General Dynamics (GD) 10-Q2020 Q1 Quarterly report

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

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

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

Our fiscal quarters are typically 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three-month period ended March 29, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three-month periods ended March 29, 2020, and March 31, 2019.

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, 2019.

The nature of our business requires that we make estimates and assumptions in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The COVID-19 outbreak has impacted these estimates and assumptions and will continue to do so. The accounting for long-term contracts requires the use of estimates (see Note C). Our estimates at the end of the first quarter assumed no material impact from the disruptions caused by COVID-19. This assumption was based in part on the expectation that COVID-related costs will be reimbursed by our customers. The United States and other governments have taken steps, such as the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and U.S. Department of Defense (DoD) guidance, to provide relief. Through these government actions and our contract provisions, we will seek reimbursement of these costs. As the process for reimbursement has not been finalized, it is possible that our actual reimbursement could be less than 100% of our costs, resulting in a potentially unfavorable impact on the profitability of our contracts. Given the uncertainties, we are unable to estimate an amount or range, if any, of reasonably possible loss for costs that may not be reimbursed.

The company is also monitoring for other long-term impacts of the pandemic, such as the impairment of goodwill, intangibles or other long-lived assets. As of the end of the quarter, we have not identified a triggering event requiring an impairment test.

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

Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $66 and $70 for the three-month periods ended March 29, 2020, and March 31, 2019, respectively.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract.

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 81% and 75% of our revenue for the three-month periods ended March 29, 2020, and March 31, 2019, respectively. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

On March 29, 2020, we had $85.7 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 55% of our remaining performance obligations as revenue by year-end 2021, an additional 30% by year-end 2023 and the balance thereafter.

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.

Revenue by major products and services was as follows:

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

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

Revenue recognized for the three-month periods ended March 29, 2020, and March 31, 2019, that was included in the contract liability balance at the beginning of each year was $1.2 billion and $1.7 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.

Basic and diluted weighted average shares outstanding were as follows (in thousands):

We did not have any significant non-financial assets or liabilities measured at fair value on March 29, 2020, or December 31, 2019.

Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable on the unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on March 29, 2020, and December 31, 2019, and the basis for determining their fair values:

Our Level 1 assets include investments in publicly traded equity securities valued using quoted prices from the market exchanges. The fair value of our Level 2 assets and liabilities is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets include direct private equity investments that are measured using inputs unobservable to a marketplace participant.

For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50% chance

Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on March 29, 2020, was not material to our results of operations, financial condition or cash flows. In addition, there are 0 tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

On March 29, 2020, and December 31, 2019, net unbilled receivables included $2.4 billion and $2.9 billion, respectively, associated with a large international wheeled armored vehicle contract in our Combat Systems segment. We had experienced delays in payment under the contract in 2018 and 2019, which resulted in the large unbilled receivables balance. In March 2020, we finalized a new agreement with the customer that included a revised payment schedule. Under the new agreement, we received two $500 progress payments, one in each of the first and second quarters of 2020. Further progress payments will be due annually that will liquidate the net unbilled receivables balance over the next few years.

Inventories consisted of the following:

The increase in total inventories was due primarily to delays in Gulfstream aircraft deliveries in our Aerospace segment caused by quarantine and travel restrictions resulting from the COVID-19 outbreak.

On March 29, 2020, we had $2.3 billion of commercial paper outstanding with a dollar-weighted average interest rate of 1.370%. Separately, we have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. These credit facilities include a $2 billion 364-day facility expiring in March 2021, a $2 billion multi-year facility expiring in March 2023 and a $1 billion multi-year facility expiring in March 2025. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.

Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on March 29, 2020.

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

Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in AOCL until the underlying transaction is reflected in earnings. Alternatively, gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in earnings. All gains and losses from derivative financial instruments recognized in the Consolidated Statement of Earnings are presented in the same line item as the underlying transaction, either operating costs and expenses or interest expense.

Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations for the three-month periods ended March 29, 2020, and March 31, 2019. Net gains and losses reclassified to earnings from AOCL related to qualified hedges were also not material to our results of operations for the three-month periods ended March 29, 2020, and March 31, 2019, and we do not expect the amount of these gains and losses that will be reclassified to earnings during the next 12 months to be material.

We had no material derivative financial instruments designated as fair value or net investment hedges on March 29, 2020, or December 31, 2019.

We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations’ results into U.S. dollars. The impact of translating our non-U.S. operations’ revenue into U.S. dollars was not material to our results of operations for the three-month periods ended March 29,

As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liabilities. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.

In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.

