments due to changes in interest rates or market values.
Hedging Activities. We had $4 billion in notional forward exchange contracts outstanding on December 31, 2011, and $3 billion on September 30, 2012. We recognize derivative financial instruments

15

on the Consolidated Balance Sheets at fair value (see Note D). The fair value of these derivative contracts consisted of the following:

 
December 31, 2011
 
September 30, 2012
Other current assets:
 
 
 
Designated as cash flow hedges
$
64

 
$
33

Not designated as cash flow hedges
20

 
34

Other current liabilities:
 
 
 
Designated as cash flow hedges
(33
)
 
(35
)
Not designated as cash flow hedges
(17
)
 
(16
)
Total
$
34

 
$
16

We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2011, or September 30, 2012.
We record changes in the fair value of derivative financial instruments in operating costs and expenses in the Consolidated Statements of Earnings or in other comprehensive income (OCI) within the Consolidated Statements of Comprehensive Income depending on whether the derivative is designated and qualifies for hedge accounting. Gains and losses related to derivatives that qualify as cash flow hedges are deferred in OCI until the underlying transaction is reflected in earnings. We adjust derivative financial instruments not designated as cash flow hedges to market value each period and record the gain or loss in the Consolidated Statements of Earnings. The gains and losses on these instruments generally offset losses and gains on the assets, liabilities and other transactions being hedged. Gains and losses resulting from hedge ineffectiveness are recognized in the Consolidated Statements of Earnings for all derivative financial instruments, regardless of designation.
Net gains and losses recognized in earnings and OCI, including gains and losses related to hedge ineffectiveness, were not material to our results of operations for the three- and nine-month periods ended October 2, 2011, and September 30, 2012. We do not expect the amount of gains and losses in OCI that will be reclassified to earnings during the next 12 months to be material.
Foreign Currency Financial Statement Translation. We translate foreign-currency balance sheets from our international business units’ functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and earnings statements at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of OCI.
We do not hedge the fluctuation in reported revenues and earnings resulting from the translation of these international operations’ income statements into U.S. dollars. The impact of translating our international operations’ revenues and earnings into U.S. dollars was not material to our results of operations for the three- and nine-month periods ended October 2, 2011, or September 30, 2012. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in the first three or nine months of either 2011 or 2012.


16

K. COMMITMENTS AND CONTINGENCIES
Litigation
Termination of A-12 Program. The A-12 aircraft contract was a fixed-price incentive contract for the full-scale development and initial production of the carrier-based Advanced Tactical Aircraft with the U.S. Navy and a team composed of contractors General Dynamics and McDonnell Douglas (now a subsidiary of The Boeing Company). In January 1991, the U.S. Navy terminated the contract for default and demanded the contractors repay $1.4 billion in unliquidated progress payments. Following the termination, the Navy agreed to defer the collection of that amount pending a negotiated settlement or other resolution. Both contractors had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination.
Over 20 years of litigation, the trial court (the U.S. Court of Federal Claims), appeals court (the Court of Appeals for the Federal Circuit), and the U.S. Supreme Court have issued various rulings, some in favor of the government and others in favor of the contractors.
On May 3, 2007, the trial court issued a decision upholding the government’s determination of default. This decision was affirmed by a three-judge panel of the appeals court on June 2, 2009, and on November 24, 2009, the court of appeals denied the contractors’ petitions for rehearing. On September 28, 2010, the U.S. Supreme Court granted the contractors’ petitions for review as to whether the government could maintain its default claim against the contractors while invoking the state-secrets privilege to deny the contractors a defense to that claim.
On May 23, 2011, the U.S. Supreme Court vacated the judgment of the court of appeals, stating that the contractors had a plausible superior knowledge defense that had been stripped from them as a consequence of the government’s assertion of the state-secrets privilege. In particular, the U.S. Supreme Court held that, in that circumstance, neither party can obtain judicial relief.
In addition, the U.S. Supreme Court remanded the case to the court of appeals for further proceedings on whether the government has an obligation to share its superior knowledge with respect to highly classified information, whether the government has such an obligation when the agreement specifies information that must be shared (as was the case with respect to the A-12 contract), and whether these questions can safely be litigated by the courts without endangering state secrets. On July 7, 2011, the appeals court remanded these issues to the trial court for further proceedings consistent with the U.S. Supreme Court’s opinion. These issues remain to be resolved on remand.
We believe that the lower courts will ultimately rule in the contractors’ favor on the remaining issues in the case. We expect this would leave all parties where they stood prior to the contracting officer’s declaration of default, meaning that no money would be due from one party to another. Additionally, even if the lower courts were to ultimately sustain the government’s default claim, we continue to believe that there are significant legal obstacles to the government’s ability to collect any amount from the contractors given that no court has ever awarded a money judgment to the government. For these reasons, we have not recorded an accrual for this matter.
If, contrary to our expectations, the government prevails on its default claim and its recovery theories, the contractors could collectively be required to repay the government, on a joint and several basis, as much as $1.4 billion for progress payments received for the A-12 contract, plus interest, which was approximately $1.6 billion on September 30, 2012. This would result in a liability to us of half of the total (based upon The Boeing Company satisfying McDonnell Douglas’ obligations under the contract), or approximately $1.5 billion pretax. Our after-tax charge would be approximately $835, or $2.37 per share, which would be recorded in discontinued operations. Our after-tax cash cost would be approximately $740. We believe we have sufficient resources to satisfy our obligation if required.

