General Dynamics 10-Q 2021-10-03

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 3, 2021

OR

[☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 1-3671

GENERAL DYNAMICS CORPORATION

(Exact name of registrant as specified in its charter)

(703) 876-3000

Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ü No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ü Accelerated filer ___ Non-accelerated filer ___

Smaller reporting company___☐ Emerging growth company___****☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes___****☐ No ü

279,222,830 shares of the registrant’s common stock, $1 par value per share, were outstanding on October 3, 2021.

INDEX

PART I – FINANCIAL INFORMATION

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

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

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

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

CONSOLIDATED BALANCE SHEET

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

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AND RESULTS OF OPERATIONS

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

BUSINESS OVERVIEW

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

Our company is organized into four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We refer to the latter three collectively as our defense segments. Our primary customer is the U.S. government, including the Department of Defense (DoD), the intelligence community and other U.S. government customers. We also have significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business jet aircraft and related services. The following discussion should be read in conjunction with our 2020 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

BUSINESS ENVIRONMENT

GLOBAL PANDEMIC UPDATE

The Coronavirus (COVID-19) pandemic has caused significant disruptions to national and global economies and government activities since March 2020. During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the pandemic’s duration and its broader impact. For additional information, see the Risk Factors in Part I, Item 1A, and the Business Environment in Part II, Item 7, in our most recent Form 10-K filing.

The United States and other governments have taken several steps to respond to the pandemic. Most recently, on September 9, 2021, the president signed Executive Order 14042, initiating a process whereby covered federal contractors and subcontractors must implement federally required vaccine mandates. This federal contract requirement may affect various business units differently. We are working closely with our customer to ensure that we minimize disruptions and potential employee attrition at the site level as contract modifications are received that could trigger implementation. However, to the extent that we or our subcontractors experience employee attrition and/or work stoppages, our costs could increase, schedules could slip on affected programs and our ability to perform under some contracts could be negatively affected, particularly in those instances where we cannot receive cost reimbursement.

Our Aerospace segment’s operating results have experienced the most significant impact from the pandemic. New aircraft deliveries in the first half of 2021 reflect last year’s decision to reduce production rates to accommodate supply chain challenges and reduced demand due to the pandemic. However, aircraft orders have been strong in the first nine months of 2021, and deliveries are increasing in the second half of the year. As air travel has increased, demand for aircraft services has improved, but remains below pre-pandemic levels in some regions of the world. Our U.S. government business continues to experience some disruption from the COVID-19 pandemic, such as supply chain shortages,

particularly in our Technologies segment. The Review of Operating Segments includes additional information on the third-quarter results for each of our segments.

U.S. GOVERNMENT BUDGET

With approximately 70% of our revenue from the U.S. government, government spending levels — particularly defense spending — influence our financial performance. The Congress has not yet passed a defense appropriations bill for the government’s fiscal year (FY) 2022 despite the fact that the new year began on October 1, 2021. However, on September 30, 2021, a continuing resolution (CR) was signed into law, providing funding for federal agencies through December 3, 2021. When the government operates under a CR, all programs of record are funded at the prior year’s appropriated levels, and the DoD is prohibited from starting new programs. While this could result in delayed revenue growth as programs that were expected to have increased funding levels continue to operate at the prior-year levels until the current-year appropriations bill is passed, we do not anticipate that the current CR, or any subsequent extensions, will have a material impact on our results of operations, financial condition or cash flows.

OTHER LEGISLATIVE ACTIVITY

In September 2021, legislation was introduced in the U.S. House of Representatives that provides for significant changes to U.S. corporate income taxation, including an increase in the top corporate income tax rate from 21% to 26.5% and material changes to U.S. taxation of international activity. The legislation would also delay a requirement to capitalize and amortize over five years certain research and experimental expenditures beginning in 2022 that currently are deductible immediately.

We cannot determine whether some or all of these or other proposals will be enacted into law or what, if any, change may be made to such proposals prior to being enacted into law. If U.S. tax laws change in a manner that increases our tax obligations, our financial position and results of operations would be adversely impacted.