The changes in the carrying amount of warranty liabilities for the three-month periods ended March 29, 2020, and March 31, 2019, were as follows:

Net periodic defined-benefit pension and other post-retirement benefit (credit) cost for the three-month periods ended March 29, 2020, and March 31, 2019, consisted of the following:

Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense segments. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and other post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent we consider recovery of the cost to be probable based on our backlog and probable follow-on contracts, we defer the excess in other contract costs in other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have similarly deferred recognition of these excess earnings on the Consolidated Balance Sheet.

Summary financial information for each of our segments follows:

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

Our company is organized into five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We refer to the latter four segments collectively as our defense segments. Our primary customer is the U.S. government, including the Department of Defense (DoD), the intelligence community and other U.S. government customers. We also have significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business-jet aircraft and related services. The following discussion should be read in conjunction with our 2019 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak’s duration and its broader impact. See the Risk Factors in Part II, Item 1A, regarding the COVID-19 outbreak, as well as set forth in our most recent Form 10-K filing addressing additional risks facing our business, which may be affected by the COVID-19 outbreak.

The United States and other governments have taken a number of steps to respond to the outbreak and to support economic activity and liquidity in the capital markets. In the United States, the adoption of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) provides various forms of relief. The CARES Act includes provisions that allow agencies to reimburse contractors for payment to workers who are prevented from working due to COVID-19 facility closures or other restrictions. In addition, our U.S.-based businesses have been designated as critical infrastructure by the U.S. Department of Homeland Security and, as such, have been required to stay open. The DoD has issued guidance on managing the

Our U.S. government business experienced minimal disruptions in the first quarter, though we did experience, to a degree, reduced activities toward the end of the quarter due to select customer site closures and limited access to sites, slowdowns in the provision of materials from suppliers, and lower man-hours at manufacturing sites. Internationally, our defense business has experienced site closures in some countries. Within our Aerospace segment, quarantine and travel restrictions in connection with the outbreak delayed Gulfstream aircraft deliveries in the first quarter. Order activity for new aircraft was progressing well until the last two weeks of the quarter, when activity largely ceased. Typically, the last few weeks of a quarter experience the most order activity. The Review of Operating Segments includes additional information on the first quarter results for each of our segments.

Looking forward into the remainder of 2020, COVID-19 will continue to impact our businesses. We believe the continued support by the DoD, and the U.S. government generally, of the defense industrial base will help mitigate any effects of program disruptions on our U.S. defense business. However, we will closely monitor our supply chain, continue to implement measures to provide a healthy and safe work environment and ensure we have an adequate employee base to meet our customers’ demands. Our non-U.S. defense business will be impacted to varying degrees based on the response of each country. In our Aerospace segment, wide-spread extension of travel restrictions will continue to impact aircraft service volume and could delay some future deliveries if customers have difficulty traveling to take possession of their aircraft. In addition, while we continue to work closely with suppliers to mitigate COVID-19 impacts, some suppliers could experience additional delays. The supplier disruptions along with efficiency impacts resulting from our efforts to comply with the Centers for Disease Control and Prevention (CDC) protocols in our facilities have impacted our productivity. In addition, should the large economies of the world experience a significant extended downturn from the pandemic, demand for our aerospace products would likely be impacted. We will continue to assess further potential consequences to our employees, business, supply chain and customers, and take actions to mitigate adverse outcomes.

We took actions in the first quarter to strengthen our liquidity and financial condition. In March 2020, we issued $4 billion of fixed-rate notes to repay $2.5 billion of fixed- and floating-rate notes that mature in May 2020 and for general corporate purposes, including the repayment of a portion of our borrowings under our commercial paper program as they mature. In addition to this long-term borrowing, we renewed our access to $5 billion of credit facilities through March 2021. While part of our pre-COVID-19 planning, this liquidity preserves our financial flexibility during the pandemic. We believe that our cash flows from operations and borrowing capacity are sufficient to support our short and long-term liquidity needs.

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 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

Revenue was down in our Aerospace segment driven by delays in Gulfstream aircraft deliveries. Customers were unable to take delivery of 11 aircraft scheduled for delivery in the first quarter due to quarantine and travel restrictions resulting from the COVID-19 outbreak. The impact of these restrictions

The change in the segment’s operating earnings in the first quarter of 2020 consisted of the following:

Operating earnings were down due to the delayed aircraft deliveries. This decrease was offset partially by lower net G&A/other expenses, including reduced R&D expenses. Overall, R&D expenses have been trending downward with the completion of the G500 and G600 aircraft test programs, and the first quarter of 2020 included higher supplier launch assistance associated with our aircraft development programs. In total, the Aerospace segment’s operating margin decreased 40 basis points due to the reduced number and mix of Gulfstream aircraft deliveries.

