General Dynamics 10-Q 2022-07-03

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 July 3, 2022

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

274,246,220 shares of the registrant’s common stock, $1 par value per share, were outstanding on July 3, 2022.

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 2021 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

BUSINESS ENVIRONMENT

In February 2022, Russian forces invaded Ukraine. In response, the United States and several other countries imposed economic and trade sanctions, export controls and other restrictions (collectively, global sanctions) targeting Russia and Belarus. The conflict and these sanctions have caused some disruptions to global economies and some global businesses, including heightened cybersecurity risks, supply chain challenges, increased energy costs and foreign currency exchange rate fluctuations, as well as exacerbated existing inflationary pressures.

Within our defense segments, the Russia-Ukraine conflict has created a few potential supply chain challenges, which we continue to monitor and manage. The conflict could impact the fiscal year 2023 U.S. government defense budget due to the heightened national security threat. Internationally, many countries in the region have expressed a renewed commitment to defense-related spending. As a result, we may see additional demand for our products and services.

In our Aerospace segment, we continue to see strong order activity as we emerge from the impacts of the coronavirus (COVID-19) pandemic. However, this segment is the relatively most impacted by the global sanctions, particularly our aircraft services business in Europe, which we have offset to date through additional services revenue. Across the aerospace industry, the sanctions impact sales to certain individuals and entities and exports of associated aircraft parts and related services.

We continue to assess the conflict and related sanctions to help ensure compliance and take steps to attempt to mitigate any potential negative impact on our business, which to this point has not been material. Any longer-term impact to our business is currently unknown due to the uncertainty around the conflict’s duration, any further global sanctions and their broader impact.

RESULTS OF OPERATIONS

INTRODUCTION

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 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, 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 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 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 costs represent 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 costs 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 remained consistent with the prior year in the second quarter and first six months of 2022 as lower volume in our Combat Systems and Technologies segments was offset by higher volume in our Aerospace and Marine Systems segments. Operating margin increased 20 basis points in the second quarter and remained steady in the first six months of 2022 compared with the prior-year periods.

REVIEW OF OPERATING SEGMENTS

Following is a discussion of operating results and outlook 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 L to the unaudited Consolidated Financial Statements in Part I, Item 1.

AEROSPACE

Operating Results

The increase in the Aerospace segment’s revenue in the second quarter and first six months of 2022 consisted of the following:

Aircraft services revenue was up in the second quarter and first six months of 2022 due to additional demand for maintenance work and activity at our fixed-base operator (FBO) facilities driven by increased global air travel. The growth in services revenue was offset partially in the first six months by a planned decrease in aircraft deliveries, reflecting our decision in 2020 to reduce aircraft production rates in response to the COVID-19 pandemic. We have since increased production rates, which will result in increasing deliveries beginning in the second half of the year.

In the second quarter, the U.S. Federal Aviation Administration (FAA) issued an airworthiness directive (AD) that placed limitations on permissible landing conditions for the G500 and G600 aircraft models. A software update has been developed to address the AD limitations and is undergoing FAA review. As a result of these activities, deliveries of four aircraft slipped out of the second quarter. We anticipate completion of this process in September, and our full-year forecast for aircraft deliveries remains unchanged. The allocation of resources to support this review puts pressure on the scheduled entry into service of the G700, slipping that schedule by three to six months.

The increase in the segment’s operating earnings in the second quarter and first six months of 2022 consisted of the following:

Aircraft services operating earnings were up in the second quarter and first six months of 2022 due to higher volume, favorable cost performance and the mix of aircraft services. Aircraft manufacturing operating earnings were up due to a favorable mix of aircraft deliveries and ongoing improvements in manufacturing efficiency, as well as mark-to-market adjustments taken in the first quarter of 2021 related to aircraft that were in the G500 flight test program. These increases were offset partially by higher G&A/other expenses due primarily to increased R&D expenses associated with ongoing product development efforts.

In total, the Aerospace segment’s operating margin increased 70 basis points in the second quarter and 100 basis points in the first six months of 2022 compared with the prior-year periods.

2022 Outlook

We expect the Aerospace segment’s 2022 revenue to increase to approximately $8.6 billion due to increased new aircraft deliveries and growing service activity with operating margin around 12.9%.