17

Other. Various claims and other legal proceedings incidental to the normal course of business are pending or threatened against us. These matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these matters. However, based on information currently available, we believe any potential liabilities in these proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.
Environmental
We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a Potentially Responsible Party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.
As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liability. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions, will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.
Other
Portugal Program. Our European Land Systems business has a contract with the Portuguese Ministry of National Defense to provide 260 Pandur vehicles over the course of seven years. We have been engaging with the customer regarding a potential restructuring of the contract.  Recently, the Minister of National Defense stated publicly that he intends to terminate the program based upon a breach of the contract. We have not been officially notified of any such termination or breach, nor do we believe that we are in breach of the contract. To protect our rights under the contract, we have filed a demand for arbitration. We cannot predict at this time whether the contract will be restructured or terminated or the results of the arbitration proceeding. Further, we cannot predict when the matter will be resolved or the outcome it may have on our operating results or cash flows.  As of September 30, 2012, we had a balance of approximately $130 in accounts receivable and contracts in process related to this contract. 
Securities and Exchange Commission (SEC) Request. On September 23, 2011, the SEC’s Division of Enforcement requested that we provide certain information, documents and records relating to accounting practices for revisions of estimates on contracts accounted for using the percentage-of-completion method. We are cooperating with the SEC staff. We cannot predict the outcome of this request.
Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit and other similar arrangements with financial institutions and insurance carriers totaling approximately $1.3 billion on September 30, 2012. These include letters of credit for our international subsidiaries, which are backed by available local bank credit facilities aggregating approximately $830. From time to time in the ordinary course of business, we guarantee the payment or performance obligations of our subsidiaries arising under certain contracts. We are aware of no event of a material nature that would require us to satisfy these guarantees.
Government Contracts. As a government contractor, we are subject to U.S. government audits

18

and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government disputes and investigations will not have a material impact on our results of operations, financial condition or cash flows.
In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based upon the circumstances, we periodically will file a claim or a request for equitable adjustment (REA). In some cases, these requests are disputed by our customer. We believe our outstanding modifications and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.
Aircraft Trade-ins. In connection with orders for new aircraft in funded contract backlog, our Aerospace group has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are structured to establish the fair market value of the trade-in aircraft at a date generally 120 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is generally based on the number of months of warranty coverage remaining for products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion (EACs). Our other warranty obligations, primarily for business-jet aircraft, are included in other current liabilities and other liabilities on the Consolidated Balance Sheets.
The changes in the carrying amount of warranty liabilities for the nine-month periods ended October 2, 2011, and September 30, 2012, were as follows:

Nine Months Ended
October 2, 2011
 
September 30, 2012
Beginning balance
$
260

 
$
293

Warranty expense
45

 
60

Payments
(44
)
 
(47
)
Adjustments*
—

 
(5
)
Ending balance
$
261

 
$
301

* Includes reclassifications.


19

L. RETIREMENT PLANS
We provide defined-contribution benefits, as well as defined-benefit pension and other post-retirement benefits, to eligible employees.
Net periodic cost associated with our defined-benefit pension and other post-retirement benefit plans for the three- and nine-month periods ended October 2, 2011, and September 30, 2012, consisted of the following:

 
Pension Benefits
Other Post-retirement Benefits
Three Months Ended
October 2, 2011
 
September 30, 2012
October 2, 2011
 
September 30, 2012
Service cost
$
64

 
$
71

$
3

 
$
3

Interest cost
129

 
131

16

 
15

Expected return on plan assets
(150
)
 
(147
)
(8
)
 
