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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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NOTE 1 – BASIS OF PRESENTATION

We prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations, financial condition, and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement benefit plans, assets for the portion of environmental costs that are probable of future recovery and liabilities, evaluation of goodwill, investments and other assets for impairment, income taxes including deferred tax assets, fair value measurements and contingencies. The consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation.

We close our books and records on the last Sunday of the calendar quarter, which was on March 29 for the first quarter of 2020 and March 31 for the first quarter of 2019, to align our financial closing with our business processes. The consolidated financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as our fiscal year ends on December 31.

We adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020 using the modified retrospective approach. The new standard changes how we account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. Under legacy standards, we recognized an impairment of receivables when it was probable that a loss had been incurred. Under the new standard, we are required to recognize estimated credit losses expected to occur over the estimated life or remaining contractual life of an asset (which includes losses that may be incurred in future periods) using a broader range of information including reasonable and supportable forecasts about future economic conditions. The adoption of the standard did not have a significant impact on our operating results, financial position or cash flows.

We adopted ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements For Defined Benefit Plans, effective January 1, 2020. The new standard modifies the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance requires disclosure changes to be presented on a retrospective basis. As this standard relates only to financial disclosures, its adoption did not have an impact to our operating results, financial position or cash flows.

The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year or future periods. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a “per diluted share” basis. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).

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NOTE 2 – EARNINGS PER COMMON SHARE

The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):

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		Quarters Ended
		March 29, 2020				March 31, 2019
Weighted average common shares outstanding for basic computations		281.3				282.5
Weighted average dilutive effect of equity awards		1.3				1.8
Weighted average common shares outstanding for diluted computations		282.6				284.3

We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards during the quarters ended March 29, 2020 or March 31, 2019.

NOTE 3 – INFORMATION ON BUSINESS SEGMENTS

We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We organize our business segments based on the nature of products and services offered.

Net sales and operating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments.

Business segment operating profit also excludes the FAS/CAS operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, retiree benefits, significant severance actions, significant asset impairments, gains or losses from significant divestitures, and other miscellaneous corporate activities.

Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 10 – Other” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.

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Summary operating results for each of our business segments were as follows (in millions):

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		Quarters Ended
		March 29, 2020					March 31, 2019
Net sales
Aeronautics		$	6,369				$	5,584
Missiles and Fire Control		2,619					2,350
Rotary and Mission Systems		3,746					3,762
Space		2,917					2,640
Total net sales		$	15,651				$	14,336
Operating profit
Aeronautics		$	672				$	585
Missiles and Fire Control		396					417
Rotary and Mission Systems		376					379
Space		281					334
Total business segment operating profit		1,725					1,715
Unallocated items
FAS/CAS operating adjustment (a)		469					512
Stock-based compensation		(42		)			(37		)
Other, net		(30		)			93
Total unallocated items		397					568
Total consolidated operating profit		$	2,122				$	2,283
Intersegment sales
Aeronautics		$	59				$	42
Missiles and Fire Control		136					121
Rotary and Mission Systems		499					499
Space		108					68
Total intersegment sales		$	802				$	730

(a)	The FAS/CAS operating adjustment represents the difference between the service cost component of financial accounting standards (FAS) pension income (expense) and total pension costs recoverable on U.S. Government contracts as determined in accordance with CAS.

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Our total net FAS/CAS pension adjustment for the quarters ended March 29, 2020 and March 31, 2019, including the service and non-service cost components of FAS pension income (expense) for our qualified defined benefit pension plans, were as follows (in millions):

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		Quarters Ended
		March 29, 2020					March 31, 2019
Total FAS income (expense) and CAS costs
FAS pension income (expense)		$	30				$	(273	)
Less: CAS pension cost		494					641
Net FAS/CAS pension adjustment		$	524				$	368
Service and non-service cost reconciliation
FAS pension service cost		$	(25	)			$	(129	)
Less: CAS pension cost		494					641
FAS/CAS operating adjustment		469					512
Non-operating FAS pension income (expense)		55					(144		)
Net FAS/CAS pension adjustment		$	524				$	368

We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension income (expense) and total CAS pension cost. The non-service FAS pension income (expense) component is included in other non-operating income (expense), net in our consolidated statements of earnings. As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension income (expense), we have a favorable FAS/CAS operating adjustment.

The corporation will have FAS pension income in 2020, compared to FAS pension expense in prior periods. We will no longer have service costs for certain of our plans as a result of completing the planned freeze of our salaried pension plans effective January 1, 2020 that was previously announced on July 1, 2014. See “Note 6 – Postretirement Benefit Plans” for additional information regarding the corporation’s FAS pension expense or income and CAS pension cost.

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Net sales by products and services, contract type, customer, and geographic region were as follows (in millions):

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		Quarter Ended March 29, 2020
		Aeronautics				MFC				RMS				Space				Total
Net sales
Products		$	5,455			$	2,275			$	2,986			$	2,450			$	13,166
Services		914				344				760				467				2,485
Total net sales		$	6,369			$	2,619			$	3,746			$	2,917			$	15,651
Net sales by contract type
Fixed-price		$	4,584			$	1,718			$	2,482			$	519			$	9,303
Cost-reimbursable		1,785				901				1,264				2,398				6,348
Total net sales		$	6,369			$	2,619			$	3,746			$	2,917			$	15,651
Net sales by customer
U.S. Government		$	4,033			$	1,955			$	2,788			$	2,483			$	11,259
International (a)		2,321				660				855				420				4,256
U.S. commercial and other		15				4				103				14				136
Total net sales		$	6,369			$	2,619			$	3,746			$	2,917			$	15,651
Net sales by geographic region
United States		$	4,048			$	1,959			$	2,891			$	2,497			$	11,395
Asia Pacific		995				75				318				28				1,416
Europe		948				168				167				398				1,681
Middle East		328				407				207				(6		)		936
Other		50				10				163				—				223
Total net sales		$	6,369			$	2,619			$	3,746			$	2,917			$	15,651

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		Quarter Ended March 31, 2019
		Aeronautics				MFC				RMS				Space				Total
Net sales
Products		$	4,796			$	1,916			$	3,059			$	2,199			$	11,970
Services