Revenue from U.S. military vehicles increased due primarily to higher volume on the U.S. Army’s Abrams M1A2 System Enhancement Package Version 3 (SEPv3) tank program. Weapons systems and munitions revenue was up due to increased volume on several products, including artillery and missile subcomponents. Revenue from international military vehicles decreased due to lower volume on various wheeled armored vehicle programs, offset partially by increased volume on the British Army’s AJAX armored fighting vehicle program.

The Combat Systems segment’s operating earnings and margin were up due to the increased revenue as well as an unfavorable settlement in the first quarter of 2019 relating to a lease at a former operating site outside the United States.

Revenue was down across the Information Technology segment due to the exit of non-core lines of business in 2019, the closure of some customer sites to all but mission critical personnel in connection with the COVID-19 outbreak, and the completion of several legacy programs in 2019 versus the start-up of new programs. The Information Technology segment’s operating margin was up 30 basis points compared with the prior-year period, reflecting improved performance and mix.

Revenue in the Mission Systems segment was down slightly in the first quarter of 2020 due to delayed customer shipments caused in part by customer site closures due to the COVID-19 outbreak. The Mission Systems segment’s operating margin increased 50 basis points due to favorable program mix, particularly in our ground systems and products business.

Revenue from U.S. Navy ship construction was up due to higher volume on Block V of the Virginia-class submarine program and the Columbia-class submarine program, offset somewhat by lower Virginia-class Block IV volume timing and absenteeism at Bath Iron Works. Revenue from U.S. Navy ship engineering, repair and other services increased, driven by a higher volume of surface ship repair work.

The Marine Systems segment’s operating margin decreased 50 basis points due to a shift in mix and delays on a commercial ship contract.

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. In both periods, our stock option expense exceeded this offset.

Aircraft manufacturing revenue decreased due to delays in aircraft deliveries resulting from the COVID-19 outbreak. Revenue from ship construction increased due to higher volume on Block V of the Virginia-class submarine program and the Columbia-class submarine program, offset partially by lower Virginia-class Block IV volume timing. The primary drivers of the decrease in product operating costs were the changes in volume on the programs described above.

IT services revenue decreased due to the exit of non-core lines of business and the completion of several legacy programs in 2019 versus the start-up of new programs. Ship engineering, repair and other services revenue increased, driven by a higher volume of surface ship repair work. The primary drivers of the decrease in service operating costs were the changes in volume on the programs described above.

The following table details the backlog and estimated potential contract value of each segment at the end of the first quarter of 2020 and fourth quarter of 2019:

Order activity for new aircraft was progressing well until the last two weeks of the quarter, when activity largely ceased due to the COVID-19 outbreak. Typically, the last few weeks of a quarter experience the most order activity. Despite this, orders in the first quarter of 2020 reflected demand across our product and services portfolio, and the segment’s book-to-bill ratio (orders divided by revenue) was 1.1-to-1.

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 March 29, 2020, estimated potential contract value in the Aerospace segment was $2.8 billion.

Estimated potential contract value in our defense segments 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 $72.5 billion on March 29, 2020, compared with $73.6 billion on December 31, 2019. After experiencing a book-to-bill ratio of 1.1-to-1 in 2019, the Information Technology segment started 2020 with another quarter of strong orders, achieving a book-to-bill ratio of 1.2-to-1. Estimated potential contract value in our defense segments was $35.3 billion on March 29, 2020. We received the following significant contract awards during the first quarter of 2020:

Combat Systems:

Information Technology:

Mission Systems:

Marine Systems:

On March 4, 2020, our board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the first three months of 2020, we repurchased 3.4 million of our outstanding shares for $501. On March 29, 2020, 13 million shares remained authorized by our board of directors for repurchase, representing 4.5% of our total shares outstanding. We repurchased 0.5 million shares for $86 in the first three months of 2019.

We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1:

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

Our Information Technology reporting unit’s estimated fair value exceeded its carrying value by approximately 25% as of December 31, 2019. While a material change in the reporting unit’s fair value or carrying value could put it at risk of goodwill impairment, we currently do not expect the COVID-19 disruptions to have a significant impact on our IT services business or the estimated fair value of the reporting unit.

Under the relevant indenture, the guarantee of each guarantor is limited to the maximum amount that can be guaranteed without rendering the guarantee voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the company or any of its subsidiaries) or (2) there occurs a transfer, sale or other disposition of the voting stock of a guarantor so that the guarantor is no longer a subsidiary of the company, then the guarantor or the entity acquiring the assets (in the event of

The following summarized financial information presents the parent and guarantors (collectively, the combined obligor group) on a combined basis. The summarized financial information of the combined obligor group excludes net investment in and earnings of subsidiaries related to interests held by the combined obligor group in subsidiaries that are not guarantors of the notes.

The summarized balance sheet information presented above includes the funded status of the company’s primary domestic qualified defined-benefit pension plans as the parent has the ultimate obligation for the plans.