RESULTS OF OPERATIONS

INTRODUCTION

An understanding of our accounting practices is necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results.

In the Aerospace segment, we record revenue on contracts for new aircraft when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. Revenue associated with the segment’s custom completions of narrow-body and wide-body aircraft and the segment’s services businesses is recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, progress on aircraft completions, and the level and type of aircraft services performed during the period.

The majority of the Aerospace segment’s operating costs relates to new aircraft production on firm orders and consists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at aircraft delivery based on the estimated average unit cost in a production lot. While changes in the estimated average unit cost for a production lot impact the level of operating costs, the amount of operating costs reported in a given period is based largely on the number and type of aircraft delivered. Operating costs in the Aerospace segment’s completions and services businesses are recognized generally as incurred.

For new aircraft, operating earnings and margin are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft, and the mix of ultra-large-cabin, large-cabin and mid-cabin aircraft deliveries. Aircraft mix can also refer to the stage of program maturity for our aircraft models. A new aircraft model typically has lower margins in its initial production lots, and then margins generally increase as we realize efficiencies in the production process. Additional factors affecting the segment’s earnings and margin include the volume, mix and profitability of completions and services work performed, the market for pre-owned aircraft, and the level of general and administrative (G&A) and net research and development (R&D) costs incurred by the segment.

In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual contracts. Because costs are used as a measure of progress, year-over-year variances in cost result in corresponding variances in revenue, which we generally refer to as volume.

Operating earnings and margin in the defense segments are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value (or vice versa) that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- versus lower-margin work. Higher or lower margins can result from a number of factors, including contract type (e.g., fixed-price/cost-reimbursable) and type of work (e.g., development/production). Contract mix can also refer to the stage of program maturity for our long-term production contracts. New long-term production contracts typically have lower margins initially, and then margins generally increase as we achieve learning curve improvements or realize other cost reductions.

CONSOLIDATED OVERVIEW

Our consolidated revenue increased in the first nine months of 2021 driven by growth in each of our defense segments, including increases in U.S. Navy ship construction in our Marine Systems segment, international military vehicle programs in our Combat Systems segment and IT services in our Technologies segment. These increases were offset partially by fewer aircraft deliveries in our Aerospace segment reflecting last year’s decision to lower aircraft production rates in response to the COVID-19 pandemic. On a quarter-over-quarter basis, the increase in U.S. Navy ship construction in our Marine Systems segment was offset partially by lower C4ISR solutions revenue in our Technologies segment. Operating margin decreased slightly in the third quarter of 2021 but was up 30 basis points in the first nine months of 2021 on strong operating results at our Technologies and Combat Systems segments.

REVIEW OF OPERATING SEGMENTS

Following is a discussion of operating results for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note O to the unaudited Consolidated Financial Statements in Part I, Item 1.

AEROSPACE

Operating Results

The change in the Aerospace segment’s revenue in the third quarter and first nine months of 2021 consisted of the following:

Aircraft manufacturing revenue decreased in the first nine months of 2021 due to fewer aircraft deliveries reflecting the full impact of last year’s decision to reduce aircraft production rates in response to the COVID-19 pandemic. Aircraft services and completions revenue was higher in the third quarter and first nine months of 2021 due to increased air travel driving additional demand for maintenance work and activity at our fixed-base operator (FBO) facilities.

The change in the segment’s operating earnings in the third quarter and first nine months of 2021 consisted of the following:

Aircraft manufacturing operating earnings were down in the first nine months of 2021 due to the planned reduced aircraft production and delivery rates, a less favorable mix of aircraft deliveries and sales of G500 flight-test aircraft, which typically sell at less than new plane prices. In the third quarter of 2021, aircraft manufacturing operating earnings were impacted negatively by the settlement of claims with a supplier related to the assignment of warranties following the end of G550 production. These decreases were offset by increased aircraft services and completions operating earnings due to higher volume and a favorable mix of aircraft services. Operating earnings in the first nine months of 2021 were also up due to a restructuring charge taken in the second quarter of 2020 to adjust the workforce size to the revised production levels. Operating earnings in the third quarter and first nine months of 2021 reflected higher G&A/other expenses due primarily to increased net R&D expenses associated with ongoing product development efforts, including flight test activities for the G700, which is scheduled to enter service in the fourth quarter of 2022. In total, the Aerospace segment’s operating margin decreased 160 basis points in the third quarter of 2021 and remained steady in the first nine months of 2021 compared with the prior-year periods.

