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 April 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)
| Delaware | 13-1673581 | ||||||||||||||||
| State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification No. | ||||||||||||||||
| 11011 Sunset Hills Road | Reston, | Virginia | 20190 | ||||||||||||||
| Address of principal executive offices | Zip code | ||||||||||||||||
(703) 876-3000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock | GD | New York Stock Exchange | ||||||
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
277,705,115 shares of the registrant’s common stock, $1 par value per share, were outstanding on April 3, 2022.
INDEX
| PART I - | PAGE | |||||||
| Item 1 - | ||||||||
Item 2 - | ||||||||
| Item 3 - | ||||||||
| Item 4 - | ||||||||
| PART II - | ||||||||
| Item 1 - | ||||||||
| Item 1A - | ||||||||
| Item 2 - | ||||||||
| Item 6 - | ||||||||
2
PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
| Three Months Ended | |||||||||||
| (Dollars in millions, except per-share amounts) | April 3, 2022 | April 4, 2021 | |||||||||
| Revenue: | |||||||||||
| Products | $ | 5,209 | $ | 5,355 | |||||||
| Services | 4,183 | 4,034 | |||||||||
| 9,392 | 9,389 | ||||||||||
| Operating costs and expenses: | |||||||||||
| Products | (4,312) | (4,438) | |||||||||
| Services | (3,546) | (3,454) | |||||||||
| General and administrative (G&A) | (626) | (559) | |||||||||
| (8,484) | (8,451) | ||||||||||
| Operating earnings | 908 | 938 | |||||||||
| Other, net | 39 | 30 | |||||||||
| Interest, net | (98) | (123) | |||||||||
| Earnings before income tax | 849 | 845 | |||||||||
| Provision for income tax, net | (119) | (137) | |||||||||
| Net earnings | $ | 730 | $ | 708 | |||||||
| Earnings per share | |||||||||||
| Basic | $ | 2.63 | $ | 2.49 | |||||||
| Diluted | $ | 2.61 | $ | 2.48 | |||||||
3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | |||||||||||
| (Dollars in millions) | April 3, 2022 | April 4, 2021 | |||||||||
| Net earnings | $ | 730 | $ | 708 | |||||||
| Changes in unrealized cash flow hedges | (54) | (91) | |||||||||
| Foreign currency translation adjustments | 62 | (38) | |||||||||
| Changes in retirement plans’ funded status | 42 | 101 | |||||||||
| Other comprehensive income (loss), pretax | 50 | (28) | |||||||||
| Benefit for income tax, net | 5 | — | |||||||||
| Other comprehensive income (loss), net of tax | 55 | (28) | |||||||||
| Comprehensive income | $ | 785 | $ | 680 | |||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEET
| (Unaudited) | |||||||||||
| (Dollars in millions) | April 3, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | 2,907 | $ | 1,603 | |||||||
| Accounts receivable | 3,015 | 3,041 | |||||||||
| Unbilled receivables | 7,888 | 8,498 | |||||||||
| Inventories | 5,548 | 5,340 | |||||||||
| Other current assets | 1,436 | 1,505 | |||||||||
| Total current assets | 20,794 | 19,987 | |||||||||
| Noncurrent assets: | |||||||||||
| Property, plant and equipment, net | 5,450 | 5,417 | |||||||||
| Intangible assets, net | 1,926 | 1,978 | |||||||||
| Goodwill | 20,114 | 20,098 | |||||||||
| Other assets | 2,592 | 2,593 | |||||||||
| Total noncurrent assets | 30,082 | 30,086 | |||||||||
| Total assets | $ | 50,876 | $ | 50,073 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt and current portion of long-term debt | $ | 1,005 | $ | 1,005 | |||||||
| Accounts payable | 3,190 | 3,167 | |||||||||
| Customer advances and deposits | 6,363 | 6,266 | |||||||||
| Other current liabilities | 3,478 | 3,540 | |||||||||
| Total current liabilities | 14,036 | 13,978 | |||||||||
| Noncurrent liabilities: | |||||||||||
| Long-term debt | 10,491 | 10,490 | |||||||||
| Other liabilities | 8,335 | 7,964 | |||||||||
| Commitments and contingencies (see Note J) | |||||||||||
| Total noncurrent liabilities | 18,826 | 18,454 | |||||||||
| Shareholders’ equity: | |||||||||||
| Common stock | 482 | 482 | |||||||||
| Surplus | 3,434 | 3,278 | |||||||||
| Retained earnings | 35,800 | 35,420 | |||||||||
| Treasury stock | (19,837) | (19,619) | |||||||||
| Accumulated other comprehensive loss | (1,865) | (1,920) | |||||||||
| Total shareholders’ equity | 18,014 | 17,641 | |||||||||
Total liabilities and shareholders’ equity | $ | 50,876 | $ | 50,073 | |||||||
5
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
| Three Months Ended | |||||||||||
| (Dollars in millions) | April 3, 2022 | April 4, 2021 | |||||||||
| Cash flows from operating activities - continuing operations: | |||||||||||
| Net earnings | $ | 730 | $ | 708 | |||||||
| Adjustments to reconcile net earnings to net cash from operating activities: | |||||||||||
| Depreciation of property, plant and equipment | 139 | 136 | |||||||||
| Amortization of intangible and finance lease right-of-use assets | 74 | 79 | |||||||||
| Equity-based compensation expense | 96 | 40 | |||||||||
| Deferred income tax benefit | (106) | (19) | |||||||||
| (Increase) decrease in assets, net of effects of business acquisitions: | |||||||||||
| Accounts receivable | 26 | (30) | |||||||||
| Unbilled receivables | 617 | 52 | |||||||||
| Inventories | (234) | 57 | |||||||||
| Increase (decrease) in liabilities, net of effects of business acquisitions: | |||||||||||
| Accounts payable | 23 | (216) | |||||||||
| Customer advances and deposits | 675 | (544) | |||||||||
| Other, net | (72) | (260) | |||||||||
| Net cash provided by operating activities | 1,968 | 3 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (141) | (134) | |||||||||
| Other, net | (6) | 3 | |||||||||
| Net cash used by investing activities | (147) | (131) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Dividends paid | (330) | (315) | |||||||||
| Purchases of common stock | (294) | (759) | |||||||||
| Other, net | 107 | 201 | |||||||||
| Net cash used by financing activities | (517) | (873) | |||||||||
| Net cash used by discontinued operations | — | (12) | |||||||||
| Net increase (decrease) in cash and equivalents | 1,304 | (1,013) | |||||||||
| Cash and equivalents at beginning of period | 1,603 | 2,824 | |||||||||
| Cash and equivalents at end of period | $ | 2,907 | $ | 1,811 | |||||||
| Supplemental cash flow information: | |||||||||||
| Income tax payments, net | $ | (15) | $ | (33) | |||||||
| Interest payments | $ | (93) | $ | (107) | |||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
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CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Par | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||||||||||