MARINE SYSTEMS

Operating Results

The increase in the Marine Systems segment’s revenue in the second quarter and first six months of 2022 consisted of the following:

Revenue from U.S. Navy ship construction was up across our shipyards in the second quarter and first six months of 2022 due to increased volume on the Columbia-class submarine program, the Arleigh Burke-class (DDG-51) guided-missile destroyer program and the John Lewis-class (T-AO-205) fleet replenishment oiler program. Revenue from U.S. Navy ship engineering, repair and other services increased due to a higher volume of submarine and surface ship repair work. Overall, the Marine Systems segment’s operating margin decreased 30 basis points in the second quarter and 20 basis points in the first six months of 2022 due to program mix and supply chain impacts to the Virginia-class submarine schedule.

2022 Outlook

We expect the Marine Systems segment’s 2022 revenue to be approximately $10.8 billion. Operating margin is expected to be approximately 8.3% as each shipyard continues to come down the learning curve on their major construction programs.

COMBAT SYSTEMS

Operating Results

The change in the Combat Systems segment’s revenue in the second quarter and first six months of 2022 consisted of the following:

Revenue from international military vehicles decreased in the second quarter and first six months of 2022 due primarily to timing on several wheeled and tracked vehicle contracts and the impact of exchange rate fluctuations. Weapons systems and munitions revenue was down due to decreased production of various U.S. munitions and ordnance. These decreases were offset partially by increased revenue from U.S. Stryker wheeled combat vehicles, particularly in support of the maneuver short-range air defense (M-SHORAD) variant. Overall, the Combat Systems segment’s operating margin increased 70 basis points in the second quarter and 40 basis points in the first six months of 2022 driven by strong operating performance.

2022 Outlook

We expect the Combat Systems segment’s 2022 revenue to be approximately $7.1 billion with operating margin of approximately 15%.

TECHNOLOGIES

Operating Results

The change in the Technologies segment’s revenue in the second quarter and first six months of 2022 consisted of the following:

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

C5ISR solutions revenue was down in the second quarter and first six months of 2022 due primarily to continued supply chain shortages and some delays in customer order activity in 2021 resulting from the COVID-19 pandemic. IT services volume was down in the second quarter due to program timing but steady for the first six months compared with 2021. The Technologies segment’s operating margin increased 40 basis points in the second quarter and 10 basis points in the first six months of 2022 due to strong operating performance.

2022 Outlook

We expect the Technologies segment’s 2022 revenue to be approximately $12.9 billion with operating margin of around 10%.

CORPORATE

Corporate operating results totaled $20 in the second quarter and $91 in the first six months of 2022 compared with $20 and $52 in the prior-year periods, respectively, and consisted primarily of equity-based compensation expense. The increase in the first six months of 2022 was due to accelerated recognition of equity-based compensation expense.

OTHER INFORMATION

PRODUCT REVENUE AND OPERATING COSTS

The change in product revenue in the second quarter and first six months of 2022 consisted of the following:

Weapons systems and munitions revenue was down in the second quarter and the first six months of 2022 due to decreased production of various munitions and ordnance. Military vehicle production revenue decreased due to timing on several international wheeled and tracked vehicle contracts. Revenue from C5ISR products was down due to continued supply chain shortages and delays in customer order activity. These decreases were offset partially by higher ship construction revenue due to increased volume across our shipyards. In the second quarter and first six months of 2022, the primary drivers of the decrease 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 second quarter and first six months of 2022 consisted of the following:

Aircraft services revenue increased in the second quarter and first six months of 2022 due to additional maintenance work and FBO activity. Service operating costs decreased on higher revenue in the second quarter of 2022 and increased at a lower rate than revenue in the first six months of 2022 due primarily to strong operating performance in our IT services business.

G&A EXPENSES

As a percentage of revenue, G&A expenses were 6.7% in the first six months of 2022 compared with 6% in the first six months of 2021, reflecting accelerated recognition of equity-based compensation expense in the first quarter of 2022. We expect G&A expenses as a percentage of revenue in 2022 to be generally consistent with 2021.

OTHER, NET

Net other income was $79 in the first six months of 2022 compared with $61 in the first six months of 2021 and represents primarily the non-service components of pension and other post-retirement benefits.

INTEREST, NET

Net interest expense was $193 in the first six months of 2022 compared with $232 in the prior-year period, reflecting repayment of our scheduled debt maturities in 2021. See Note H to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including interest rates. We expect 2022 net interest expense to be approximately $380.

