Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENT OF EARNINGS

			Year Ended December 31
(Dollars in millions, except per-share amounts)			2021						2020						2019
Revenue:
Products			$	22,428					$	22,188					$	23,130
Services			16,041						15,737						16,220
			38,469						37,925						39,350
Operating costs and expenses:
Products			(18,524)						(18,192)						(18,611)
Services			(13,537)						(13,408)						(13,752)
General and administrative (G&A)			(2,245)						(2,192)						(2,417)
			(34,306)						(33,792)						(34,780)
Operating earnings			4,163						4,133						4,570
Other, net			134						82						92
Interest, net			(424)						(477)						(460)
Earnings before income tax			3,873						3,738						4,202
Provision for income tax, net			(616)						(571)						(718)
Net earnings			$	3,257					$	3,167					$	3,484
Earnings per share
Basic			$	11.61					$	11.04					$	12.09
Diluted			$	11.55					$	11.00					$	11.98

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

			Year Ended December 31
(Dollars in millions)						2021						2020						2019
Net earnings						$	3,257					$	3,167					$	3,484
(Losses) gains on cash flow hedges						(174)						366						97
Foreign currency translation adjustments						(103)						353						186
Change in retirement plans’ funded status						2,365						(453)						(857)
Other comprehensive income (loss), pretax						2,088						266						(574)
(Provision) benefit for income tax, net						(458)						2						156
Other comprehensive income (loss), net of tax						1,630						268						(418)
Comprehensive income						$	4,887					$	3,435					$	3,066

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

CONSOLIDATED BALANCE SHEET

			December 31
(Dollars in millions)			2021						2020
ASSETS
Current assets:
Cash and equivalents			$	1,603					$	2,824
Accounts receivable			3,041						3,161
Unbilled receivables			8,498						8,024
Inventories			5,340						5,745
Other current assets			1,505						1,789
Total current assets			19,987						21,543
Noncurrent assets:
Property, plant and equipment, net			5,417						5,100
Intangible assets, net			1,978						2,117
Goodwill			20,098						20,053
Other assets			2,593						2,495
Total noncurrent assets			30,086						29,765
Total assets			$	50,073					$	51,308
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt			$	1,005					$	3,003
Accounts payable			3,167						2,952
Customer advances and deposits			6,266						6,276
Other current liabilities			3,540						3,733
Total current liabilities			13,978						15,964
Noncurrent liabilities:
Long-term debt			10,490						9,995
Other liabilities			7,964						9,688
Commitments and contingencies (see Note M)
Total noncurrent liabilities			18,454						19,683
Shareholders’ equity:
Common stock			482						482
Surplus			3,278						3,124
Retained earnings			35,420						33,498
Treasury stock			(19,619)						(17,893)
Accumulated other comprehensive loss			(1,920)						(3,550)
Total shareholders’ equity			17,641						15,661
Total liabilities and shareholders’ equity			$	50,073					$	51,308

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

CONSOLIDATED STATEMENT OF CASH FLOWS

			Year Ended December 31
(Dollars in millions)			2021						2020						2019
Cash flows from operating activities - continuing operations:
Net earnings			$	3,257					$	3,167					$	3,484
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation of property, plant and equipment			568						523						466
Amortization of intangible and finance lease right-of-use assets			322						355						363
Equity-based compensation expense			126						128						133
Deferred income tax (benefit) provision			(66)						(127)						92
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable			138						371						176
Unbilled receivables			(410)						(116)						(1,303)
Inventories			405						502						(376)
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable			194						(215)						6
Customer advances and deposits			354						(707)						(105)
Other, net			(617)						(23)						45
Net cash provided by operating activities			4,271						3,858						2,981
Cash flows from investing activities:
Capital expenditures			(887)						(967)						(987)
Other, net			5						(7)						(7)
Net cash used by investing activities			(882)						(974)						(994)
Cash flows from financing activities:
Repayment of fixed-rate notes			(2,500)						(2,000)						—
Proceeds from commercial paper, gross (maturities greater than 3 months)			1,997						420						—
Repayment of commercial paper, gross (maturities greater than 3 months)			(1,997)						(420)						—
Purchases of common stock			(1,828)						(587)						(231)
Proceeds from fixed-rate notes			1,497						3,960						—
Dividends paid			(1,315)						(1,240)						(1,152)
Repayment of floating-rate notes			(500)						(500)						—
Proceeds from (repayment of) credit facility, net			6						(441)						291
Repayment of commercial paper, net			—						—						(850)
Other, net			50						(95)						(55)
Net cash used by financing activities			(4,590)						(903)						(1,997)
Net cash used by discontinued operations			(20)						(59)						(51)
Net (decrease) increase in cash and equivalents			(1,221)						1,922						(61)
Cash and equivalents at beginning of year			2,824						902						963
Cash and equivalents at end of year			$	1,603					$	2,824					$	902

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

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

			Common Stock												Retained						Treasury						Accumulated Other Comprehensive						Total Shareholders’
(Dollars in millions)			Par						Surplus						Earnings						Stock						Loss						Equity
December 31, 2018			$	482					$	2,946					$	29,326					$	(17,244)					$	(3,400)					$	12,110
Net earnings			—						—						3,484						—						—						3,484
Cash dividends declared			—						—						(1,177)						—						—						(1,177)
Equity-based awards			—						93						—						70						—						163
Shares purchased			—						—						—						(184)						—						(184)
Other comprehensive loss			—						—						—						—						(418)						(418)
December 31, 2019			482						3,039						31,633						(17,358)						(3,818)						13,978
Cumulative-effect adjustment*			—						—						(37)						—						—						(37)
Net earnings			—						—						3,167						—						—						3,167
Cash dividends declared			—						—						(1,265)						—						—						(1,265)
Equity-based awards			—						85						—						67						—						152
Shares purchased			—						—						—						(602)						—						(602)
Other comprehensive income			—						—						—						—						268						268
December 31, 2020			482						3,124						33,498						(17,893)						(3,550)						15,661
Net earnings			—						—						3,257						—						—						3,257
Cash dividends declared			—						—						(1,335)						—						—						(1,335)
Equity-based awards			—						154						—						109						—						263
Shares purchased			—						—						—						(1,835)						—						(1,835)
Other comprehensive income			—						—						—						—						1,630						1,630
December 31, 2021			$	482					$	3,278					$	35,420					$	(19,619)					$	(1,920)					$	17,641

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

*Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services.

Basis of Consolidation and Classification. The 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 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.

Use of Estimates and Other Uncertainties. The nature of our business requires that we make estimates and assumptions in accordance with U.S. generally accepted accounting principles (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. We base our estimates on historical experience, currently available information and various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

Research and Development Expenses. Company-sponsored research and development (R&D) expenses, including Aerospace product-development costs, were $415 in 2021, $374 in 2020 and $466 in 2019. R&D expenses trended downward in 2019 and 2020 with the completion of the G500 and G600 aircraft test programs, and increased in 2021 driven by activities primarily associated with the G700 aircraft test program. R&D expenses are included in operating costs and expenses in the Consolidated Statement of Earnings in the period in which they are incurred. Customer-sponsored R&D expenses are charged directly to the related contracts.

The Aerospace segment has cost-sharing arrangements with some of its suppliers that enhance the segment’s internal development capabilities and offset a portion of the financial cost associated with the segment’s product development efforts. These arrangements explicitly state that supplier contributions are for reimbursement of costs we incur in the development of new aircraft models and technologies, and we retain substantial rights in the products developed under these arrangements. We record amounts received from these cost-sharing arrangements as a reduction of R&D expenses. We have no obligation to refund any amounts received under the agreements regardless of the outcome of the development efforts. Under the typical terms of an agreement, payments received from suppliers for their share of the costs are based on milestones and are recognized as received. Our policy is to defer payments in excess of the costs we have incurred.

Interest, Net. Net interest expense consisted of the following:

Year Ended December 31			2021						2020						2019
Interest expense			$	431					$	489					$	472
Interest income			(7)						(12)						(12)
Interest expense, net			$	424					$	477					$	460

See Note K for information regarding our debt obligations, including interest rates.

Cash and Equivalents and Investments in Debt and Equity Securities. We consider securities with a maturity of three months or less to be cash equivalents. Our cash balances are invested primarily in time deposits rated A-/A3 or higher. Our investments in other securities are included in other current and noncurrent assets on the Consolidated Balance Sheet. We report our equity securities at fair value with subsequent changes in fair value recognized in net earnings. We report our available-for-sale debt securities at fair value with unrealized gains and losses recognized as a component of other comprehensive income in the Consolidated Statement of Comprehensive Income. We had no trading or held-to-maturity debt securities on December 31, 2021 or 2020. See Note P for additional information regarding our investments in debt and equity securities.