| December 31, 2021 | $ | 482 | $ | 3,278 | $ | 35,420 | $ | (19,619) | $ | (1,920) | $ | 17,641 | |||||||||||||||||||||||
| Net earnings | — | — | 730 | — | — | 730 | |||||||||||||||||||||||||||||
| Cash dividends declared | — | — | (350) | — | — | (350) | |||||||||||||||||||||||||||||
| Equity-based awards | — | 156 | — | 74 | — | 230 | |||||||||||||||||||||||||||||
| Shares purchased | — | — | — | (292) | — | (292) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 55 | 55 | |||||||||||||||||||||||||||||
| April 3, 2022 | $ | 482 | $ | 3,434 | $ | 35,800 | $ | (19,837) | $ | (1,865) | $ | 18,014 | |||||||||||||||||||||||
| December 31, 2020 | $ | 482 | $ | 3,124 | $ | 33,498 | $ | (17,893) | $ | (3,550) | $ | 15,661 | |||||||||||||||||||||||
| Net earnings | — | — | 708 | — | — | 708 | |||||||||||||||||||||||||||||
| Cash dividends declared | — | — | (337) | — | — | (337) | |||||||||||||||||||||||||||||
| Equity-based awards | — | 28 | — | 52 | — | 80 | |||||||||||||||||||||||||||||
| Shares purchased | — | — | — | (744) | — | (744) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (28) | (28) | |||||||||||||||||||||||||||||
| April 4, 2021 | $ | 482 | $ | 3,152 | $ | 33,869 | $ | (18,585) | $ | (3,578) | $ | 15,340 | |||||||||||||||||||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per-share amounts or unless otherwise noted)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services.
Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the unaudited Consolidated Financial Statements.
Consistent with industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts may not be realized within one year.
Further discussion of our significant accounting policies is contained in the other notes to these financial statements.
Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These rules and regulations permit some of the information and footnote disclosures included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are typically 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three-month period ended April 3, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three-month periods ended April 3, 2022, and April 4, 2021.
These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Property, Plant and Equipment, Net. Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. Net PP&E consisted of the following:
| April 3, 2022 | December 31, 2021 | ||||||||||
| PP&E | $ | 11,631 | $ | 11,464 | |||||||
| Accumulated depreciation | (6,181) | (6,047) | |||||||||
| PP&E, net | $ | 5,450 | $ | 5,417 | |||||||
Accounting Standards Updates. There are accounting standards that have been issued by the Financial Accounting Standards Board (FASB) but are not yet effective. These standards are not expected to have a material impact on our results of operations, financial condition or cash flows.
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B. REVENUE
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue. A contract’s transaction price is allocated to each distinct performance obligation within that contract and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product life cycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract.
Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 80% of our revenue for the three-month periods ended April 3, 2022, and April 4, 2021. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.
Revenue from goods and services transferred to customers at a point in time accounted for 20% of our revenue for the three-month periods ended April 3, 2022, and April 4, 2021. Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.
On April 3, 2022, we had $87.2 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 55% of our remaining performance obligations as revenue by year-end 2023, an additional 30% by year-end 2025 and the balance thereafter.
Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity
9
of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
The nature of our contracts gives rise to several types of variable consideration, including claims, award fees and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award fees or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:
| Three Months Ended | April 3, 2022 | April 4, 2021 | |||||||||
| Revenue | $ | 107 | $ | 85 | |||||||
| Operating earnings | 105 | 63 | |||||||||
| Diluted earnings per share | $ | 0.30 | $ | 0.17 | |||||||
No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended April 3, 2022, or April 4, 2021.
Revenue by Category. Our portfolio of products and services consists of approximately 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.
10
Revenue by major products and services was as follows:
| Three Months Ended | April 3, 2022 | April 4, 2021 | |||||||||
| Aircraft manufacturing | $ | 1,262 | $ | 1,372 | |||||||
| Aircraft services | 641 | 515 | |||||||||
| Total Aerospace | 1,903 | 1,887 | |||||||||
| Nuclear-powered submarines | 1,762 | 1,719 | |||||||||
| Surface ships | 593 | 528 | |||||||||
| Repair and other services | 296 | 236 | |||||||||
| Total Marine Systems | 2,651 | 2,483 | |||||||||
| Military vehicles | 1,095 | 1,203 | |||||||||
| Weapons systems, armament and munitions | 416 | 460 | |||||||||
| Engineering and other services | 164 | 157 | |||||||||
| Total Combat Systems | 1,675 | 1,820 | |||||||||
| Information technology (IT) services | 2,140 | 2,085 | |||||||||
| C5ISR* solutions | 1,023 | 1,114 | |||||||||
| Total Technologies | 3,163 | 3,199 | |||||||||
| Total revenue | $ | 9,392 | $ | 9,389 | |||||||
*Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance
Revenue by contract type was as follows:
| Three Months Ended April 3, 2022 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| Fixed-price | $ | 1,673 | $ | 1,601 | $ | 1,465 | $ | 1,338 | $ | 6,077 | |||||||||||||||||||
| Cost-reimbursement | — | 1,050 | 197 | 1,328 | 2,575 | ||||||||||||||||||||||||
| Time-and-materials | 230 | — | 13 | 497 | 740 | ||||||||||||||||||||||||
| Total revenue | $ | 1,903 | $ | 2,651 | $ | 1,675 | $ | 3,163 | $ | 9,392 | |||||||||||||||||||
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||||||||
| Fixed-price | $ | 1,709 | $ | 1,784 | $ | 1,569 | $ | 1,340 | $ | 6,402 | |||||||||||||||||||
| Cost-reimbursement | — | 699 | 235 | 1,363 | 2,297 | ||||||||||||||||||||||||
| Time-and-materials | 178 | — | 16 | 496 | 690 | ||||||||||||||||||||||||
| Total revenue | $ | 1,887 | $ | 2,483 | $ | 1,820 | $ | 3,199 | $ | 9,389 | |||||||||||||||||||
Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. The amount for an incentive or award fee is determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.