MARINE SYSTEMS

Operating Results

The increase in the Marine Systems segment’s revenue in the third quarter and first nine months of 2021 consisted of the following:

Revenue from U.S. Navy ship construction was up across our shipyards in the third quarter and first nine months of 2021 due to increased volume on the Columbia-class submarine program, the Arleigh Burke-class (DDG-51) destroyer program and the John Lewis-class (T-AO-205) fleet replenishment oiler program. These increases were offset partially by lower commercial ship construction. Overall, the Marine Systems segment’s operating margin decreased 60 basis points in the third quarter of 2021 and 20 basis points in the first nine months of 2021, reflecting the shift in mix to early work on new submarine programs with typical lower initial profit rates.

COMBAT SYSTEMS

Operating Results

The change in the Combat Systems segment’s revenue in the third quarter and first nine months of 2021 consisted of the following:

Revenue from international military vehicles increased in the first nine months of 2021 due to higher volume on wheeled armored vehicle programs, including contracts to produce armored combat support vehicles (ACSVs) and light armored vehicles (LAVs) for the Canadian government. In the third quarter of 2021, revenue was down due primarily to timing on several programs. The Combat Systems segment’s operating margin increased 80 basis points in the third quarter of 2021 and 50 basis points in the first nine months of 2021 on strong program performance, favorable product mix and continued cost reduction efforts.

TECHNOLOGIES

Operating Results

The change in the Technologies segment’s revenue in the third quarter and first nine months of 2021 consisted of the following:

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

IT services revenue increased due to the ramp up of several new programs and the reopening of, and increased access to, customer sites. The decrease in C4ISR solutions revenue was due to timing on several programs driven, in part, by impacts to customer acquisition cycles, chip shortages and other supply chain impacts resulting from the COVID-19 pandemic, which may extend into the fourth quarter. C4ISR solutions revenue also decreased due to approximately $115 of revenue in the prior-year period from a satellite communications business that was sold in the second quarter of 2020. Year-over-year growth for the segment was 1.9% excluding the impact of the sale.

Overall, the Technologies segment’s operating margin increased 80 basis points in the third quarter and first nine months of 2021 due to favorable contract mix and reduced COVID-related impacts in our IT services business, particularly customer reimbursement of idle workforce cost at zero fee in 2020 and early 2021. Additionally, operating results in the first nine months of 2020 included an approximate $40 loss on a contract with a non-U.S. customer from schedule delays caused by COVID-related travel restrictions, offset partially by a gain on the sale of the satellite communications business.

CORPORATE

Corporate operating results consisted primarily of equity-based compensation expense and totaled $14 in the third quarter and $66 in the first nine months of 2021 compared with $18 and $40 in the prior-year periods, respectively.

OTHER INFORMATION

PRODUCT REVENUE AND OPERATING COSTS

The increase in product revenue in the third quarter and first nine months of 2021 consisted of the following:

Ship construction revenue increased in the third quarter and first nine months of 2021 driven by higher U.S. Navy ship construction volume across our shipyards. This increase was offset partially by lower aircraft manufacturing revenue due to fewer aircraft deliveries and decreased C4ISR products revenue driven by timing on several programs and supply chain shortages. In the third quarter and first nine months of 2021, the primary drivers of the changes in product operating costs were the changes in volume on the programs described above.