Other Contract Costs. Other contract costs represent amounts accrued under GAAP that are not currently allocable to U.S. government contracts in accordance with the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS). These costs include workers’ compensation, pension and other post-retirement benefits, and environmental obligations. We defer these costs in other current assets on the Consolidated Balance Sheet until they can be allocated to contracts, which is generally after they are paid. We expect to recover these costs through ongoing business, including existing backlog and probable follow-on contracts. We regularly assess the probability of recovery of these costs. 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. Other contract costs on December 31, 2021 and 2020, were $305 and $499, respectively.

Acquisitions and Divestitures. In the last three years, we acquired six businesses in our Aerospace segment, two businesses in our Combat Systems segment and a business in our Technologies segment. The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.

In 2020, we completed the sale of a business in our Aerospace segment and two businesses in our Technologies segment, one of which was classified as held for sale on the Consolidated Balance Sheet on December 31, 2019. In 2019, we completed the sale of a business in our Technologies segment that was classified as held for sale on the Consolidated Balance Sheet on December 31, 2018.

Long-lived Assets and Goodwill. We review long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over the estimated fair value as determined by discounted cash flows.

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Our reporting units are consistent with our operating segments in Note O. We use both qualitative and quantitative approaches when testing goodwill for impairment. When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments. Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events. If, based on the qualitative assessment, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary. However, if a quantitative assessment is determined to be necessary, we compare the fair value of a reporting unit to its carrying value and, if necessary, recognize an impairment loss for the amount by which the carrying value exceeds the reporting unit’s fair value. Our estimate of fair value is based primarily on the discounted cash flows of the underlying operations.

As of December 31, 2021, we completed qualitative assessments for our reporting units as the estimated fair values of each of the reporting units significantly exceeded the respective carrying values based on our most recent quantitative assessments, which were performed as of December 31, 2018, for the Aerospace, Marine Systems and Combat Systems reporting units, and as of December 31, 2020, for the Technologies reporting unit. Our qualitative assessments, including consideration of the impact of the coronavirus (COVID-19) pandemic, did not present indicators of impairment for the reporting units. For a summary of our goodwill by reporting unit, see Note H.

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

B. REVENUE

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue. A contract’s transaction price is allocated to each distinct performance obligation within that contract and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product life cycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

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

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 78% of our revenue in 2021, 77% in 2020 and 73% in 2019. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a point in time accounted for 22% of our revenue in 2021, 23% in 2020 and 27% in 2019. Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On December 31, 2021, we had $87.6 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 35% of our remaining performance obligations as revenue in 2022, an additional 35% by the end of 2024 and the balance thereafter.

Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims, award fees 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 fees 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.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:

Year Ended December 31			2021						2020						2019
Revenue			$	411					$	389					$	342
Operating earnings			377						283						271
Diluted earnings per share			$	1.06					$	0.78					$	0.74

No adjustment on any one contract was material to the Consolidated Financial Statements in 2021, 2020 or 2019.

Revenue by Category. Our portfolio of products and services consists of approximately 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

Revenue by major products and services was as follows:

Year Ended December 31			2021						2020						2019
Aircraft manufacturing			$	5,864					$	6,115					$	7,541
Aircraft services			2,271						1,960						2,260
Total Aerospace			8,135						8,075						9,801
Nuclear-powered submarines			7,117						6,938						6,254
Surface ships			2,328						2,055						1,912
Repair and other services			1,081						986						1,017
Total Marine Systems			10,526						9,979						9,183
Military vehicles			4,699						4,687						4,620
Weapons systems, armament and munitions			2,006						1,991						1,906
Engineering and other services			646						545						481
Total Combat Systems			7,351						7,223						7,007
Information technology (IT) services			8,069						7,892						8,422
C5ISR* solutions			4,388						4,756						4,937
Total Technologies			12,457						12,648						13,359
Total revenue			$	38,469					$	37,925					$	39,350

*Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance

Revenue by contract type was as follows:

Year Ended December 31, 2021			Aerospace						Marine Systems						Combat Systems						Technologies						Total Revenue
Fixed-price			$	7,329					$	6,711					$	6,400					$	5,362					$	25,802
Cost-reimbursement			—						3,812						890						5,195						9,897
Time-and-materials			806						3						61						1,900						2,770
Total revenue			$	8,135					$	10,526					$	7,351					$	12,457					$	38,469
Year Ended December 31, 2020
Fixed-price			$	7,402					$	6,924					$	6,159					$	5,794					$	26,279
Cost-reimbursement			—						3,045						997						5,300						9,342
Time-and-materials			673						10						67						1,554						2,304
Total revenue			$	8,075					$	9,979					$	7,223					$	12,648					$	37,925
Year Ended December 31, 2019
Fixed-price			$	8,949					$	6,331					$	6,049					$	6,344					$	27,673
Cost-reimbursement			—						2,839						894						5,263						8,996
Time-and-materials			852						13						64						1,752						2,681
Total revenue			$	9,801					$	9,183					$	7,007					$	13,359					$	39,350

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

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

Revenue by customer was as follows:

Year Ended December 31, 2021			Aerospace						Marine Systems						Combat Systems						Technologies						Total Revenue
U.S. government:
Department of Defense (DoD)			$	255					$	10,325					$	3,869					$	6,937					$	21,386
Non-DoD			—						6						10						4,846						4,862
Foreign military sales (FMS)			84						186						294						34						598
Total U.S. government			339						10,517						4,173						11,817						26,846
U.S. commercial			4,381						3						223						201						4,808
Non-U.S. government			622						4						2,881						415						3,922
Non-U.S. commercial			2,793						2						74						24						2,893
Total revenue			$	8,135					$	10,526					$	7,351					$	12,457					$	38,469
Year Ended December 31, 2020
U.S. government:
DoD			$	394					$	9,656					$	3,813					$	6,977					$	20,840
Non-DoD			—						9						12						4,705						4,726
FMS			119						206						366						46						737
Total U.S. government			513						9,871						4,191						11,728						26,303
U.S. commercial			4,268						97						254						272						4,891
Non-U.S. government			221						9						2,704						551						3,485
Non-U.S. commercial			3,073						2						74						97						3,246
Total revenue			$	8,075					$	9,979					$	7,223					$	12,648					$	37,925
Year Ended December 31, 2019
U.S. government:
DoD			$	305					$	8,837					$	3,695					$	7,027					$	19,864
Non-DoD			88						2						13						5,151						5,254
FMS			105						188						340						56						689
Total U.S. government			498						9,027						4,048						12,234						25,807
U.S. commercial			5,270						142						229						327						5,968
Non-U.S. government			399						9						2,663						673						3,744
Non-U.S. commercial			3,634						5						67						125						3,831
Total revenue			$	9,801					$	9,183					$	7,007					$	13,359					$	39,350

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and

liability balances during the year ended December 31, 2021, were not materially impacted by any other factors.

Revenue recognized in 2021, 2020 and 2019 that was included in the contract liability balance at the beginning of each year was $3.4 billion, $3.8 billion and $4.5 billion, respectively. This revenue represented primarily the sale of business jet aircraft.

C. EARNINGS PER SHARE

We compute basic earnings per share (EPS) using net earnings for the period and the weighted average number of common shares outstanding during the period. Basic weighted average shares outstanding have decreased in 2021 and 2020 due to share repurchases. See Note N for further discussion of our share repurchases. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs).

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

Year Ended December 31			2021						2020						2019
Basic weighted average shares outstanding			280,427						286,922						288,286
Dilutive effect of stock options and restricted stock/RSUs*			1,590						991						2,550
Diluted weighted average shares outstanding			282,017						287,913						290,836

*Excludes outstanding options to purchase shares of common stock that had exercise prices in excess of the average market price of our common stock during the year and, therefore, the effect of including these options would be antidilutive. These options totaled 5,037 in 2021, 7,159 in 2020 and 4,985 in 2019.

D. INCOME TAXES

Income Tax Provision. We calculate our provision for federal, state and foreign income taxes based on current tax law. The following is a summary of our net provision for income taxes for continuing operations:

Year Ended December 31			2021						2020						2019
Current:
U.S. federal			$	515					$	558					$	471
State			30						8						36
Foreign			137						132						119
Total current			682						698						626
Deferred:
U.S. federal			(53)						(130)						49
State			(5)						(2)						1
Foreign			(8)						5						42
Total deferred			(66)						(127)						92
Provision for income taxes, net			$	616					$	571					$	718
Net income tax payments			$	740					$	764					$	572

The reported tax provision differs from the amounts paid because some income and expense items are recognized in different time periods for financial reporting than for income tax purposes. State and local income taxes allocable to U.S. government contracts are included in operating costs and expenses in the Consolidated Statement of Earnings and, therefore, are not included in the provision above.