(7
)
Recognized net actuarial loss
40

 
66

1

 
2

Amortization of prior service (credit) cost
(11
)
 
(11
)
1

 
2

Net periodic cost
$
72

 
$
110

$
13

 
$
15

 
Pension Benefits
Other Post-retirement Benefits
Nine Months Ended
October 2, 2011
 
September 30, 2012
October 2, 2011
 
September 30, 2012
Service cost
$
191

 
$
213

$
10

 
$
9

Interest cost
388

 
393

46

 
43

Expected return on plan assets
(450
)
 
(441
)
(24
)
 
(22
)
Recognized net actuarial loss
120

 
198

3

 
7

Amortization of prior service (credit) cost
(33
)
 
(33
)
4

 
6

Net periodic cost
$
216

 
$
330

$
39

 
$
43

Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense business groups. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent recovery of the cost is considered probable based on our backlog and probable follow-on contracts, we defer the excess in contracts in process on the Consolidated Balance Sheets until the cost is allocable to contracts. See Note E for discussion of our deferred contract costs. For other plans, the amount allocated to contracts and included in revenues has exceeded the plans’ cumulative benefit cost. We have deferred recognition of these excess earnings to provide a better matching of revenues and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheets.
In late 2011, changes were made to the CAS to harmonize the regulations with the Pension Protection Act of 2006 (PPA). As a result, pension costs allocable to our contracts are expected to increase beginning in 2014 when the full impact of the CAS regulations begins to take effect. For certain contracts awarded prior to February 27, 2012, we are entitled to recovery of these additional pension costs from our customers. We expect to submit REAs of approximately $170 for these contracts in the fourth quarter of 2012.


20

M. BUSINESS GROUP INFORMATION
We operate in four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. We organize our business groups in accordance with the nature of products and services offered. These business groups derive their revenues from business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding; and communications and information technology, respectively. We measure each group’s profit based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our business groups.
Summary financial information for each of our business groups follows:

 
Revenues
Operating Earnings
Three Months Ended
October 2, 2011
September 30, 2012
October 2, 2011
September 30, 2012
Aerospace
$
1,412

$
1,836

$
217

$
261

Combat Systems
2,140

1,956

319

274

Marine Systems
1,621

1,670

173

186

Information Systems and Technology
2,680

2,472

310

201

Corporate*
—

—

(21
)
(17
)
 
$
7,853

$
7,934

$
998

$
905


 
Revenues
Operating Earnings
Nine Months Ended
October 2, 2011
September 30, 2012
October 2, 2011
September 30, 2012
Aerospace
$
4,141

$
5,051

$
656

$
789

Combat Systems
6,216

6,016

895

799

Marine Systems
4,873

4,928

501

554

Information Systems and Technology
8,300

7,440

885

645

Corporate*
—

—

(61
)
(52
)
 
$
23,530

$
23,435

$
2,876

$
2,735

*Corporate operating results primarily consists of stock option expense.


21

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

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS
Three Months Ended October 2, 2011
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenues
$
—

$
6,262

$
1,591

$
—

$
7,853

Cost of sales
(2
)
5,059

1,306

—

6,363

General and administrative expenses
23

368

101

—

492

Operating earnings
(21
)
835

184

—

998

Interest expense
(40
)
(1
)
—

—

(41
)
Interest income
1

2

—

—

3

Other, net
1

(12
)
3

—

(8
)
Earnings before income taxes
(59
)
824

187

—

952

Provision for income taxes
(21
)
267

41

—

287

Discontinued operations, net of tax
(13
)
—

—

—

(13
)
Equity in net earnings of subsidiaries
703

—

—

(703
)
—

Net earnings
$
652

$
557

$
146

$
(703
)
$
652

Comprehensive income
$
171

$
541

$
(336
)
$
(205
)
$
171

Three Months Ended September 30, 2012
 
 
 
 
 
Revenues
$
—

$
6,684

$
1,250

$
—

$
7,934

Cost of sales
(7
)
5,476

1,050

—

6,519

General and administrative expenses
22

388

100

—

510

Operating earnings
(15
)
820

100

—

905

Interest expense
(40
)
—

—

—

(40
)
Interest income
2

(2
)
1

—

1

Other, net
(2
)
1

(2
)
—

(3
)
Earnings before income taxes
(55
)
819

99

—

863

Provision for income taxes
(12
)
244

31

—

263

Equity in net earnings of subsidiaries
643

—

—

(643
)
—

Net earnings
$
600

$
575

$
68

$
(643
)
$
600

Comprehensive income
$
745

$
577

$
170

$
(747
)
$
745



22

CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS
Nine Months Ended October 2, 2011
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Revenues
$
—