SERVICE REVENUE AND OPERATING COSTS

The increase in service revenue in the third quarter and first nine months of 2021 consisted of the following:

Services revenue increased in the third quarter and first nine months of 2021 due to the ramp up of several new IT services programs and the reopening of, and increased access to, customer sites, and higher aircraft services and completions revenue driven by additional maintenance work and FBO activity. Service operating costs decreased on increased revenue in the third quarter of 2021, and increased at a lower rate than revenue in the first nine months of 2021, due primarily to favorable contract mix and reduced COVID-related impacts in our IT services business.

G&A EXPENSES

As a percentage of revenue, G&A expenses were 5.9% in the first nine months of 2021 and 2020.

OTHER, NET

Net other income was $95 in the first nine months of 2021 compared with $70 in the first nine months of 2020. Other represents primarily the non-service components of pension and other post-retirement benefits, which were income in both periods.

INTEREST, NET

Net interest expense was $331 in the first nine months of 2021 compared with $357 in the prior-year period. See Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including interest rates.

PROVISION FOR INCOME TAX, NET

Our effective tax rate was 15.9% in the first nine months of 2021 compared with 15.2% in the prior-year period.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was $88.1 billion at the end of the third quarter of 2021 compared with $89.2 billion on July 4, 2021. Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note B to the unaudited Consolidated Financial Statements in Part I, Item 1. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $129.6 billion on October 3, 2021.

The following table details the backlog and estimated potential contract value of each segment at the end of the third and second quarters of 2021:

AEROSPACE

Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace segment ended the third quarter of 2021 with backlog of $14.7 billion, up 8.6% from $13.5 billion on July 4, 2021, following growth of 13.3% in the second quarter of 2021.

Reflecting strong demand across our aircraft portfolio, unit orders in the third quarter of 2021 were the second highest of any quarter in more than five years. The segment’s book-to-bill ratio (orders divided by revenue) was 1.6-to-1 in the third quarter of 2021, resulting in a book-to-bill of 1.4-to-1 over the trailing 12 months. Our October 3, 2021, backlog included orders for the recently announced G400 and G800 aircraft.

Beyond total backlog, estimated potential contract value represents primarily options and other agreements with existing customers to purchase new aircraft and long-term aircraft services agreements. On October 3, 2021, estimated potential contract value in the Aerospace segment was $2 billion.

DEFENSE SEGMENTS

The total backlog in our defense segments represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of total backlog includes items that have been authorized and appropriated by the U.S. Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments. The unfunded portion of total backlog includes the amounts we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.

Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.

Total backlog in our defense segments was $73.4 billion on October 3, 2021. In the third quarter of 2021, the Technologies segment achieved a book-to-bill ratio of 1-to1, and overall, the defense segments achieved a book-to-bill ratio of 1.1-to-1 over the trailing 12 months. Estimated potential contract value in our defense segments was $39.5 billion on October 3, 2021. We received the following significant contract awards during the third quarter of 2021:

MARINE SYSTEMS

• $475 from the U.S. Navy to provide ongoing lead yard services for the Columbia-class submarine program.

• $195 from the Navy to provide engineering, technical, design and planning yard support services for operational strategic and attack submarines.

• $160 from the Navy to provide maintenance and repair services for the Arleigh Burke-class destroyer, Nimitz-class aircraft carrier, San Antonio-class amphibious transport dock and Whidbey Island-class dock landing ship programs.

• $150 from the Navy for Advanced Nuclear Plant Studies (ANPS) in support of the Columbia-class submarine program and options totaling $570 of additional potential value.

COMBAT SYSTEMS

• $165 to produce various munitions, ordnance and missile subcomponents for the U.S. Army.

• $125 for Abrams main battle tank upgrades, mission control units and systems technical support.

• $60 from the Army for the concept design phase of the Optionally Manned Fighting Vehicle (OMFV) acquisition program.

• $30 from the Army for the production of Hydra-70 rockets.

TECHNOLOGIES

• $540 for several key contracts for classified customers and additional classified IDIQ awards with a maximum potential value of $4.2 billion among multiple awardees.