The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:

Year Ended December 31			2021						2020						2019
Statutory federal income tax rate			21.0		%				21.0		%				21.0		%
Domestic tax credits			(2.0)						(4.6)						(2.0)
Equity-based compensation			(0.1)						(0.2)						(1.1)
Foreign derived intangible income			(1.5)						(2.1)						(1.4)
State tax on commercial operations, net of federal benefits			0.5						0.1						0.7
Global impact of international operations			(1.0)						1.9						0.2
Other, net			(1.0)						(0.8)						(0.3)
Effective income tax rate			15.9		%				15.3		%				17.1		%

Net Deferred Tax Liability. The tax effects of temporary differences between reported earnings and taxable income consisted of the following:

December 31			2021						2020
Retirement benefits			$	570					$	1,042
Lease liabilities			370						373
Tax loss and credit carryforwards			294						311
Salaries and wages			236						259
Workers’ compensation			161						167
Other			365						373
Deferred assets			1,996						2,525
Valuation allowances			(258)						(273)
Net deferred assets			$	1,738					$	2,252
Intangible assets			$	(1,059)					$	(1,067)
Property, plant and equipment			(412)						(270)
Lease right-of-use assets			(367)						(379)
Contract accounting methods			(259)						(311)
Capital Construction Fund qualified ships			(57)						(59)
Other			(411)						(590)
Deferred liabilities			$	(2,565)					$	(2,676)
Net deferred tax liability			$	(827)					$	(424)

Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax liability consisted of the following:

December 31			2021						2020
Deferred tax asset			$	41					$	37
Deferred tax liability			(868)						(461)
Net deferred tax liability			$	(827)					$	(424)

We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized.

Our deferred tax balance associated with our retirement benefits includes a deferred tax asset of $692 on December 31, 2021, and $1.2 billion on December 31, 2020, related to the amounts recorded in accumulated other comprehensive loss (AOCL) to recognize the funded status of our retirement plans. For a reconciliation of the decrease in funded status of our defined benefit plans in 2021, see Note S.

One of our deferred tax liabilities results from our participation in the Capital Construction Fund (CCF), a program established by the U.S. government and administered by the Maritime Administration that supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. The program allows us to defer federal and state income taxes on earnings derived from eligible programs as long as the proceeds are deposited in the fund and withdrawals are used for qualified activities. We had U.S. government accounts receivable pledged (and thereby deposited) to the CCF of $295 on December 31, 2021 and 2020.

On December 31, 2021, we had net operating loss carryforwards of $1 billion, substantially all of which are associated with jurisdictions that have an indefinite carryforward period.

Tax Uncertainties. We participate in the Internal Revenue Service (IRS) Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2020.

For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50% chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.

Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on December 31, 2021, was not material to our results of operations, financial condition or cash flows. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.

E. ACCOUNTS RECEIVABLE

Accounts receivable represent amounts billed and currently due from customers. Payment is typically received from our customers either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Accounts receivable consisted of the following:

December 31			2021						2020
Non-U.S. government			$	1,569					$	1,701
U.S. government			1,043						1,040
Commercial			429						420
Total accounts receivable			$	3,041					$	3,161

Receivables from non-U.S. government customers included amounts related to long-term production programs for the Spanish Ministry of Defence of $1.4 billion and $1.6 billion on December 31, 2021 and 2020, respectively. A different ministry, the Spanish Ministry of Industry, has funded work on these

programs in advance of costs incurred by the company. The cash advances are reported on the Consolidated Balance Sheet in current customer advances and deposits and will be repaid to the Ministry of Industry as we collect on the outstanding receivables from the Ministry of Defence. The net amounts for these programs on December 31, 2021 and 2020, were advance payments of $55 and $245, respectively. With respect to our other receivables, we expect to collect substantially all of the year-end 2021 balance during 2022.

F. UNBILLED RECEIVABLES

Unbilled receivables represent revenue recognized on long-term contracts (contract costs and estimated profits) less associated advances and progress billings. These amounts will be billed in accordance with the agreed-upon contractual terms. Unbilled receivables consisted of the following:

December 31			2021						2020
Unbilled revenue			$	39,566					$	36,657
Advances and progress billings			(31,068)						(28,633)
Net unbilled receivables			$	8,498					$	8,024

On December 31, 2021 and 2020, net unbilled receivables included $3.3 billion and $3.4 billion, respectively, associated with two large international contracts in our Combat Systems segment. We had experienced payment delays in 2018 and 2019 on a wheeled vehicle contract that was negotiated in 2012 before finalizing a contract amendment in 2020 with the customer that included a revised payment schedule. Under the amended contract, we have received progress payments in 2020 and 2021 that have reduced the program’s unbilled balance to $2 billion. The remaining scheduled progress payments will liquidate the net unbilled receivables balance by the end of 2023. A separate tracked vehicle contract that was signed in 2010 has experienced an unbilled receivable build-up over the past year while we work to resolve concerns that were raised by the customer on certain aspects of the program. As a result, the balance on this program has grown to $1.3 billion. Other than the balance related to the two large international contracts, we expect to bill substantially all of the remaining year-end 2021 net unbilled receivables balance during 2022. The amount not expected to be billed in 2022 results primarily from the agreed-upon contractual billing terms.

G&A costs in unbilled revenue on December 31, 2021 and 2020, were $501 and $427, respectively.

G. INVENTORIES

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

Inventories consisted of the following:

December 31			2021						2020
Work in process			$	3,654					$	3,990
Raw materials			1,651						1,712
Finished goods			22						30
Pre-owned aircraft			13						13
Total inventories			$	5,340					$	5,745

H. GOODWILL AND INTANGIBLE ASSETS

Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:

			Aerospace						Marine Systems						Combat Systems						Information Technology						Mission Systems						Technologies						Total Goodwill
December 31, 2019 (a)			$	2,831					$	297					$	2,681					$	9,700					$	4,168					$	—					$	19,677
Acquisitions (b)			72						—						65						—						—						—						137
Other (c)			162						—						40						46						(9)						—						239
Change in reporting unit composition (d)			—						—						—						(9,746)						(4,159)						13,905						—
December 31, 2020 (e)			3,065						297						2,786						—						—						13,905						20,053
Acquisitions (b)			33						—						54						—						—						—						87
Other (c)			(59)						—						(13)						—						—						30						(42)
December 31, 2021 (e)			$	3,039					$	297					$	2,827					$	—					$	—					$	13,935					$	20,098

(a)Goodwill in the Information Technology and Mission Systems reporting units was net of $536 and $1.3 billion of accumulated impairment losses, respectively.

(b)Included adjustments during the purchase price allocation period.

(c)Consisted primarily of adjustments for foreign currency translation. Activity for the year ended December 31, 2020, also included an allocation of goodwill to operations classified as held for sale.

(d)Effective December 31, 2020, we reorganized our Information Technology and Mission Systems operating segments into a single Technologies segment. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Technology and Mission Systems reporting units was combined and assigned to the Technologies reporting unit.

(e)Goodwill in the Technologies reporting unit was net of $1.8 billion of accumulated impairment losses.

Intangible Assets. Intangible assets consisted of the following:

			Gross Carrying Amount (a)			Accumulated Amortization			Net Carrying Amount						Gross Carrying Amount (a)			Accumulated Amortization			Net Carrying Amount
December 31			2021												2020
Contract and program intangible assets (b)			$	3,239		$	(1,547)		$	1,692					$	3,399		$	(1,600)		$	1,799
Trade names and trademarks			501			(238)			263						516			(229)			287
Technology and software			70			(48)			22						134			(106)			28
Other intangible assets			64			(63)			1						161			(158)			3
Total intangible assets			$	3,874		$	(1,896)		$	1,978					$	4,210		$	(2,093)		$	2,117

(a)Changes in gross carrying amounts consisted primarily of adjustments for write-offs of fully amortized intangible assets, acquired intangible assets and foreign currency translation.

(b)Consisted of acquired backlog and probable follow-on work and associated customer relationships.

We did not recognize any impairments of our intangible assets in 2021, 2020 or 2019. The amortization lives (in years) of our intangible assets on December 31, 2021, were as follows:

Intangible Asset						Range of Amortization Life
Contract and program intangible assets						7-30
Trade names and trademarks						30
Technology and software						5-15
Other intangible assets						7

Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $226 in 2021, $261 in 2020 and $277 in 2019. We expect to record annual amortization expense over the next five years as follows:

Year Ended December 31			Amortization Expense
2022			$	200
2023			185
2024			173
2025			166
2026			161

I. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. Net PP&E by major asset class consisted of the following:

December 31			2021						2020
Machinery and equipment			$	6,281					$	5,941
Buildings and improvements			3,712						3,558
Construction in process			1,057						802
Land and improvements			414						413
Total PP&E			11,464						10,714
Accumulated depreciation			(6,047)						(5,614)
PP&E, net			$	5,417					$	5,100

We depreciate most of our assets using the straight-line method and the remainder using accelerated methods. Buildings and improvements are depreciated over periods of up to 50 years. Machinery and equipment are depreciated over periods of up to 30 years. Our government customers provide certain facilities and equipment for our use that are not included above.

J. LEASES

We determine at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize an ROU asset and lease liability for leases with terms of 12 months or less. Some of our leases include options to

extend the term of the lease for up to 30 years or to terminate the lease within 1 year. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments. As most of our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate on the commencement date to calculate the present value of future payments.