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Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.
Revenue by customer was as follows:
| Three Months Ended April 3, 2022 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| Department of Defense (DoD) | $ | 80 | $ | 2,605 | $ | 855 | $ | 1,751 | $ | 5,291 | |||||||||||||||||||
| Non-DoD | — | 1 | 2 | 1,243 | 1,246 | ||||||||||||||||||||||||
| Foreign military sales (FMS) | 33 | 44 | 69 | 10 | 156 | ||||||||||||||||||||||||
| Total U.S. government | 113 | 2,650 | 926 | 3,004 | 6,693 | ||||||||||||||||||||||||
| U.S. commercial | 1,110 | — | 45 | 50 | 1,205 | ||||||||||||||||||||||||
| Non-U.S. government | 120 | 1 | 685 | 102 | 908 | ||||||||||||||||||||||||
| Non-U.S. commercial | 560 | — | 19 | 7 | 586 | ||||||||||||||||||||||||
| Total revenue | $ | 1,903 | $ | 2,651 | $ | 1,675 | $ | 3,163 | $ | 9,392 | |||||||||||||||||||
| Three Months Ended April 4, 2021 | |||||||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| DoD | $ | 58 | $ | 2,420 | $ | 916 | $ | 1,747 | $ | 5,141 | |||||||||||||||||||
| Non-DoD | — | 4 | 2 | 1,246 | 1,252 | ||||||||||||||||||||||||
| FMS | 19 | 56 | 87 | 14 | 176 | ||||||||||||||||||||||||
| Total U.S. government | 77 | 2,480 | 1,005 | 3,007 | 6,569 | ||||||||||||||||||||||||
| U.S. commercial | 857 | 1 | 66 | 57 | 981 | ||||||||||||||||||||||||
| Non-U.S. government | 190 | 2 | 732 | 129 | 1,053 | ||||||||||||||||||||||||
| Non-U.S. commercial | 763 | — | 17 | 6 | 786 | ||||||||||||||||||||||||
| Total revenue | $ | 1,887 | $ | 2,483 | $ | 1,820 | $ | 3,199 | $ | 9,389 | |||||||||||||||||||
Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the three-month period ended April 3, 2022, were not materially impacted by any other factors.
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Revenue recognized for the three-month periods ended April 3, 2022, and April 4, 2021, that was included in the contract liability balance at the beginning of each year was $1.7 billion and $1.5 billion, respectively. This revenue represented primarily the sale of business jet aircraft.
C. EARNINGS PER SHARE
We compute basic earnings per share (EPS) using net earnings for the period and the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs).
Basic and diluted weighted average shares outstanding were as follows (in thousands):
| Three Months Ended | April 3, 2022 | April 4, 2021 | |||||||||
| Basic weighted average shares outstanding | 277,074 | 284,102 | |||||||||
| Dilutive effect of stock options and restricted stock/RSUs* | 2,863 | 1,096 | |||||||||
| Diluted weighted average shares outstanding | 279,937 | 285,198 | |||||||||
* Excludes outstanding options to purchase shares of common stock that had exercise prices in excess of the average market price of our common stock during the period and, therefore, the effect of including these options would be antidilutive. These options totaled 2,086 and 8,298 for the three-month periods ended April 3, 2022, and April 4, 2021, respectively.
D. INCOME TAXES
Net Deferred Tax Liability. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax liability consisted of the following:
| April 3, 2022 | December 31, 2021 | ||||||||||
| Deferred tax asset | $ | 41 | $ | 41 | |||||||
| Deferred tax liability | (757) | (868) | |||||||||
| Net deferred tax liability | $ | (716) | $ | (827) | |||||||
Tax Uncertainties. We participate in the Internal Revenue Service (IRS) Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2020.
For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50% chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.
Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on April 3, 2022, was not material to our results of operations, financial condition or cash flows. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.
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E. UNBILLED RECEIVABLES
Unbilled receivables represent revenue recognized on long-term contracts (contract costs and estimated profits) less associated advances and progress billings. These amounts will be billed in accordance with the agreed-upon contractual terms. Unbilled receivables consisted of the following:
| April 3, 2022 | December 31, 2021 | ||||||||||
| Unbilled revenue | $ | 35,695 | $ | 39,566 | |||||||
| Advances and progress billings | (27,807) | (31,068) | |||||||||
| Net unbilled receivables | $ | 7,888 | $ | 8,498 | |||||||
On April 3, 2022, and December 31, 2021, net unbilled receivables included $2.4 billion and $3.3 billion, respectively, associated with two large international contracts in our Combat Systems segment. A wheeled vehicle contract, originally negotiated in 2012, was amended in 2020 to include a revised payment schedule that addressed a build-up in unbilled receivables. Under the amended contract, we have received progress payments that have reduced the program’s unbilled balance to $1 billion. The remaining scheduled progress payments will liquidate the net unbilled receivables balance by the end of 2023. A separate tracked vehicle contract signed in 2010 has been experiencing an unbilled receivable build-up since 2021 while we work to resolve customer concerns on certain aspects of the program. As a result, the balance on this program has grown to $1.4 billion.