PROVISION FOR INCOME TAX, NET

Our effective tax rate was 15.6% in the first six months of 2022 compared with 16.3% in the prior-year period. The decrease is due to a variety of factors, including the impact of tax benefits from equity-based compensation. For 2022, we anticipate a full-year effective tax rate of approximately 16%.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was $87.6 billion at the end of the second quarter of 2022 compared with $87.2 billion at the end of the first quarter. 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 $126.4 billion on July 3, 2022.

The following table details the backlog and estimated potential contract value of each segment at the end of the second and first quarters of 2022:

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 second quarter of 2022 with backlog of $18.8 billion, up 6.6% from $17.6 billion on April 3, 2022, and up 38.9% in the past year.

Orders in the second quarter of 2022 reflected strong demand across our product and services portfolio, including orders for all models of Gulfstream aircraft. The segment’s book-to-bill ratio (orders divided by revenue) was 2-to-1 in the second quarter of 2022 and 1.7-to-1 over the trailing 12 months.

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 July 3, 2022, estimated potential contract value in the Aerospace segment was $877, down from $1.8 billion at the end of the first quarter. During the quarter we restructured the last remaining element of the segment’s backlog associated with fractional aircraft operators, including the removal of aircraft options for these customers from estimated potential contract value.

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 $68.8 billion on July 3, 2022. In the second quarter of 2022, the Combat Systems and Technologies segments achieved book-to-bill ratios of 1.4-to-1 and 1-to-1, respectively. Estimated potential contract value in our defense segments was $37.9 billion on July 3, 2022. We received the following significant contract awards during the second quarter:

MARINE SYSTEMS

• $500 from the U.S. Navy for long-lead materials to support construction of two additional T-AO-205 oilers.

• $315 from the Navy to provide submarine industrial base development and expansion for the Columbia-class submarine program.

• $100 from the Navy for long-lead materials to support construction of an additional Expeditionary Sea Base (ESB) auxiliary support ship.

• $55 from the Navy to provide ongoing lead yard services for the DDG-51 program.

• $50 from the Navy to improve submarine acoustic performance.

COMBAT SYSTEMS

• $410 from the U.S. Army to begin low-rate initial production (LRIP) of the Mobile Protected Firepower (MPF) vehicle. The contract has a maximum potential value of $1.1 billion.

• $295 for various munitions and ordnance with additional option value of $465.

• $525 from the Army to upgrade Stryker vehicles to the double-V-hull (DVH) A1 configuration.

• $355 to produce Abrams main battle tanks in the system enhancement package version 3 (SEPv3) configuration for Australia.

• $60 to produce M3 amphibious bridge systems for an international customer. The contract has a maximum potential value of $210.

• $90 from the Army for engineering and logistics support services for the Abrams family of vehicles.

• $50 from the Army to upgrade domestic Abrams main battle tanks to the SEPv3 configuration.

TECHNOLOGIES

• $545 for several key classified contracts.

• $160 from the U.S. Space Development Agency to build and operate ground systems for the new low earth orbit (LEO) satellite network. The contract has a maximum potential value of $325.

• An IDIQ contract for the development and sustainment of applications and websites for the Administrative Office of the United States Courts (AOUSC). The contract has a maximum potential value of $300.

• $280 from the Centers for Medicare and Medicaid Services (CMS) for several contracts, including work to provide cloud services and software tools.

• $155 to provide ship modernization services for the Navy.

• $120 to provide global enterprise and digital modernization services under the Southern Command’s (SOUTHCOM) Cyber Information Technology Enterprise Services (SCITES) contract.

• $10 from the Department of Veteran Affairs (VA) to provide IT support to more than 500,000 VA personnel and contractors nationwide. The contract has a maximum potential value of $110.

• $105 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.

• $85 to provide military information support operations for the United States Special Operations Command.

• $75 to provide command, control and communications capabilities for the DoD.

LIQUIDITY AND CAPITAL RESOURCES

We place a strong emphasis on cash flow generation, which is underpinned by an operating discipline focused on cost control and working capital management. This emphasis gives us the flexibility for prudent capital deployment, while allowing us to step down debt over time, and preserves a strong balance sheet for future opportunities.