• A contract to provide cloud support services to the U.S. Patent and Trademark Office (USPTO). The contract has a maximum potential value of $190.

• A contract to modernize and consolidate existing information technology (IT) help desks for the Navy. The contract has a maximum potential value of $135.

• $85 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.

• $75 to provide logistics, sustainment and maintenance support services for the Army.

• $70 to provide command, control and communications capabilities for the DoD.

• $65 from the U.S. Department of State (DoS) to provide overseas consular services to support visa application and issuance at U.S. embassies and consulates throughout the world under the Global Support Strategy (GSS) program.

• $50 to provide simulation and training support for the Army.

• $45 from the Centers for Medicare and Medicaid Services (CMS) to provide cloud services and software tools.

• $45 to provide service desk; endpoint support and maintenance; and account, asset and security management services to the DoS.

• $45 from the U.S. Department of Veterans Affairs under the Veterans Intake, Conversion and Communications Services (VICCS) program to modernize benefits and claim processing.

• $40 to provide communications technical support for the U.S. Air Force.

• $35 to provide design, development, testing, installation, maintenance, logistics support and modernization for Navy airborne and shipboard platforms.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We ended the third quarter of 2021 with a cash and equivalents balance of $3.1 billion compared with $2.8 billion at the end of 2020.

We expect to continue to generate funds in excess of our short- and long-term liquidity needs. We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy. The following is a discussion of our major operating, investing and financing activities in the first nine months of 2021 and 2020, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1.

OPERATING ACTIVITIES

Cash provided by operating activities was $2.6 billion in the first nine months of 2021 compared with $1.3 billion in the same period in 2020. The primary driver of cash inflows in both periods was net earnings. However, cash flows in both periods were affected negatively by growth in operating working capital (OWC), which is defined as current assets, excluding cash and equivalents, less current liabilities, excluding short-term debt and current portion of long-term debt. Throughout 2020, we experienced growth in OWC in our Aerospace segment due to our position in the development and production cycles of our Gulfstream aircraft models. While Aerospace OWC has decreased in the first nine months of 2021, the timing of billings and payments in our defense segments resulted in net OWC growth.

INVESTING ACTIVITIES

Cash used by investing activities was $501 in the first nine months of 2021 compared with $589 in the same period in 2020. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales. The primary use of cash for investing activities in both periods was capital expenditures. Capital expenditures were $502 in the first nine months of 2021 compared with $622 in the same period in 2020.

FINANCING ACTIVITIES

Cash used by financing activities was $1.8 billion in the first nine months of 2021 compared with $100 in the same period in 2020. Net cash from financing activities includes proceeds received from debt and commercial paper issuances and employee stock option exercises. Our financing activities also include the use of cash for repurchases of common stock, payment of dividends and debt repayments.

Our board of directors from time to time authorizes management to repurchase outstanding shares of our common stock on the open market. We paid $1.5 billion and $501 in the first nine months of 2021 and 2020, respectively, to repurchase our outstanding shares. On October 3, 2021, 13.8 million shares remained authorized by our board of directors for repurchase, representing 5% of our total shares outstanding.

On March 3, 2021, our board of directors declared an increased quarterly dividend of $1.19 per share, the 24th consecutive annual increase. Previously, the board had increased the quarterly dividend to $1.10 per share in March 2020. Cash dividends paid were $983 in the first nine months of 2021 compared with $925 in the same period in 2020.

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. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note I to the unaudited Consolidated Financial Statements in Part 1, Item 1.

In the first nine months of 2021, we received net proceeds of $2 billion from the issuance of commercial paper, which remained outstanding on October 3, 2021. 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. We also have an effective shelf registration on file with the Securities and Exchange Commission (SEC) that allows us to access the debt markets.

NON-GAAP FINANCIAL MEASURES

We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations and net debt to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures.