F. INVENTORIES
The majority of our inventories are for business jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value.
Inventories consisted of the following:
| April 3, 2022 | December 31, 2021 | ||||||||||
| Work in process | $ | 3,865 | $ | 3,654 | |||||||
| Raw materials | 1,645 | 1,651 | |||||||||
| Finished goods | 25 | 22 | |||||||||
| Pre-owned aircraft | 13 | 13 | |||||||||
| Total inventories | $ | 5,548 | $ | 5,340 | |||||||
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G. GOODWILL AND INTANGIBLE ASSETS
Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:
| Aerospace | Marine Systems | Combat Systems | Technologies | Total Goodwill | |||||||||||||||||||||||||
| December 31, 2021 (a) | $ | 3,039 | $ | 297 | $ | 2,827 | $ | 13,935 | $ | 20,098 | |||||||||||||||||||
| Other (b) | (6) | — | 18 | 4 | 16 | ||||||||||||||||||||||||
| April 3, 2022 (a) | $ | 3,033 | $ | 297 | $ | 2,845 | $ | 13,939 | $ | 20,114 | |||||||||||||||||||
(a)Goodwill in the Technologies reporting unit was net of $1.8 billion of accumulated impairment losses.
(b)Consisted primarily of adjustments for foreign currency translation.
Intangible Assets. Intangible assets consisted of the following:
| Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| April 3, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Contract and program intangible assets (b) | $ | 3,242 | $ | (1,597) | $ | 1,645 | $ | 3,239 | $ | (1,547) | $ | 1,692 | |||||||||||
| Trade names and trademarks | 499 | (240) | 259 | 501 | (238) | 263 | |||||||||||||||||
| Technology and software | 70 | (49) | 21 | 70 | (48) | 22 | |||||||||||||||||
| Other intangible assets | 64 | (63) | 1 | 64 | (63) | 1 | |||||||||||||||||
| Total intangible assets | $ | 3,875 | $ | (1,949) | $ | 1,926 | $ | 3,874 | $ | (1,896) | $ | 1,978 | |||||||||||
(a)Changes in gross carrying amounts consisted primarily of adjustments for foreign currency translation.
(b)Consisted of acquired backlog and probable follow-on work and associated customer relationships.
Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $50 and $55 for the three-month periods ended April 3, 2022, and April 4, 2021, respectively.
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H. DEBT
Debt consisted of the following:
| April 3, 2022 | December 31, 2021 | |||||||||||||
| Fixed-rate notes due: | Interest rate: | |||||||||||||
| November 2022 | 2.250% | $ | 1,000 | $ | 1,000 | |||||||||
| May 2023 | 3.375% | 750 | 750 | |||||||||||
| August 2023 | 1.875% | 500 | 500 | |||||||||||
| November 2024 | 2.375% | 500 | 500 | |||||||||||
| April 2025 | 3.250% | 750 | 750 | |||||||||||
| May 2025 | 3.500% | 750 | 750 | |||||||||||
| June 2026 | 1.150% | 500 | 500 | |||||||||||
| August 2026 | 2.125% | 500 | 500 | |||||||||||
| April 2027 | 3.500% | 750 | 750 | |||||||||||
| November 2027 | 2.625% | 500 | 500 | |||||||||||
| May 2028 | 3.750% | 1,000 | 1,000 | |||||||||||
| April 2030 | 3.625% | 1,000 | 1,000 | |||||||||||
| June 2031 | 2.250% | 500 | 500 | |||||||||||
| April 2040 | 4.250% | 750 | 750 | |||||||||||
| June 2041 | 2.850% | 500 | 500 | |||||||||||
| November 2042 | 3.600% | 500 | 500 | |||||||||||
| April 2050 | 4.250% | 750 | 750 | |||||||||||
| Other | Various | 102 | 106 | |||||||||||
| Total debt principal | 11,602 | 11,606 | ||||||||||||
| Less unamortized debt issuance costs and discounts | 106 | 111 | ||||||||||||
| Total debt | 11,496 | 11,495 | ||||||||||||
| Less current portion | 1,005 | 1,005 | ||||||||||||
| Long-term debt | $ | 10,491 | $ | 10,490 | ||||||||||
On April 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. This credit facility expires in March 2027. We may renew or replace this credit facility in whole or in part at or prior to its expiration date. We also have an effective shelf registration on file with the SEC that allows us to access the debt markets.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on April 3, 2022.
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I. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
| April 3, 2022 | December 31, 2021 | ||||||||||
| Salaries and wages | $ | 870 | $ | 1,022 | |||||||
| Dividends payable | 350 | 331 | |||||||||
| Lease liabilities | 331 | 337 | |||||||||
| Retirement benefits | 285 | 288 | |||||||||
| Workers’ compensation | 265 | 270 | |||||||||
| Other | 1,377 | 1,292 | |||||||||
| Total other current liabilities | $ | 3,478 | $ | 3,540 | |||||||
| Retirement benefits | $ | 2,717 | $ | 2,813 | |||||||
| Customer deposits on commercial contracts | 1,828 | 1,250 | |||||||||
| Lease liabilities | 1,346 | 1,343 | |||||||||
| Other | 2,444 | 2,558 | |||||||||
| Total other liabilities | $ | 8,335 | $ | 7,964 | |||||||
J. COMMITMENTS AND CONTINGENCIES
Litigation
In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter which had been filed under seal in U.S. district court. Also in 2016, the Suspending and Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and engaged in discussions with the U.S. government.
In the third quarter of 2019, the Department of Justice declined to intervene in the qui tam action, noting that its investigation continues, and the court unsealed the relator’s complaint. In the fourth quarter of 2020, the relator filed a second amended complaint. In the third quarter of 2021, the court dismissed the relator’s complaint with prejudice. The relator has appealed the dismissal of the complaint to the United States Court of Appeals. Given the current status of these matters, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on our results of operations, financial condition and cash flows.