We evaluate a variety of capital deployment options based on current market conditions and our long-term outlook, and we believe agility is a key component of our capital deployment strategy as market conditions change over time. Our capital deployment priorities include investments in our products and services to drive long-term growth, a predictable dividend, strategic acquisitions and opportunistic share repurchases.

We believe cash generated by operating activities, supplemented by commercial paper issuances, is sufficient to satisfy our short- and long-term liquidity needs. An additional potential source of capital is the issuance of long-term debt in capital market transactions.

We ended the second quarter of 2022 with a cash and equivalents balance of $2.2 billion compared with $1.6 billion at the end of 2021. The following is a discussion of our major operating, investing and financing activities in the first six months of 2022 and 2021, 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 six months of 2022 compared with $1.1 billion in the same period in 2021. The primary driver of cash inflows in both periods was net earnings. Cash flows in the first six months of 2022 were affected positively by an increase in customer deposits driven by Gulfstream aircraft orders and a decrease in unbilled receivables driven by the receipt of progress payments on a large international wheeled vehicle contract in our Combat Systems segment. Cash flows in the first six months of 2021 were affected negatively by the timing of billings and payments in our defense segments.

INVESTING ACTIVITIES

Cash used by investing activities was $365 in the first six months of 2022 compared with $308 in the same period in 2021. 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 $365 in the first six months of 2022 compared with $306 in the same period in 2021. We expect capital expenditures to be approximately 2.5% of revenue in 2022.

FINANCING ACTIVITIES

Cash used by financing activities was $1.7 billion in the first six months of 2022 compared with $671 in the same period in 2021. Financing activities include the use of cash for repurchases of common stock, payment of dividends, and debt and commercial paper repayments. Our financing activities also include proceeds received from debt and commercial paper issuances and employee stock option exercises.

On March 2, 2022, our board of directors declared an increased quarterly dividend of $1.26 per share, the 25th consecutive annual increase. Previously, the board had increased the quarterly dividend to $1.19 per share in March 2021. Cash dividends paid were $679 in the first six months of 2022 compared with $651 in the same period in 2021.

Our board of directors from time to time authorizes management to repurchase outstanding shares of our common stock on the open market. We paid $1.1 billion and $1.4 billion in the first six months of 2022 and 2021, respectively, to repurchase our outstanding shares. On July 3, 2022, 7.2 million shares remained authorized by our board of directors for repurchase, representing 2.6% of our total shares outstanding.

Fixed-rate notes of $1 billion mature in November 2022. We intend to repay these notes with cash on hand at maturity. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note H to the unaudited Consolidated Financial Statements in Part I, Item 1.

On July 3, 2022, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have a $4 billion committed bank credit facility 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 MEASURE - FREE CASH FLOW

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 to measure our performance in these areas. While we believe this metric provides useful information, it is not a defined operating measure under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with its use. Our calculation of this metric 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 this metric should not be considered in isolation from, or as a substitute for, other GAAP measures.

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

ADDITIONAL FINANCIAL INFORMATION

ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES

For a discussion of environmental matters and other contingencies, see Note J to the unaudited Consolidated Financial Statements in Part I, Item 1. Except as otherwise noted in Note J, 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 AND ESTIMATES

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. 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 $101 ($0.29) and $206 ($0.58) for the three- and six-month periods ended July 3, 2022, respectively. The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by $76 ($0.21) and $139 ($0.39) for the three- and six-month periods ended July 4, 2021, respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 3, 2022, or July 4, 2021.

Other critical accounting policies and estimates include long-lived assets and goodwill, commitments and contingencies, and retirement plans. For a full discussion of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2021.

GUARANTOR FINANCIAL INFORMATION

The outstanding notes described in Note H 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, 2021.

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 July 3, 2022. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on July 3, 2022, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting that occurred during the quarter ended July 3, 2022, 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,” “forecasts,” “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 the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. These factors include:

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

• 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;

• changing prices for energy and raw materials;

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

• 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;

• cybersecurity events and other disruptions;

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

• potential for increased regulation related to global climate change.

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 revisions to any 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 J 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, 2021.

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

The following table provides information about our second-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.

We did not make any unregistered sales of equity securities in the second quarter of 2022.

22 Subsidiary Guarantors (incorporated herein by reference from Exhibit 22 to the company’s quarterly report on Form 10-Q for the quarter ended October 3, 2021, filed with the SEC on October 27, 2021)

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.