Our leases commonly include payments that are based on the Consumer Price Index (CPI) or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability. Other variable lease payments, such as usage-based amounts, are excluded from the ROU asset and lease liability, and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease, such as commissions.

In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.

Our leases are for office space, manufacturing facilities, and machinery and equipment. Real estate represents over 75% of our lease obligations.

The components of lease costs were as follows:

Year Ended December 31			2021						2020						2019
Finance lease cost:
Amortization of right-of-use assets			$	96					$	94					$	86
Interest on lease liabilities			20						25						24
Operating lease cost			323						326						332
Short-term lease cost			71						62						75
Variable lease cost			18						12						14
Sublease income			(18)						(16)						(13)
Total lease costs, net			$	510					$	503					$	518

Additional information related to leases was as follows:

Year Ended December 31			2021						2020						2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	322					$	323					$	325
Operating cash flows from finance leases			21						25						24
Financing cash flows from finance leases			66						64						57
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases			249						205						365
Finance leases			27						45						50

Additional quantitative lease information was as follows:

December 31			2021						2020
Weighted-average remaining lease term:
Operating leases			11.5 years						10.5 years
Finance leases			13.7 years						10.1 years
Weighted-average discount rate:
Operating leases			3		%				3		%
Finance leases			5		%				7		%

The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the Consolidated Balance Sheet on December 31, 2021:

Year Ended December 31			Operating Leases						Finance Leases
2022			$	289					$	92
2023			227						45
2024			184						27
2025			121						25
2026			96						24
Thereafter			728						202
Total future lease payments			1,645						415
Less imputed interest			302						78
Present value of future lease payments			1,343						337
Less current portion of lease liabilities			258						79
Long-term lease liabilities			$	1,085					$	258
ROU assets			$	1,257					$	319

On December 31, 2020, operating and finance lease liabilities and the related ROU assets were as follows:

			Operating Leases						Finance Leases
Current portion of lease liabilities			$	262					$	68
Long-term lease liabilities			1,149						255
ROU assets			1,328						333

Lease liabilities are included on the Consolidated Balance Sheet in current and noncurrent other liabilities, while ROU assets are included in noncurrent other assets.

On December 31, 2021, we had additional future payments on leases that had not yet commenced of $54. These leases will commence in 2022 and 2023, and have lease terms of 1 to 20 years.

K. DEBT

Debt consisted of the following:

December 31						2021						2020
Fixed-rate notes due:			Interest rate:
May 2021			3.000%			$	—					$	2,000
July 2021			3.875%			—						500
November 2022			2.250%			1,000						1,000
May 2023			3.375%			750						750
August 2023			1.875%			500						500
November 2024			2.375%			500						500
April 2025			3.250%			750						750
May 2025			3.500%			750						750
June 2026			1.150%			500						—
August 2026			2.125%			500						500
April 2027			3.500%			750						750
November 2027			2.625%			500						500
May 2028			3.750%			1,000						1,000
April 2030			3.625%			1,000						1,000
June 2031			2.250%			500						—
April 2040			4.250%			750						750
June 2041			2.850%			500						—
November 2042			3.600%			500						500
April 2050			4.250%			750						750
Floating-rate notes due:
May 2021			3-month LIBOR + 0.38%			—						500
Other			Various			106						117
Total debt principal						11,606						13,117
Less unamortized debt issuance costs and discounts						111						119
Total debt						11,495						12,998
Less current portion						1,005						3,003
Long-term debt						$	10,490					$	9,995

In May 2021, we issued $1.5 billion of fixed-rate notes. The proceeds, together with cash on hand and commercial paper issuances, were used to repay fixed- and floating-rate notes totaling $2.5 billion that matured in May 2021 and for general corporate purposes. In July 2021, we repaid an additional $500 of fixed-rate notes at the scheduled maturity.

Interest payments associated with our debt were $433 in 2021, $459 in 2020 and $434 in 2019.

The aggregate amounts of scheduled principal maturities of our debt are as follows:

Year Ended December 31			Debt Principal
2022			$	1,006
2023			1,255
2024			505
2025			1,503
2026			1,004
Thereafter			6,333
Total debt principal			$	11,606

On December 31, 2021, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. These credit facilities include a $2 billion 364-day facility expiring in March 2022, a $2 billion multi-year facility expiring in March 2023 and a $1 billion multi-year facility expiring in March 2025. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. We also have an effective shelf registration on file with the Securities and Exchange Commission (SEC) that allows us to access the debt markets.

Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on December 31, 2021.

L. OTHER LIABILITIES

A summary of significant other liabilities by balance sheet caption follows:

December 31			2021						2020
Salaries and wages			$	1,022					$	1,007
Lease liabilities			337						330
Dividends payable			331						316
Retirement benefits			288						306
Workers’ compensation			270						338
Other			1,292						1,436
Total other current liabilities			$	3,540					$	3,733
Retirement benefits*			$	2,813					$	5,182
Lease liabilities			1,343						1,404
Customer deposits on commercial contracts			1,250						872
Other			2,558						2,230
Total other liabilities			$	7,964					$	9,688

*For a reconciliation of the decrease in funded status of our defined benefit plans in 2021, see Note S.

M. COMMITMENTS AND CONTINGENCIES

Litigation

In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter which had been filed under seal in U.S. district court. Also in 2016, the Suspending and Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and engaged in discussions with the U.S. government.

In the third quarter of 2019, the Department of Justice declined to intervene in the qui tam action, noting that its investigation continues, and the court unsealed the relator’s complaint. In the fourth quarter of 2020, the relator filed a second amended complaint. In the third quarter of 2021, the court dismissed the relator’s complaint with prejudice. The relator has appealed the dismissal of the complaint to the United States Court of Appeals. Given the current status of these matters, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on our results of operations, financial condition and cash flows.

Additionally, various other claims and legal proceedings incidental to the normal course of business are pending or threatened against us. These other matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these other matters. However, based on information currently available, we believe any potential liabilities in these other proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.

Environmental

We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.

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

Other

Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government audits and investigations will not have a material impact on our results of operations, financial condition or cash flows.

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

Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance carriers totaling approximately $1.2 billion on December 31, 2021. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance of our subsidiaries arising under certain contracts.

Aircraft Trade-ins. In connection with orders for new aircraft in contract backlog, our Aerospace segment has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are generally structured to establish the fair market value of the trade-in aircraft at a date generally 45 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Other trade-in commitments are structured to guarantee a pre-determined trade-in value. These commitments present more risk in the event of an adverse change in market conditions. In either case, any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction. As of December 31, 2021, the estimated change in fair market values from the date of the commitments was not material.

Labor Agreements. On December 31, 2021, approximately one-fifth of the employees of our subsidiaries were working under collectively bargained terms and conditions, including 62 collective agreements that we have negotiated directly with unions and works councils. A number of these agreements expire within any given year. Historically, we have been successful at renegotiating these labor agreements without any material disruption of operating activities. In 2022, we expect to negotiate the terms of 21 agreements covering approximately 3,000 employees. We do not expect the renegotiations will, either individually or in the aggregate, have a material impact on our results of operations, financial condition or cash flows.

Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheet.

The changes in the carrying amount of warranty liabilities for each of the past three years were as follows:

Year Ended December 31			2021						2020						2019
Beginning balance			$	660					$	619					$	480
Warranty expense			104						113						258
Payments			(124)						(108)						(105)
Adjustments			1						36						(14)
Ending balance			$	641					$	660					$	619

N. SHAREHOLDERS’ EQUITY

Authorized Stock. Our authorized capital stock consists of 500 million shares of $1 per share par value common stock and 50 million shares of $1 per share par value preferred stock. The preferred stock is issuable in series, with the rights, preferences and limitations of each series to be determined by our board of directors.

Shares Issued and Outstanding. On December 31, 2021, we had 481,880,634 shares of common stock issued and 277,620,943 shares of common stock outstanding, including unvested restricted stock of 532,142 shares. On December 31, 2020, we had 481,880,634 shares of common stock issued and 286,477,836 shares of common stock outstanding. No shares of our preferred stock were outstanding on either date. The only changes in our shares outstanding during 2021 and 2020 resulted from shares repurchased in the open market and share activity under our equity compensation plans. See Note R for additional details.

Share Repurchases. Our board of directors, from time to time, authorizes management to repurchase outstanding shares of our common stock on the open market. On June 2, 2021, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In 2021, we repurchased 10.3 million of our outstanding shares for $1.8 billion. On December 31, 2021, 12.1 million shares remained authorized by our board of directors for repurchase, representing 4.3% of our total shares outstanding. We repurchased 4.1 million shares for $602 in 2020 and 1.1 million shares for $184 in 2019.

Dividends per Share. Our board of directors declared dividends per share of $4.76 in 2021, $4.40 in 2020 and $4.08 in 2019. We paid cash dividends of $1.3 billion in 2021 and $1.2 billion in 2020 and 2019.

Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of AOCL consisted of the following:

			(Losses) Gains on Cash Flow Hedges						Foreign Currency Translation Adjustments			Changes in Retirement Plans’ Funded Status			AOCL
December 31, 2018			$	(71)					$	102		$	(3,431)		$	(3,400)
Other comprehensive loss, pretax			97						186			(857)			(574)
Benefit from income tax, net			(24)						—			180			156
Other comprehensive loss, net of tax			73						186			(677)			(418)
December 31, 2019			2						288			(4,108)			(3,818)
Other comprehensive income, pretax			366						353			(453)			266
Benefit from income tax, net			(96)						—			98			2
Other comprehensive income, net of tax			270						353			(355)			268
December 31, 2020			272						641			(4,463)			(3,550)
Other comprehensive income, pretax			(174)						(103)			2,365			2,088
Provision for income tax, net			46						—			(504)			(458)
Other comprehensive income, net of tax			(128)						(103)			1,861			1,630
December 31, 2021			$	144					$	538		$	(2,602)		$	(1,920)

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 S for these amounts, which are included in our net periodic pension and other post-retirement benefit cost.

O. SEGMENT INFORMATION

We have four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We organize our segments in accordance with the nature of products and services offered. We measure each segment’s profitability based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our segments.

Summary financial information for each of our segments follows:

			Revenue (a)												Operating Earnings												Revenue from U.S. Government
Year Ended December 31			2021			2020			2019						2021			2020			2019						2021			2020			2019
Aerospace			$	8,135		$	8,075		$	9,801					$	1,031		$	1,083		$	1,532					$	339		$	513		$	498
Marine Systems			10,526			9,979			9,183						874			854			785						10,517			9,871			9,027
Combat Systems			7,351			7,223			7,007						1,067			1,041			996						4,173			4,191			4,048
Technologies			12,457			12,648			13,359						1,275			1,211			1,311						11,817			11,728			12,234
Corporate (b)			—			—			—						(84)			(56)			(54)						—			—			—
Total			$	38,469		$	37,925		$	39,350					$	4,163		$	4,133		$	4,570					$	26,846		$	26,303		$	25,807

(a)See Note B for additional revenue information by segment.

(b)Corporate operating results consist primarily of equity-based compensation expense.

The following is additional summary financial information for each of our segments:

			Identifiable Assets												Capital Expenditures												Depreciation and Amortization
Year Ended December 31			2021			2020			2019						2021			2020			2019						2021			2020			2019
Aerospace			$	11,748		$	12,050		$	12,324					$	102		$	95		$	138					$	205		$	201		$	178
Marine Systems			5,294			4,488			3,918						573			604			449						165			145			122
Combat Systems			11,657			12,034			11,220						100			92			109						109			95			85
Technologies			19,490			19,663			20,453						111			172			222						401			428			437
Corporate*			1,884			3,073			1,434						1			4			69						10			9			7
Total			$	50,073		$	51,308		$	49,349					$	887		$	967		$	987					$	890		$	878		$	829

*Corporate identifiable assets are primarily cash and equivalents.

The following table presents our revenue by geographic area based on the location of our customers:

Year Ended December 31			2021						2020						2019
North America:
United States			$	31,654					$	31,194					$	31,775
Other			934						1,078						898
Total North America			32,588						32,272						32,673
Europe			2,675						2,846						2,836
Asia/Pacific			1,269						1,292						1,739
Africa/Middle East			1,703						1,249						1,785
South America			234						266						317
Total revenue			$	38,469					$	37,925					$	39,350

Our revenue from non-U.S. operations was $4.4 billion in 2021, $4.3 billion in 2020 and $4.4 billion in 2019, and earnings from continuing operations before income taxes from non-U.S. operations were $588 in 2021, $585 in 2020 and $600 in 2019. The long-lived assets associated with these operations were 4% of our total long-lived assets on December 31, 2021, 2020 and 2019.

P. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:

• Level 1 - quoted prices in active markets for identical assets or liabilities.

• Level 2 - inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly.

• Level 3 - unobservable inputs significant to the fair value measurement.

We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2021 or 2020.

Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable on the Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of

our other financial assets and liabilities on December 31, 2021 and 2020, and the basis for determining their fair values:

			Carrying Value						Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets (Liabilities)			December 31, 2021
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents			$	4					$	4					$	—					$	4					$	—
Available-for-sale debt securities			125						125						—						125						—
Equity securities			62						62						62						—						—
Other investments			12						12						—						—						12
Cash flow hedge assets			320						320						—						320						—
Cash flow hedge liabilities			(98)						(98)						—						(98)						—
Measured at amortized cost:
Short- and long-term debt principal			(11,606)						(12,549)						—						(12,549)						—
			December 31, 2020
Measured at fair value:
Marketable securities held in trust:
Cash and equivalents			$	19					$	19					$	17					$	2					$	—
Available-for-sale debt securities			134						134						—						134						—
Equity securities			58						58						58						—						—
Other investments			9						9						—						—						9
Cash flow hedge assets			498						498						—						498						—
Cash flow hedge liabilities			(79)						(79)						—						(79)						—
Measured at amortized cost:
Short- and long-term debt principal			(13,117)						(14,606)						—						(14,606)						—

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

Q. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risk, primarily from foreign currency exchange rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivative financial instruments for trading or speculative purposes.

Foreign Currency Risk. Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale

contracts, designed to offset and minimize our risk. The dollar-weighted two-year average maturity of these instruments generally matches the duration of the activities that are at risk.

Commodity Price Risk. We are subject to commodity price risk, primarily on long-term, fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from these risks. Some of the protective terms included in our contracts are considered derivative financial instruments but are not accounted for separately, because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in 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 December 31, 2021 and 2020, we held $1.6 billion and $2.8 billion in cash and equivalents, respectively, but held no marketable securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified pension plans. On December 31, 2021 and 2020, we held marketable securities in trust of $191 and $211, respectively. These marketable securities are reflected at fair value on the Consolidated Balance Sheet in other current and noncurrent assets. See Note P for additional details.

Hedging Activities. On December 31, 2021, we had notional forward exchange contracts outstanding of $6.8 billion. On December 31, 2020, we had notional forward exchange and interest rate swap contracts outstanding of $9.4 billion. These derivative financial instruments are cash flow hedges, and are reflected at fair value on the Consolidated Balance Sheet in other current assets and liabilities. See Note P for additional details.

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

Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations in any of the past three years. Net gains and losses reclassified to earnings from AOCL related to qualified hedges were also not material to our results of operations in any of the past three years, 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 December 31, 2021 or 2020.

Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international businesses’ functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and statements of earnings at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of AOCL.

We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations’ results into U.S. dollars. The impact of translating our non-U.S. operations’ revenue and earnings into U.S. dollars was not material to our results of operations in any of the past three years. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in any of the past three years.

R. EQUITY COMPENSATION PLANS

Equity Compensation Overview. We have equity compensation plans for employees, as well as for non-employee members of our board of directors. The equity compensation plans seek to provide an effective means of attracting and retaining directors, officers and key employees, and to provide them with incentives to enhance our growth and profitability. Under the equity compensation plans, awards may be granted to officers, employees or non-employee directors in common stock, options to purchase common stock, restricted shares of common stock, participation units or any combination of these.

Annually, we grant awards of stock options, restricted stock and RSUs to participants in our equity compensation plans in early March. Additionally, we may make limited ad hoc grants on a quarterly basis for new hires or promotions. We issue common stock under our equity compensation plans from treasury stock. On December 31, 2021, in addition to the shares reserved for issuance upon the exercise of outstanding stock options, approximately 20 million shares have been authorized for awards that may be granted in the future.

Equity-based Compensation Expense. Equity-based compensation expense is included in G&A expenses. The following table details the components of equity-based compensation expense recognized in net earnings in each of the past three years:

Year Ended December 31			2021						2020						2019
Stock options			$	46					$	43					$	43
Restricted stock/RSUs			53						58						62
Total equity-based compensation expense, net of tax			$	99					$	101					$	105

Stock Options. Stock options granted under our equity compensation plans are issued with an exercise price at the fair value of our common stock determined by the average of the high and low stock prices as listed on the New York Stock Exchange (NYSE) on the date of grant. Our outstanding stock options generally vest over three years, with 50% of the options vesting after two years and the remaining 50% vesting the following year, and expire 10 years after the grant date.

We recognize compensation expense related to stock options on a straight-line basis over the vesting period of the awards, net of estimated forfeitures. Estimated forfeitures are based on our historical forfeiture experience. We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model with the following assumptions for each of the past three years:

Year Ended December 31			2021						2020						2019
Expected volatility			26.7-27.3%						21.1-26.9%						19.7-20.0%
Weighted average expected volatility			27.3		%				21.2		%				19.7		%
Expected term (in months)			60						60						64
Risk-free interest rate			0.6-1.2%						0.4-1.5%						1.7-2.6%
Expected dividend yield			2.9		%				2.4		%				2.0		%

We determine the above assumptions based on the following:

• Expected volatility is based on the historical volatility of our common stock over a period equal to the expected term of the option.