Additionally, various other claims and legal proceedings incidental to the normal course of business are pending or threatened against us. These other matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these other matters. However, based on information currently available, we believe any potential liabilities in these
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other proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.
Environmental
We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.
As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liabilities. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.
Other
Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government audits and investigations will not have a material impact on our results of operations, financial condition or cash flows.
In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.
Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance carriers totaling approximately $1 billion on April 3, 2022. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance of our subsidiaries arising under certain contracts.
Aircraft Trade-ins. In connection with orders for new aircraft in contract backlog, our Aerospace segment has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are generally structured to establish the fair market value of the trade-in aircraft at a date generally 45 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Other trade-in commitments are structured to guarantee a pre-determined trade-in value. These commitments present more risk in the event of an adverse change in market conditions. In either
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case, any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction. As of April 3, 2022, the estimated change in fair market values from the date of the commitments was not material.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheet.
The changes in the carrying amount of warranty liabilities for the three-month periods ended April 3, 2022, and April 4, 2021, were as follows:
| Three Months Ended | April 3, 2022 | April 4, 2021 | |||||||||
| Beginning balance | $ | 641 | $ | 660 | |||||||
| Warranty expense | 21 | 26 | |||||||||
| Payments | (33) | (40) | |||||||||
| Ending balance | $ | 629 | $ | 646 | |||||||
K. SHAREHOLDERS’ EQUITY
Share Repurchases. Our board of directors, from time to time, authorizes management to repurchase outstanding shares of our common stock on the open market. In the three-month period ended April 3, 2022, we repurchased 1.3 million of our outstanding shares for $292. On April 3, 2022, 10.8 million shares remained authorized by our board of directors for repurchase, representing 3.9% of our total shares outstanding. We repurchased 4.6 million shares for $744 in the three-month period ended April 4, 2021.
Dividends per Share. Our board of directors declared dividends per share of $1.26 and $1.19 for the three-month periods ended April 3, 2022, and April 4, 2021, respectively. We paid cash dividends of $330 and $315 for the three-month periods ended April 3, 2022, and April 4, 2021, respectively.
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Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of accumulated other comprehensive loss (AOCL) consisted of the following:
| Changes in Unrealized Cash Flow Hedges | Foreign Currency Translation Adjustments | Changes in Retirement Plans’ Funded Status | AOCL | |||||||||||
| December 31, 2021 | $ | 144 | $ | 538 | $ | (2,602) | $ | (1,920) | ||||||
| Other comprehensive income, pretax | (54) | 62 | 42 | 50 | ||||||||||
| Benefit for income tax, net | 14 | — | (9) | 5 | ||||||||||
| Other comprehensive income, net of tax | (40) | 62 | 33 | 55 | ||||||||||
| April 3, 2022 | $ | 104 | $ | 600 | $ | (2,569) | $ | (1,865) | ||||||
| December 31, 2020 | $ | 272 | $ | 641 | $ | (4,463) | $ | (3,550) | ||||||
| Other comprehensive loss, pretax | (91) | (38) | 101 | (28) | ||||||||||
| Benefit for income tax, net | 23 | — | (23) | — | ||||||||||
| Other comprehensive loss, net of tax | (68) | (38) | 78 | (28) | ||||||||||
| April 4, 2021 | $ | 204 | $ | 603 | $ | (4,385) | $ | (3,578) | ||||||
Amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and included pretax recognized net actuarial losses and amortization of prior service credit. See Note O for these amounts, which are included in our net periodic pension and other post-retirement benefit credit.
L. SEGMENT INFORMATION
We have four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We organize our segments in accordance with the nature of products and services offered. We measure each segment’s profitability based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our segments.
Summary financial information for each of our segments follows:
| Revenue (a) | Operating Earnings | |||||||||||||
| Three Months Ended | April 3, 2022 | April 4, 2021 | April 3, 2022 | April 4, 2021 | ||||||||||
| Aerospace | $ | 1,903 | $ | 1,887 | $ | 243 | $ | 220 | ||||||
| Marine Systems | 2,651 | 2,483 | 211 | 200 | ||||||||||
| Combat Systems | 1,675 | 1,820 | 227 | 244 | ||||||||||
| Technologies | 3,163 | 3,199 | 298 | 306 | ||||||||||
| Corporate (b) | — | — | (71) | (32) | ||||||||||
| Total | $ | 9,392 | $ | 9,389 | $ | 908 | $ | 938 | ||||||
(a)See Note B for additional revenue information by segment.
(b)Corporate operating results consist primarily of equity-based compensation expense.
M. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants.
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Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
•Level 1 - quoted prices in active markets for identical assets or liabilities.
•Level 2 - inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly.
•Level 3 - unobservable inputs significant to the fair value measurement.
We did not have any significant non-financial assets or liabilities measured at fair value on April 3, 2022, or December 31, 2021.
Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable on the unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on April 3, 2022, and December 31, 2021, and the basis for determining their fair values:
| Carrying Value | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
| Financial Assets (Liabilities) | April 3, 2022 | ||||||||||||||||||||||||||||
| Measured at fair value: | |||||||||||||||||||||||||||||
| Marketable securities held in trust: | |||||||||||||||||||||||||||||
| Cash and equivalents | $ | 3 | $ | 3 | $ | — | $ | 3 | $ | — | |||||||||||||||||||
| Available-for-sale debt securities | 121 | 121 | — | 121 | — | ||||||||||||||||||||||||
| Equity securities | 58 | 58 | 58 | — | — | ||||||||||||||||||||||||
| Other investments | 17 | 17 | — | — | 17 | ||||||||||||||||||||||||
| Cash flow hedge assets | 359 | 359 | — | 359 | — | ||||||||||||||||||||||||
| Cash flow hedge liabilities | (125) | (125) | — | (125) | — | ||||||||||||||||||||||||
| Measured at amortized cost: | |||||||||||||||||||||||||||||
| Short- and long-term debt principal | (11,602) | (11,705) | — | (11,705) | — | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Measured at fair value: | |||||||||||||||||||||||||||||
| Marketable securities held in trust: | |||||||||||||||||||||||||||||
| Cash and equivalents | $ | 4 | $ | 4 | $ | — | $ | 4 | $ | — | |||||||||||||||||||
| Available-for-sale debt securities | 125 | 125 | — | 125 | — | ||||||||||||||||||||||||
| Equity securities | 62 | 62 | 62 | — | — | ||||||||||||||||||||||||
| Other investments | 12 | 12 | — | — | 12 | ||||||||||||||||||||||||
| Cash flow hedge assets | 320 | 320 | — | 320 | — | ||||||||||||||||||||||||
| Cash flow hedge liabilities | (98) | (98) | — | (98) | — | ||||||||||||||||||||||||
| Measured at amortized cost: | |||||||||||||||||||||||||||||
| Short- and long-term debt principal | (11,606) | (12,549) | — | (12,549) | — | ||||||||||||||||||||||||
Our Level 1 assets include investments in publicly traded equity securities valued using quoted prices from the market exchanges. The fair value of our Level 2 assets and liabilities, which consist
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primarily of fixed-income securities, cash flow hedges and our fixed-rate notes, is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets include direct private equity investments that are measured using inputs unobservable to a marketplace participant.
N. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk, primarily from foreign currency exchange rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivative financial instruments for trading or speculative purposes.
Foreign Currency Risk. Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale contracts, designed to offset and minimize our risk. The dollar-weighted two-year average maturity of these instruments generally matches the duration of the activities that are at risk.
Commodity Price Risk. We are subject to commodity price risk, primarily on long-term, fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from these risks. Some of the protective terms included in our contracts are considered derivative financial instruments but are not accounted for separately, because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On April 3, 2022, and December 31, 2021, we held $2.9 billion and $1.6 billion in cash and equivalents, respectively, but held no marketable securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified pension plans. On April 3, 2022, and December 31, 2021, we held marketable securities in trust of $182 and $191, respectively. These marketable securities are reflected at fair value on the Consolidated Balance Sheet in other current and noncurrent assets. See Note M for additional details.
Hedging Activities. We had notional forward exchange contracts outstanding of $7.5 billion and $6.8 billion on April 3, 2022, and December 31, 2021, respectively. These derivative financial instruments are cash flow hedges, and are reflected at fair value on the Consolidated Balance Sheet in other current assets and liabilities. See Note M for additional details.
Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in AOCL until the underlying transaction is reflected in earnings. Alternatively, gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in earnings. All gains and losses from derivative financial instruments recognized in the Consolidated Statement of Earnings are presented in the same line item as the underlying transaction, generally operating costs and expenses.
Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations for the three-month periods ended April 3, 2022, and April 4, 2021. Net gains and losses reclassified to earnings from AOCL related to
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qualified hedges were also not material to our results of operations for the three-month periods ended April 3, 2022, and April 4, 2021, and we do not expect the amount of these gains and losses that will be reclassified to earnings during the next 12 months to be material.
We had no material derivative financial instruments designated as fair value or net investment hedges on April 3, 2022, and December 31, 2021.
Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international businesses’ functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and statements of earnings at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of AOCL.
We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations’ results into U.S. dollars. The impact of translating our non-U.S. operations’ revenue and earnings into U.S. dollars was not material to our results of operations for the three-month periods ended April 3, 2022, and April 4, 2021. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the three-month periods ended April 3, 2022, and April 4, 2021.
O. RETIREMENT PLANS
We provide retirement benefits to eligible employees through a variety of plans:
•Defined contribution
•Defined benefit
◦Pension (qualified and non-qualified)
◦Other post-retirement benefit
For our defined benefit plans, net periodic benefit credit for the three-month periods ended April 3, 2022, and April 4, 2021, consisted of the following:
| Pension Benefits | Other Post-retirement Benefits | |||||||||||||||||||
| Three Months Ended | April 3, 2022 | April 4, 2021 | April 3, 2022 | April 4, 2021 | ||||||||||||||||
| Service cost | $ | 26 | $ | 30 | $ | 1 | $ | 2 | ||||||||||||
| Interest cost | 100 | 90 | 5 | 5 | ||||||||||||||||
| Expected return on plan assets | (228) | (241) | (8) | (9) | ||||||||||||||||
| Net actuarial loss (gain) | 54 | 103 | (4) | — | ||||||||||||||||
| Prior service credit | (5) | (5) | — | — | ||||||||||||||||
| Net periodic benefit credit | $ | (53) | $ | (23) | $ | (6) | $ | (2) | ||||||||||||
Our contractual arrangements with the U.S. government provide for the recovery of pension and other post-retirement benefit costs related to employees working on government contracts. As we expect to recover these costs, we defer them in other contract costs in other current assets on the Consolidated Balance Sheet until they can be allocated to contracts, which is generally after they are paid. To the extent there is a non-service component of net periodic benefit credit for our defined benefit plans, it is reported in other income (expense) in the Consolidated Statement of Earnings.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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
With approximately 70% of our revenue coming from the U.S. government, government spending levels — particularly defense spending — influence our financial performance. At the beginning of the government’s fiscal year (FY) 2022, we were operating under a series of continuing resolutions (CRs), which provided funding for federal agencies for all programs of record at the prior year’s appropriated levels. On March 15, 2022, the U.S. government enacted a defense appropriations bill for the government’s FY 2022 totaling $728 billion, representing an increase of approximately 5% over the enacted FY 2021 spending level and an increase of approximately 3% over the FY 2022 budget request. The FY 2022 defense appropriations bill was supportive of our key programs but did not have a material impact on our financial outlook for 2022.
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 disruptions to global economies and some global businesses, including heightened cybersecurity risks, supply chain challenges, increased energy costs, foreign currency exchange rate fluctuations, as well as an exacerbation of existing inflationary pressures.