$
19,007

$
4,523

$
—

$
23,530

Cost of sales
(7
)
15,399

3,756

—

19,148

General and administrative expenses
67

1,118

321

—

1,506

Operating earnings
(60
)
2,490

446

—

2,876

Interest expense
(112
)
(3
)
—

—

(115
)
Interest income
8

3

1

—

12

Other, net
2

30

2

—

34

Earnings before income taxes
(162
)
2,520

449

—

2,807

Provision for income taxes
(53
)
790

121

—

858

Discontinued operations, net of tax
(26
)
—

—

—

(26
)
Equity in net earnings of subsidiaries
2,058

—

—

(2,058
)
—

Net earnings
$
1,923

$
1,730

$
328

$
(2,058
)
$
1,923

Comprehensive income
$
1,918

$
1,740

$
257

$
(1,997
)
$
1,918

Nine Months Ended September 30, 2012
 
 
 
 
 
Revenues
$
—

$
19,485

$
3,950

$
—

$
23,435

Cost of sales
(16
)
15,834

3,312

—

19,130

General and administrative expenses
66

1,196

308

—

1,570

Operating earnings
(50
)
2,455

330

—

2,735

Interest expense
(123
)
—

(1
)
—

(124
)
Interest income
5

1

3

—

9

Other, net
—

(5
)
(3
)
—

(8
)
Earnings before income taxes
(168
)
2,451

329

—

2,612

Provision for income taxes
(74
)
790

98

—

814

Equity in net earnings of subsidiaries
1,892

—

—

(1,892
)
—

Net earnings
$
1,798

$
1,661

$
231

$
(1,892
)
$
1,798

Comprehensive income
$
1,953

$
1,659

$
273

$
(1,932
)
$
1,953



23

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,530

$
—

$
1,119

$
—

$
2,649

Accounts receivable
—

1,659

2,793

—

4,452

Contracts in process
292

3,182

1,694

—

5,168

Inventories
 
 
 
 
 
Work in process
—

1,168

34

—

1,202

Raw materials
—

898

133

—

1,031

Finished goods
—

36

41

—

77

Other current assets
320

247

222

—

789

Total current assets
2,142

7,190

6,036

—

15,368

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment
153

5,181

1,184

—

6,518

Accumulated depreciation of PP&E
(49
)
(2,604
)
(581
)
—

(3,234
)
Intangible assets
—

1,767

1,452

—

3,219

Accumulated amortization of intangible assets
—

(976
)
(430
)
—

(1,406
)
Goodwill
—

9,287

4,289

—

13,576

Other assets
10

629

203

—

842

Investment in subsidiaries
33,450

—

—

(33,450
)
—

Total noncurrent assets
33,564

13,284

6,117

(33,450
)
19,515

Total assets
$
35,706

$
20,474

$
12,153

$
(33,450
)
$
34,883

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt
$
—

$
21

$
2

$
—

$
23

Customer advances and deposits
—

2,483

2,528

—

5,011

Other current liabilities
537

3,729

1,845

—

6,111

Total current liabilities
537

6,233

4,375

—

11,145

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
3,895

9

3

—

3,907

Other liabilities
3,443

2,541

615

—

6,599

Total noncurrent liabilities
7,338

2,550

618

—

10,506

Intercompany
14,599

(15,240
)
641

—

—

Shareholders' equity:
 
 
 
 
 
Common stock
482

6

44

(50
)
482

Other shareholders' equity
12,750

26,925

6,475

(33,400
)
12,750

Total shareholders' equity
13,232

26,931

6,519

(33,450
)
13,232

Total liabilities and shareholders' equity
$
35,706

$
20,474

$
12,153

$
(33,450
)
$
34,883



24

CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2012
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and equivalents
$
1,987

$
—

$
887

$
—

$
2,874

Accounts receivable
—

1,390

2,949

—

4,339

Contracts in process
421

3,176

1,434

—

5,031

Inventories
 
 
 
 
 
Work in process
—

1,441

16

—

1,457

Raw materials
—

952

113

—

1,065

Finished goods
—

34

48

—

82

Pre-owned aircraft
—

57

—

—

57

Other current assets
197

239

252

—

688

Total current assets
2,605

7,289

5,699

—

15,593

Noncurrent assets:
 
 
 
 
 