• Expected term is based on assumptions used by a set of comparable peer companies.

• Risk-free interest rate is the yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option at the grant date.

• Expected dividend yield is based on our historical dividend yield.

The resulting weighted average fair value per stock option granted (in dollars) was $28.87 in 2021, $24.86 in 2020 and $29.06 in 2019. Stock option expense reduced pretax operating earnings (and on a diluted per-share basis) by $58 ($0.16) in 2021 and $55 ($0.15) in 2020 and 2019. On December 31, 2021, we had $76 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.8 years.

A summary of stock option activity during 2021 follows:

In Shares and Dollars			Shares Under Option						Weighted Average Exercise Price Per Share
Outstanding on December 31, 2020			11,128,721						$	167.00
Granted			2,266,080						169.01
Exercised			(1,272,976)						134.46
Forfeited/canceled			(191,411)						168.44
Outstanding on December 31, 2021			11,930,414						$	170.83
Vested and expected to vest on December 31, 2021			11,582,836						$	170.94
Exercisable on December 31, 2021			6,495,518						$	173.89

Summary information with respect to our stock options’ intrinsic value and remaining contractual term on December 31, 2021, follows:

			Weighted Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value
Outstanding			6.6						$	471
Vested and expected to vest			6.6						457
Exercisable			5.1						247

In the table above, intrinsic value is calculated as the excess, if any, of the market price of our stock on the last trading day of the year over the exercise price of the options. For stock options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the exercise price. The total intrinsic value of stock options exercised was $62 in 2021, $57 in 2020 and $244 in 2019.

Restricted Stock/RSUs. The fair value of restricted stock and RSUs equals the average of the high and low market prices of our common stock as listed on the NYSE on the date of grant. Grants of restricted stock are awards of shares of common stock. Participation units represent obligations that have a value derived from or related to the value of our common stock. These include stock appreciation rights, phantom stock units and RSUs, and are payable in cash or common stock.

Restricted stock and RSUs generally vest over a three-year restriction period after the grant date, during which recipients may not sell, transfer, pledge, assign or otherwise convey their restricted shares to another party. During this period, restricted stock recipients receive cash dividends on their restricted shares and are entitled to vote those shares, while RSU recipients receive dividend-equivalent units instead of cash dividends and are not entitled to vote their RSUs or dividend-equivalent units.

We grant RSUs with one or more performance measures determined by the compensation committee of the board of directors as described in our proxy statement. Depending on the company’s performance, the number of RSUs earned may be less than, equal to or greater than the original number of RSUs awarded subject to a payout range.

We generally recognize compensation expense related to restricted stock and RSUs on a straight-line basis over the vesting period of the awards. Compensation expense related to restricted stock and RSUs reduced pretax operating earnings (and on a diluted per-share basis) by $68 ($0.19) in 2021, $73 ($0.20) in 2020 and $79 ($0.21) in 2019. On December 31, 2021, we had $59 of unrecognized compensation cost related to restricted stock and RSUs, which is expected to be recognized over a weighted average period of 1.6 years.

A summary of restricted stock and RSU activity during 2021 follows:

In Shares and Dollars			Shares/ Share-Equivalent Units						Weighted Average Grant-Date Fair Value Per Share
Nonvested at December 31, 2020			1,150,151						$	180.98
Granted			492,104						174.34
Vested			(302,186)						220.91
Forfeited			(19,591)						167.61
Nonvested at December 31, 2021			1,320,478						$	169.54

The total fair value of vesting shares was $52 in 2021, $103 in 2020 and $88 in 2019.

S. RETIREMENT PLANS

We provide retirement benefits to eligible employees through a variety of plans:

• Defined contribution

• Defined benefit

◦Pension (qualified and non-qualified)

◦Other post-retirement benefit

Substantially all of our plans use a December 31 measurement date consistent with our fiscal year.

Defined Contribution Plans

We provide eligible employees the opportunity to participate in defined contribution plans (commonly known as 401(k) plans), which permit contributions on a before-tax and after-tax basis. Employees may contribute to various investment alternatives. In most of these plans, we match a portion of the employees’ contributions. Our contributions to these plans totaled $398 in 2021, $379 in 2020 and $333 in 2019. The defined-contribution plans held approximately 17 million and 19 million shares of our common stock, representing approximately 6% and 7% of our outstanding shares on December 31, 2021 and 2020, respectively.

Defined Benefit Plans

Plan Descriptions. We have trusteed, qualified pension plans covering eligible employees aligned with the markets in our business: U.S. government, non-U.S. government and commercial. Some of these plans require employees to make contributions to the plan. We also sponsor several non-qualified pension plans, which provide eligible executives with additional benefits, including excess benefits over

limits imposed on qualified plans by federal tax law. The principal factors affecting the benefits earned by participants in our pension plans are employees’ years of service and compensation levels. Our primary U.S. pension plans, which comprise the majority of our unfunded obligation, were closed to new salaried participants on January 1, 2007, and were closed to new hourly participants in subsequent collective bargaining agreements over the next several years. Additionally, we have made several changes to these plans for certain participants that limit or cease the benefits that accrue for future service.

In addition to pension benefits, we maintain plans that provide post-retirement healthcare and life insurance coverage for certain employees and retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. The plans provide health and life insurance benefits only to those employees who retire directly from our service and not to those who terminate service prior to eligibility for retirement.

Contributions. It is our policy to fund our qualified pension plans in a manner that optimizes the tax deductibility and contract recovery of contributions considered within our capital deployment framework. Therefore, we may make discretionary contributions in addition to the required contributions determined in accordance with IRS regulations. We contributed $135 to our qualified pension plans in 2021. In 2022, our required contributions are approximately $40.

We maintain several tax-advantaged accounts, primarily Voluntary Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations for some of our other post-retirement benefit plans. For non-funded plans, claims are paid as received. Contributions to our other post-retirement benefit plans were not material in 2021 and are not expected to be material in 2022.

Benefit Payments. We expect the following benefits to be paid from our defined benefit plans over the next 10 years:

			Pension Benefits						Other Post-retirement Benefits
2022			$	885					$	57
2023			899						56
2024			926						54
2025			944						52
2026			967						50
2027-2031			4,921						228

Benefit Cost. Our annual benefit cost consists of five primary elements:

• the cost of benefits earned by employees for services rendered during the year.

• an interest charge on our plan liabilities.

• an expected return on our plan assets for the year.

• actuarial gains and losses, which result from changes in assumptions and differences between actual and expected return on assets and participant experience.

• the cost or credit attributed to prior service resulting from changes we make to plan benefit terms.

For qualified pension plans and other post-retirement benefit plans, actuarial gains and losses and prior service costs or credits are initially deferred in AOCL and then amortized on a straight-line basis over future years. For our qualified U.S. government pension plans, we amortize actuarial gains and

losses over a custom amortization period based on the amount of pension costs allocable to our U.S. government contracts. For the remaining qualified pension plans and other post-retirement benefit plans, we amortize only the amount of actuarial gains and losses that exceeds 10% of the greater of plan assets or benefit obligations. This amount is amortized over the average remaining service period of plan participants who are active employees unless all or almost all of a plan’s participants are inactive or are not accruing additional benefits, then the amortization period is based on the average remaining life expectancy of the plan participants. To further reduce the volatility of our annual benefit cost, gains and losses resulting from the return on plan assets are included over five years in the determination of the amortizable amount of actuarial gains and losses. For non-qualified pension plans, we recognize actuarial gains and losses immediately.

Net annual benefit (credit) cost consisted of the following:

			Pension Benefits
Year Ended December 31			2021						2020						2019
Service cost			$	119					$	115					$	111
Interest cost			360						491						600
Expected return on plan assets			(963)						(926)						(911)
Net actuarial loss			352						387						355
Prior service credit			(20)						(18)						(19)
Settlement/curtailment/other			70						—						—
Net annual benefit (credit) cost			$	(82)					$	49					$	136

			Other Post-retirement Benefits
Year Ended December 31			2021						2020						2019
Service cost			$	10					$	10					$	8
Interest cost			19						27						35
Expected return on plan assets			(36)						(36)						(36)
Net actuarial gain			—						(3)						(8)
Prior service credit			—						(1)						(3)
Net annual benefit credit			$	(7)					$	(3)					$	(4)

In October 2021, we purchased an irrevocable group annuity contract (referred to as a buy-out contract) for approximately $550 using retirement plan assets held in trust to transfer the related outstanding qualified pension obligations to an insurance company. As a result of the transaction, the insurance company is now required to pay and administer the retirement benefits owed to approximately 21,000 U.S. retirees and beneficiaries, with no change to the amount, timing or form of the monthly retirement benefit payments. In connection with this transaction, we recognized a non-cash settlement charge of approximately $75 in our qualified U.S. government pension plans related to the GAAP acceleration of deferred actuarial losses included in AOCL for the plans.