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

Net Debt. We define net debt as short- and long-term debt (total debt) less cash and equivalents. We believe net debt is a useful measure for investors because it reflects the borrowings that support our operations and capital deployment strategy. We use net debt as an important indicator of liquidity and financial position. The following table reconciles net debt with total debt:

ADDITIONAL FINANCIAL INFORMATION

ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES

For a discussion of environmental matters and other contingencies, see Note M to the unaudited Consolidated Financial Statements in Part I, Item 1. Except as otherwise noted in Note M, we do not expect our aggregate liability with respect to these matters to have a material impact on our results of operations, financial condition or cash flows.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the unaudited Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We employ judgment in making our estimates, but they are based on historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.

Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that often span several years. 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. The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by $134 ($0.38) and $273 ($0.76) for the three- and nine-month periods ended October 3, 2021, and $84 ($0.23) and $169 ($0.46) for the three- and nine-month periods ended September 27, 2020, respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and nine-month periods ended October 3, 2021, or September 27, 2020.

Other critical accounting policies include long-lived assets and goodwill, commitments and contingencies, and retirement plans. For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2020.

GUARANTOR FINANCIAL INFORMATION

The outstanding notes described in Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, issued by General Dynamics Corporation (the parent), are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of the parent’s 100%-owned subsidiaries (the guarantors). The guarantee of each guarantor ranks equally in right of payment with all other existing and future senior unsecured indebtedness of such guarantor. A listing of the guarantors is included in an exhibit to this Form 10-Q.

Because the parent is a holding company, its cash flow and ability to service its debt, including the outstanding notes, depends on the performance of its subsidiaries and the ability of those subsidiaries to distribute cash to the parent, whether by dividends, loans or otherwise. Holders of the outstanding notes have a direct claim only against the parent and the guarantors.

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

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

STATEMENT OF EARNINGS INFORMATION

BALANCE SHEET INFORMATION

The summarized balance sheet information presented above includes the funded status of the company’s primary qualified U.S. government pension plans as the parent has the ultimate obligation for the plans.

There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of October 3, 2021. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on October 3, 2021, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting that occurred during the quarter ended October 3, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The certifications of the company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “outlook,” “estimates,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples include projections of revenue, earnings, operating margin, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog. In making these statements we rely on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we consider appropriate under the circumstances. We believe our estimates and judgments are reasonable based on information available to us at the time. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation, the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. These factors include:

• general U.S. and international political and economic conditions;

• the negative impact of the COVID-19 pandemic, or other similar outbreaks;

• decreases in U.S. government defense spending or changing priorities within the defense budget;

• termination of government contracts due to unilateral government action;

• differences in anticipated and actual program performance, including the ability to perform within estimated costs, and performance issues with key suppliers and subcontractors;

• expected recovery on contract claims and requests for equitable adjustment;

• changing customer demand for business aircraft, including the effects of economic conditions on the business-aircraft market;

• potential for changing prices for energy and raw materials;

• the status or outcome of legal and/or regulatory proceedings;

• potential effects of audits and reviews by government agencies of our government contract performance, compliance and internal control systems and policies;

• risks and uncertainties relating to our acquisitions and joint ventures; and

• potential for cybersecurity events and other disruptions.

All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to General Dynamics or any person acting on our behalf are qualified by the cautionary statements in this section. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report. These factors may be revised or supplemented in subsequent reports on SEC Forms 10-Q and 8-K.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information relating to legal proceedings, see Note M to the unaudited Consolidated Financial Statements in Part I, Item 1.

There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about our third-quarter purchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

*Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the statutory tax withholding due upon vesting of the restricted shares.

On June 2, 2021, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding common stock on the open market. We repurchased 0.6 million shares in the third quarter of 2021. On October 3, 2021, 13.8 million shares remained authorized by our board of directors for repurchase.

We did not make any unregistered sales of equity securities in the third quarter of 2021.

10 General Dynamics Corporation Supplemental Savings Plan, amended and restated effective as of October 1, 2021*

22 Subsidiary Guarantors*

31.1 Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2 Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH Inline XBRL Taxonomy Extension Schema Document*

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*

104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

• Filed or furnished electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.