Property, plant and equipment
154

5,445

1,281

—

6,880

Accumulated depreciation of PP&E
(54
)
(2,792
)
(689
)
—

(3,535
)
Intangible assets
—

1,857

1,456

—

3,313

Accumulated amortization of intangible assets
—

(1,082
)
(497
)
—

(1,579
)
Goodwill
—

9,637

4,349

—

13,986

Other assets
2

668

175

—

845

Investment in subsidiaries
35,597

—

—

(35,597
)
—

Total noncurrent assets
35,699

13,733

6,075

(35,597
)
19,910

Total assets
$
38,304

$
21,022

$
11,774

$
(35,597
)
$
35,503

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt
$
1,000

$
—

$
1

$
—

$
1,001

Customer advances and deposits
—

2,954

2,569

—

5,523

Other current liabilities
549

3,694

1,426

—

5,669

Total current liabilities
1,549

6,648

3,996

—

12,193

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
2,897

27

—

—

2,924

Other liabilities
3,137

2,358

619

—

6,114

Total noncurrent liabilities
6,034

2,385

619

—

9,038

Intercompany
16,449

(16,805
)
356

—

—

Shareholders' equity:
 
 
 
 
 
Common stock
482

6

44

(50
)
482

Other shareholders' equity
13,790

28,788

6,759

(35,547
)
13,790

Total shareholders' equity
14,272

28,794

6,803

(35,597
)
14,272

Total liabilities and shareholders' equity
$
38,304

$
21,022

$
11,774

$
(35,597
)
$
35,503



25

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended October 2, 2011
Parent
Guarantors
on a
Combined
Basis
Other
Subsidiaries
on a
Combined
Basis
Consolidating
Adjustments
Total
Consolidated
Net cash provided by operating activities
$
(305
)
$
1,708

$
(187
)
$
—

$
1,216

Cash flows from investing activities:
 
 
 
 
 
Business acquisitions, net of cash acquired
—

(1,143
)
—

—

(1,143
)
Purchases of held-to-maturity securities
(428
)
—

—

—

(428
)
Maturities of held-to-maturity securities
215

—

107

—

322

Purchases of available-for-sale securities
(264
)
(86
)
—

—

(350
)
Other, net
232

(39
)
(51
)
—

142

Net cash used by investing activities
(245
)
(1,268
)
56

—

(1,457
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from fixed-rate notes
1,497

—

—

—

1,497

Purchases of common stock
(1,449
)
—

—

—

(1,449
)
Repayment of fixed-rate notes
(750
)
—

—

—

(750
)
Dividends paid
(504
)
—

—

—

(504
)
Net proceeds from commercial paper
200

—

—

—

200

Other, net
203

(20
)
(3
)
—

180

Net cash used by financing activities
(803
)
(20
)
(3
)
—

(826
)
Net cash used by discontinued operations
(6
)
—

—

—

(6
)
Cash sweep/funding by parent
433

(420
)
(13
)
—

—

Net decrease in cash and equivalents
(926
)
—

(147
)
—

(1,073
)
Cash and equivalents at beginning of period
1,608

—

1,005

—

2,613

Cash and equivalents at end of period
$
682

$
—

$
858

$
—

$
1,540

Nine Months Ended September 30, 2012
 
 
 
 
 
Net cash provided by operating activities
$
(523
)
$
2,275

$
155

$
—

$
1,907

Cash flows from investing activities:
 
 
 
 
 
Business acquisitions, net of cash acquired
(101
)
(299
)
(26
)
—

(426
)
Capital expenditures
(1
)
(251
)
(34
)
—

(286
)
Purchases of held-to-maturity securities
(260
)
—

—

—

(260
)
Sales of held-to-maturity securities
211

—

—

—

211

Purchases of available-for-sale securities
(140
)
(61
)
—

—

(201
)
Other, net
233

61

—

—

294

Net cash used by investing activities
(58
)
(550
)
(60
)
—

(668
)
Cash flows from financing activities:
 
 
 
 
 
Purchases of common stock
(602
)
—

—

—

(602
)
Dividends paid
(533
)
—

—

—

(533
)
Proceeds from option exercises
121

—

—

—

121

Other, net
24

(20
)
(2
)
—

2

Net cash used by financing activities
(990
)
(20
)
(2
)
—

(1,012
)
Net cash used by discontinued operations
(2
)
—

—

—

(2
)
Cash sweep/funding by parent
2,030

(1,705
)
(325
)
—

—

Net increase in cash and equivalents
457

—

(232
)
—

225

Cash and equivalents at beginning of period
1,530

—

1,119

—

2,649

Cash and equivalents at end of period
$
1,987

$
—

$
887

$
—

$
2,874



26

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