Our contractual arrangements with the U.S. government provide for the recovery of pension and other post-retirement benefit costs related to employees working on government contracts, including settlement costs. See Note A for a discussion of our other contract costs. To the extent there is a non-service component of net annual benefit (credit) cost for our defined benefit plans, it is reported in other income (expense) in the Consolidated Statement of Earnings.

Funded Status. We recognize an asset or liability on the Consolidated Balance Sheet equal to the funded status of each of our defined benefit plans. The funded status is the difference between the fair

value of the plan’s assets and its benefit obligation. The following is a reconciliation of the benefit obligations and plan/trust assets, and the resulting funded status, of our defined benefit plans:

			Pension Benefits												Other Post-retirement Benefits
Year Ended December 31			2021						2020						2021						2020
Change in Benefit Obligation
Benefit obligation at beginning of year			$	(19,692)					$	(18,107)					$	(1,062)					$	(1,027)
Service cost			(119)						(115)						(10)						(10)
Interest cost			(360)						(491)						(19)						(27)
Amendments			3						37						4						2
Actuarial gain (loss)			955						(1,780)						187						(60)
Settlement/curtailment/other			553						(65)						—						(4)
Benefits paid			881						829						60						64
Benefit obligation at end of year			$	(17,779)					$	(19,692)					$	(840)					$	(1,062)
Change in Plan/Trust Assets
Fair value of assets at beginning of year			$	14,751					$	13,177					$	705					$	644
Actual return on plan assets			1,692						1,843						114						102
Employer contributions			135						480						—						—
Settlement/curtailment/other			(551)						58						—						—
Benefits paid			(860)						(807)						(42)						(41)
Fair value of assets at end of year			$	15,167					$	14,751					$	777					$	705
Funded status at end of year			$	(2,612)					$	(4,941)					$	(63)					$	(357)

The overall decrease in our pension benefit obligation for the year ended December 31, 2021, was due primarily to the settlement resulting from the buy-out contract and actuarial gains created by the change in the weighted-average discount rate, which increased from 2.54% at December 31, 2020, to 2.84% at December 31, 2021.

The overall increase in our pension benefit obligation for the year ended December 31, 2020, was due primarily to actuarial losses created by the change in the weighted-average discount rate, which decreased from 3.19% at December 31, 2019, to 2.54% at December 31, 2020.

Amounts recognized on the Consolidated Balance Sheet consisted of the following:

			Pension Benefits												Other Post-retirement Benefits
December 31			2021						2020						2021						2020
Noncurrent assets			$	134					$	69					$	292					$	121
Current liabilities			(176)						(181)						(112)						(125)
Noncurrent liabilities			(2,570)						(4,829)						(243)						(353)
Net liability recognized			$	(2,612)					$	(4,941)					$	(63)					$	(357)

Amounts deferred in AOCL for our defined benefit plans consisted of the following:

			Pension Benefits												Other Post-retirement Benefits
December 31			2021						2020						2021						2020
Net actuarial loss (gain)			$	3,639					$	5,752					$	(277)					$	(12)
Prior service (credit) cost			(76)						(93)						8						12
Total amount recognized in AOCL, pretax			$	3,563					$	5,659					$	(269)					$	—

The following is a reconciliation of the change in AOCL for our defined benefit plans:

			Pension Benefits												Other Post-retirement Benefits
Year Ended December 31			2021						2020						2021						2020
Net actuarial (gain) loss			$	(1,684)					$	863					$	(265)					$	(6)
Prior service credit			(3)						(38)						(4)						(1)
Amortization of:
Net actuarial (loss) gain from prior years			(352)						(387)						—						3
Prior service credit			20						18						—						1
Settlement/curtailment/other			(77)						—						—						—
Change in AOCL, pretax			$	(2,096)					$	456					$	(269)					$	(3)

A pension plan’s funded status is the difference between the plan’s assets and its projected benefit obligation (PBO). The PBO is the present value of future benefits attributed to employee services rendered to date, including assumptions about future compensation levels. On December 31, 2021 and 2020, most of our pension plans had a PBO that exceeded the plans’ assets. Summary information for those plans follows:

December 31			2021						2020
PBO			$	(16,958)					$	(19,189)
Fair value of plan assets			14,213						14,191

A pension plan’s accumulated benefit obligation (ABO) is the present value of future benefits attributed to employee services rendered to date, excluding assumptions about future compensation levels. The ABO for all pension plans was $17.5 billion and $19.4 billion on December 31, 2021 and 2020, respectively. The ABO for all other post-retirement plans was $840 and $1.1 billion on December 31, 2021 and 2020, respectively. On December 31, 2021 and 2020, most of our defined benefit plans had an ABO that exceeded the plans’ assets. Summary information for those plans follows:

			Pension Benefits												Other Post-retirement Benefits
December 31			2021						2020						2021						2020
ABO			$	(16,775)					$	(18,596)					$	(384)					$	(784)
Fair value of plan assets			14,213						13,829						36						300

Assumptions. We calculate the plan assets and liabilities for a given year and the net annual benefit cost for the subsequent year using assumptions determined as of December 31 of the year in question.

The following table summarizes the weighted average assumptions used to determine our benefit obligations:

Assumptions on December 31			2021						2020
Pension Benefits
Benefit obligation discount rate			2.84		%				2.54		%
Rate of increase in compensation levels			2.77		%				2.66		%
Other Post-retirement Benefits
Benefit obligation discount rate			2.89		%				2.52		%
Healthcare cost trend rate:
Trend rate for next year			5.50		%				6.00		%
Ultimate trend rate			5.00		%				5.00		%
Year rate reaches ultimate trend rate			2024						2024

The following table summarizes the weighted average assumptions used to determine our net annual benefit cost:

Assumptions for Year Ended December 31			2021						2020						2019
Pension Benefits
Discount rates:
Benefit obligation			2.54		%				3.19		%				4.28		%
Service cost			2.25		%				2.74		%				3.81		%
Interest cost			1.87		%				2.78		%				3.92		%
Expected long-term rate of return on assets			7.14		%				7.41		%				7.46		%
Rate of increase in compensation levels			2.63		%				2.73		%				2.77		%
Other Post-retirement Benefits
Discount rates:
Benefit obligation			2.52		%				3.18		%				4.24		%
Service cost			2.97		%				3.35		%				4.23		%
Interest cost			1.83		%				2.78		%				3.88		%
Expected long-term rate of return on assets			6.33		%				6.86		%				6.84		%

We base the discount rates on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period.

We determine the long-term rates of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation. Beginning in 2021, we decreased the expected long-term rates of return on assets in our primary U.S. pension plans by 25 basis points and in our primary U.S. other post-retirement benefit plans by 25 basis points or 125 basis points depending on the investment mix of each plan’s assets. These changes to our expected long-term rates of return resulted from an assessment of the historical and forward-looking long-term returns of our various asset classes.

Beginning in 2022, we are decreasing the expected long-term rates of return on assets by between 0 and 86 basis points in our primary U.S. pension plans and by between 0 and 300 basis points in our primary U.S. other post-retirement benefit plans. These changes to our expected long-term rates of return resulted from changes in our expected asset allocation.

In 2021, we revised the mortality assumption based on a recent experience study. Additionally, we updated several other assumptions to align them with historical experience and future expectations, including rates of retirement and cost of living increases. The impact of these changes was a net decrease of $332 and $85 in the benefit obligations of our pension and other post-retirement benefit plans, respectively, on December 31, 2021.

Retirement plan assumptions are based on our best judgment, including consideration of current and future market conditions. Given the long-term nature of the assumptions being made, actual outcomes can and often do differ from these estimates. Changes in these estimates impact future pension and other post-retirement benefit costs. As previously discussed, our contractual arrangements with the U.S. government provide for the recovery of pension and other post-retirement benefit costs. Therefore, the impact of annual changes in financial reporting assumptions on the cost for these plans does not immediately affect our operating results.

Assets. A committee of our board of directors is responsible for the strategic oversight of our defined benefit plan assets held in trust. Management develops investment policies and provides oversight of a third-party investment manager who reports to the committee on a regular basis. The outsourced third-party investment manager develops investment strategies and makes all day-to-day investment decisions related to defined benefit plan assets in accordance with our investment policy and target allocation percentages with the objective of generating future returns at or above our assumed long-term rates of return used to determine net annual benefit cost.

Our investment policy endeavors to strike the appropriate balance between asset growth and funded status protection. The objective of the policy is to generate asset returns that will increase the funded status of our plans while systematically reducing cost and deficit risk as funded status of the plans improve. Several of our U.S. pension plans are now utilizing a target asset allocation strategy that will automatically increase investments in liability-hedging assets (primarily fixed-income securities) and decrease investments in return-seeking assets (primarily U.S. equity investments) as the plans reach specific funded status targets.

At the end of 2021, our target asset allocation ranges for plans that are less than fully funded were:

Equities			39-68%
Fixed income			20-50%
Cash			0-5%
Other asset classes			0-16%

More than 90% of our pension plan assets are held in a single trust for our primary qualified U.S. government and commercial pension plans. On December 31, 2021, the trust was invested largely in publicly traded equities, fixed-income securities, and commingled funds comprised primarily of equity securities. The trust also invests in other asset classes consistent with our investment policy. Our investment policy allows the use of derivative instruments when appropriate to reduce anticipated asset volatility, to gain exposure to an asset class or to adjust the duration of fixed-income assets.

We hold assets in VEBA trusts for some of our other post-retirement benefit plans. These assets are managed by a third-party investment manager with oversight by management and are generally invested in publicly traded equities, fixed-income securities and commingled funds comprised primarily of equity and fixed-income securities. Our asset allocation strategy for the VEBA trusts considers funded status, potential fluctuations in our other post-retirement benefit obligation, the taxable nature of certain VEBA trusts, tax deduction limits on contributions and the regulatory environment.

Our defined benefit plan assets are reported at fair value. See Note P for a discussion of the hierarchy for determining fair value. Our Level 1 assets include investments in publicly traded equity securities. These securities are actively traded and valued using quoted prices for identical securities from the market exchanges. Our Level 2 assets include fixed-income securities and commingled funds whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally 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 plan assets that are invested in commingled funds are valued using a unit price or net asset value (NAV) that is based on the underlying investments of the fund. Our Level 3 assets consist of insurance deposit contracts, retirement annuity contracts and real estate funds.

Certain investments valued using NAV as a practical expedient are excluded from the fair value hierarchy. These investments are redeemable at NAV generally on a monthly or quarterly basis, and most have redemption notice periods of up to 90 days. The unfunded commitments related to these investments were not material on December 31, 2021 or 2020.

The fair value of our pension plan assets by investment category and the corresponding level within the fair value hierarchy were as follows:

			Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Asset Category			December 31, 2021
Cash and equivalents			$	130					$	9					$	121					$	—
Equity securities (a):
U.S. companies			1,143						1,143						—						—
Non-U.S. companies			151						151						—						—
Fixed-income securities:
Corporate bonds (b)			4,090						—						4,090						—
Treasury securities			1,495						—						1,495						—
Commingled funds:
Equity funds			6,592						—						6,592						—
Fixed-income funds			430						—						430						—
Real estate funds			8						—						—						8
Other investments:
Insurance deposit contracts			163						—						—						163
Retirement annuity contracts			35						—						—						35
Total plan assets in fair value hierarchy			$	14,237					$	1,303					$	12,728					$	206
Plan assets measured using NAV as a practical expedient (c):
Real estate funds			632
Hedge funds			260
Equity funds			38
Total pension plan assets			$	15,167

(a)No single equity holding amounted to more than 1% of the total fair value.

(b)Our corporate bond investments had an average rating of A.

(c)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.

			Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Asset Category			December 31, 2020
Cash and equivalents			$	112					$	—					$	112					$	—
Equity securities (a):
U.S. companies			1,137						1,137						—						—
Non-U.S. companies			90						90						—						—
Private equity investments			33						—						—						33
Fixed-income securities:
Corporate bonds (b)			3,532						—						3,532						—
Treasury securities			1,129						—						1,129						—
Commingled funds:
Equity funds			7,306						—						7,306						—
Fixed-income funds			416						—						416						—
Real estate funds			90						—						—						90
Other investments:
Insurance deposit contracts			157						—						—						157
Retirement annuity contracts			38						—						—						38
Total plan assets in fair value hierarchy			$	14,040					$	1,227					$	12,495					$	318
Plan assets measured using NAV as a practical expedient (c):
Real estate funds			446
Hedge funds			254
Equity funds			11
Total pension plan assets			$	14,751

(a)No single equity holding amounted to more than 1% of the total fair value.

(b)Our corporate bond investments had an average rating of A-.

(c)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.

The fair value of our other post-retirement benefit plan assets by category and the corresponding level within the fair value hierarchy were as follows:

			Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)
Asset Category (a)			December 31, 2021
Cash and equivalents			$	12					$	—					$	12
Equity securities			105						105						—
Fixed-income securities			154						—						154
Commingled funds:
Equity funds			354						—						354
Fixed-income funds			140						—						140
Real estate funds			2						2						—
Total plan assets in fair value hierarchy			$	767					$	107					$	660
Plan assets measured using NAV as a practical expedient (b):
Real estate funds			7
Hedge funds			3
Total other post-retirement benefit plan assets			$	777

(a)We had no Level 3 investments on December 31, 2021.

(b)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.

			Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)
Asset Category (a)			December 31, 2020
Cash and equivalents			$	16					$	—					$	16
Equity securities			97						97						—
Fixed-income securities			134						—						134
Commingled funds:
Equity funds			320						—						320
Fixed-income funds			128						—						128
Real estate funds			2						2						—
Total plan assets in fair value hierarchy			$	697					$	99					$	598
Plan assets measured using NAV as a practical expedient (b):
Real estate funds			5
Hedge funds			3
Total other post-retirement benefit plan assets			$	705

(a)We had no Level 3 investments on December 31, 2020.

(b)Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.

Changes in our Level 3 defined benefit plan assets during 2021 and 2020 were as follows:

			Insurance Deposits Contracts						Retirement Annuity Contracts						Private Equity Investments						Real Estate Funds						Total Level 3 Assets
December 31, 2019			$	137					$	35					$	26					$	84					$	282
Actual return on plan assets:
Unrealized gains, net			18						3						5						7						33
Realized losses, net			—						—						—						(1)						(1)
Purchases, sales and settlements, net			2						—						2						—						4
December 31, 2020			157						38						33						90						318
Transfers out of Level 3			—						—						(33)						(82)						(115)
Actual return on plan assets:
Unrealized gains (losses), net			9						(3)						—						—						6
Purchases, sales and settlements, net			(3)						—						—						—						(3)
December 31, 2021			$	163					$	35					$	—					$	8					$	206

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of General Dynamics Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying Consolidated Balance Sheet of General Dynamics Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows, and Shareholders’ Equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 9, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Estimation of costs at completion for select long-term contracts

As discussed in Note B to the consolidated financial statements, accounting for long-term contracts involves estimation of the costs to complete a contract in order to accurately recognize the associated revenue. The estimated costs at completion for each contract are used to assess the proportion of revenues to recognize based upon the costs incurred-to-date in comparison to the total estimate of costs to complete the contract.

We identified the assessment of the estimation of costs at completion for a select group of long-term contracts in the defense segments as a critical audit matter. The estimated costs at completion for the select group of long-term contracts incorporates assumptions, such as labor hours and the cost of materials for the work to be performed. The evaluation of one or more of the assumptions used in the estimation of the costs to complete for the select group of contracts required a high level of subjective auditor judgment due to the nature of the individual contracts and related contract performance risks. Specifically, changes to certain assumptions may have a significant impact on the estimated revenue recorded during the period.

The following are primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the estimation of costs at completion for the select group of long-term contracts. This included contract level controls over the estimated cost assumptions. For certain contracts, we compared the Company’s historical estimates of costs to actual costs incurred to assess the Company’s ability to estimate accurately. Based on the nature of the individual contract, we evaluated certain assumptions within the Company’s estimated costs at completion by:

–reading the underlying contract and any related amendments to obtain an understanding of the contractual requirements and related performance obligations

–assessing costs incurred to-date and the relative progress toward satisfying the performance obligation(s) of the contract

–assessing, if relevant, the estimated costs at completion on similar or predecessor contracts and programs

–inquiring of financial and operational personnel of the Company to identify factors that should be considered within the estimated costs at completion or indications of potential management bias

–inspecting correspondence, if any, between the Company and the customer regarding actual to-date and expected performance

–analyzing the sufficiency of the Company’s assessment of contract performance risks included within the estimated costs at completion.

Discount rates used in pension benefit obligation

As discussed in Note S to the consolidated financial statements, the Company’s pension benefit obligation and the associated plan assets were $17.8 billion and $15.2 billion, respectively, on December 31, 2021. These balances resulted in a net liability of $2.6 billion. The pension benefit obligation is the estimated present value of future pension benefits attributed to employee services rendered to date, including assumptions about future compensation levels. The weighted average discount rate assumption used in estimating the pension benefit obligation as of

December 31, 2021, of 2.84% was based on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period. The selected discount rates have a significant effect on the measurement of the pension benefit obligation.

We identified the evaluation of the discount rates for certain pension benefit obligations to be a critical audit matter. This is due to the specialized skills required to assess the discount rate assumption used to discount estimated future benefit payments. In addition, the pension benefit obligations for certain plans were sensitive to changes in this assumption.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the pension benefit obligation process. This included a control related to the determination of the discount rate assumption. We involved an actuarial professional with specialized skills and knowledge, who assisted in:

–evaluating the Company’s methodology used to develop the discount rates

–recalculating discount rates using the cash flows and spot rates provided by the Company

–evaluating the Company’s determination of the discount rates for certain plans by comparing changes in the discount rates from the prior year against changes in published indices using publicly available market data.

						/s/ KPMG LLP

We have served as the Company’s auditor since 2002.

McLean, Virginia

February 9, 2022