Within our defense segments, the Russia-Ukraine conflict has created some potential supply chain challenges, which we continue to monitor and manage. The conflict may impact the FY 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 most impacted by the global sanctions, particularly our aircraft services business in Europe, which we have managed to-date. Across the aerospace industry, the sanctions impact sales to certain individuals and entities and exports of associated aircraft parts and related services.
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We continue to assess the conflict and related sanctions 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 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 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.
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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
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 9,392 | $ | 9,389 | $ | 3 | — | % | |||||||||||||||
| Operating costs and expenses | (8,484) | (8,451) | (33) | 0.4 | % | ||||||||||||||||||
| Operating earnings | 908 | 938 | (30) | (3.2) | % | ||||||||||||||||||
| Operating margin | 9.7 | % | 10.0 | % | |||||||||||||||||||
Our consolidated revenue in the first quarter was consistent with last year as higher volume in our Marine Systems segment was largely offset by lower volume in our Combat Systems segment. Operating earnings and margin decreased $30 and 30 basis points, respectively, in the first quarter of 2022 due to timing of Corporate operating expenses. Operating earnings and margin increased in the aggregate for our operating segments in the first quarter of 2022.
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 L to the unaudited Consolidated Financial Statements in Part I, Item 1.
AEROSPACE
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 1,903 | $ | 1,887 | $ | 16 | 0.8 | % | |||||||||||||||
| Operating earnings | 243 | 220 | 23 | 10.5 | % | ||||||||||||||||||
| Operating margin | 12.8 | % | 11.7 | % | |||||||||||||||||||
| Gulfstream aircraft deliveries (in units) | 25 | 28 | (3) | (10.7) | % | ||||||||||||||||||
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Operating Results
The increase in the Aerospace segment’s revenue in the first quarter of 2022 consisted of the following:
| Aircraft services | $ | 126 | |||
| Aircraft manufacturing | (110) | ||||
| Total increase | $ | 16 | |||
Aircraft services revenue was up in the first quarter of 2022 due to increased air travel driving additional demand for maintenance work and activity at our fixed-base operator (FBO) facilities. Offsetting the growth in services revenue was a 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.
The increase in the segment’s operating earnings in the first quarter of 2022 consisted of the following:
| Aircraft services | $ | 40 | |||
| Aircraft manufacturing | 20 | ||||
| G&A/other expenses | (37) | ||||
| Total increase | $ | 23 | |||
Aircraft services operating earnings were up in the first quarter of 2022 due to higher volume, favorable cost performance and the mix of aircraft services. Aircraft manufacturing operating earnings were up due to 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 to increased R&D expenses associated with ongoing product development efforts, including flight test activities for the G700, which is targeted to enter service in the fourth quarter of 2022. While there is a modest risk to the aircraft certification timeline, this risk does not impact our outlook for 2022 or beyond.
In total, the Aerospace segment’s operating margin increased 110 basis points in the first quarter of 2022 compared with the prior-year period.
MARINE SYSTEMS
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 2,651 | $ | 2,483 | $ | 168 | 6.8 | % | |||||||||||||||
| Operating earnings | 211 | 200 | 11 | 5.5 | % | ||||||||||||||||||
| Operating margin | 8.0 | % | 8.1 | % | |||||||||||||||||||
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Operating Results
The increase in the Marine Systems segment’s revenue in the first quarter of 2022 consisted of the following:
| U.S. Navy ship engineering, repair and other services | $ | 86 | |||
| U.S. Navy ship construction | 82 | ||||
| Total increase | $ | 168 | |||
Revenue from U.S. Navy ship engineering and construction increased in the first quarter of 2022 as work progressed on the Navy’s top acquisition priority, the Columbia-class submarine program. Revenue from U.S. Navy ship construction was also up due to increased volume on the Arleigh Burke-class (DDG-51) destroyer program and the John Lewis-class (T-AO-205) fleet replenishment oiler program. Overall, the Marine Systems segment’s operating margin decreased 10 basis points in the first quarter of 2022 due to program mix.
COMBAT SYSTEMS
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 1,675 | $ | 1,820 | $ | (145) | (8.0) | % | |||||||||||||||
| Operating earnings | 227 | 244 | (17) | (7.0) | % | ||||||||||||||||||
| Operating margin | 13.6 | % | 13.4 | % | |||||||||||||||||||
Operating Results
The change in the Combat Systems segment’s revenue in the first quarter of 2022 consisted of the following:
| International military vehicles | $ | (76) | |||
| Weapons systems and munitions | (59) | ||||
| U.S. military vehicles | (10) | ||||
| Total decrease | $ | (145) | |||
Revenue from international military vehicles decreased in the first quarter of 2022 due primarily to timing on several wheeled vehicle contracts. Weapons systems and munitions revenue was down due to decreased production of various munitions and ordnance and timing of materials on weapons systems programs. The Combat Systems segment’s operating margin increased 20 basis points in the first quarter of 2022 driven by favorable contract mix and strong operating performance.
TECHNOLOGIES
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 3,163 | $ | 3,199 | $ | (36) | (1.1) | % | |||||||||||||||
| Operating earnings | 298 | 306 | (8) | (2.6) | % | ||||||||||||||||||
| Operating margin | 9.4 | % | 9.6 | % | |||||||||||||||||||
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Operating Results
The change in the Technologies segment’s revenue in the first quarter of 2022 consisted of the following:
| C5ISR* solutions | $ | (91) | |||
| IT services | 55 | ||||
| Total decrease | $ | (36) | |||
*Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance
C5ISR solutions revenue was down due primarily to continued supply chain shortages and delays in customer order activity in 2021 resulting from the COVID-19 pandemic. This decrease was offset partially by increased IT services revenue across a variety of programs. The Technologies segment’s operating margin decreased 20 basis points in the first quarter of 2022 due to unfavorable contract mix, including fewer shipments in our higher-margin products business.
CORPORATE
Corporate operating results totaled $71 in the first quarter of 2022 compared with $32 in the first quarter of 2021 and consisted primarily of equity-based compensation expense. The increase was due to accelerated recognition of equity-based compensation expense.
OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 5,209 | $ | 5,355 | $ | (146) | (2.7) | % | |||||||||||||||
| Operating costs | (4,312) | (4,438) | 126 | (2.8) | % | ||||||||||||||||||
The change in product revenue in the first quarter of 2022 consisted of the following:
| Aircraft manufacturing | $ | (110) | |||
| Other, net | (36) | ||||
| Total decrease | $ | (146) | |||
Aircraft manufacturing revenue decreased in the first quarter of 2022 due to fewer planned aircraft deliveries. In the first quarter of 2022, the primary driver of the decrease in product operating costs was the decrease in aircraft deliveries.
SERVICE REVENUE AND OPERATING COSTS
| Three Months Ended | April 3, 2022 | April 4, 2021 | Variance | ||||||||||||||||||||
| Revenue | $ | 4,183 | $ | 4,034 | $ | 149 | 3.7 | % | |||||||||||||||
| Operating costs | (3,546) | (3,454) | (92) | 2.7 | % | ||||||||||||||||||
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The increase in service revenue in the first quarter of 2022 consisted of the following:
| Aircraft services | $ | 126 | |||
| Other, net | 23 | ||||
| Total increase | $ | 149 | |||
Aircraft services revenue increased in the first quarter of 2022 due to additional maintenance work and FBO activity. In the first quarter of 2022, the primary driver of the increase in service operating costs was the increase in aircraft services volume.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.7% in the first three months of 2022 compared with 6% in the first three months of 2021. The increase was driven by accelerated recognition of equity-based compensation expense.
OTHER, NET
Net other income was $39 in the first three months of 2022 compared with $30 in the first three months of 2021 and represents primarily the non-service components of pension and other post-retirement benefits.
INTEREST, NET
Net interest expense was $98 in the first three months of 2022 compared with $123 in the prior-year period. See Note H 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 14% in the first three months of 2022 compared with 16.2% in the prior-year period. The decrease is due to a variety of factors, including the impact of excess tax benefits from equity-based compensation.
BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $87.2 billion at the end of the first quarter of 2022 compared with $87.6 billion on December 31, 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 billion on April 3, 2022.
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The following table details the backlog and estimated potential contract value of each segment at the end of the first quarter of 2022 and fourth quarter of 2021:
| Funded | Unfunded | Total Backlog | Estimated Potential Contract Value | Total Estimated Contract Value | |||||||||||||||||||||||||
| April 3, 2022 | |||||||||||||||||||||||||||||
| Aerospace | $ | 17,114 | $ | 501 | $ | 17,615 | $ | 1,829 | $ | 19,444 | |||||||||||||||||||
| Marine Systems | 27,656 | 15,258 | 42,914 | 4,316 | 47,230 | ||||||||||||||||||||||||
| Combat Systems | 12,760 | 299 | 13,059 | 6,298 | 19,357 | ||||||||||||||||||||||||
| Technologies | 9,067 | 4,579 | 13,646 | 29,347 | 42,993 | ||||||||||||||||||||||||
| Total | $ | 66,597 | $ | 20,637 | $ | 87,234 | $ | 41,790 | $ | 129,024 | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Aerospace | $ | 15,878 | $ | 415 | $ | 16,293 | $ | 1,657 | $ | 17,950 | |||||||||||||||||||
| Marine Systems | 23,678 | 21,177 | 44,855 | 4,271 | 49,126 | ||||||||||||||||||||||||
| Combat Systems | 12,584 | 509 | 13,093 | 6,936 | 20,029 | ||||||||||||||||||||||||
| Technologies | 9,005 | 4,348 | 13,353 | 26,997 | 40,350 | ||||||||||||||||||||||||
| Total | $ | 61,145 | $ | 26,449 | $ | 87,594 | $ | 39,861 | $ | 127,455 | |||||||||||||||||||
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 first quarter of 2022 with backlog of $17.6 billion, up 8.1% from $16.3 billion on December 31, 2021, and up 47.7% in the past year.
Orders in the first 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 1.7-to-1 in the first quarter of 2022 and 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 April 3, 2022, estimated potential contract value in the Aerospace segment was $1.8 billion, up 10.4% from December 31, 2021.
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)
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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 $69.6 billion on April 3, 2022 compared with $71.3 billion on December 31, 2021. In the first quarter of 2022, the Combat Systems and Technologies segments achieved book-to-bill ratios of 1-to-1 and 1.1-to-1, respectively. Estimated potential contract value in our defense segments was $40 billion on April 3, 2022, up 4.6% from $38.2 billion on December 31, 2021. We received the following significant contract awards during the first quarter of 2022:
MARINE SYSTEMS
•$260 from the U.S. Navy to provide maintenance and repair services for a DDG-51 guided-missile destroyer and a Wasp-class amphibious assault ship.
•$130 from the Navy for maintenance and modernization work on the USS Hartford, a Los Angeles-class submarine.
•$95 from the Navy for advanced nuclear plant studies (ANPS) in support of the Columbia-class submarine program.
•$75 from the Navy for changes in scope associated with DDG-51 contracts.
COMBAT SYSTEMS
•$340 from the U.S. Army to produce Stryker maneuver short-range air defense (M-SHORAD) vehicles.
•$325 from the Army to upgrade Abrams main battle tanks to the system enhancement package version 3 (SEPv3) configuration.
•$235 from the Army to provide spare parts and inventory management and support services for the Stryker wheeled combat vehicle program.
•$230 to produce Piranha armored combat vehicles for Switzerland.
•$45 to provide laser range finders and repair and management support services for Canadian light armored vehicle (LAV) programs.
TECHNOLOGIES
•An IDIQ contract from the National Geospatial-Intelligence Agency (NGA) to provide hybrid cloud services and IT design, engineering, and operations and sustainment services. The contract has a maximum potential value of $4.5 billion over 10 years.
•$80 from the Environmental Protection Agency (EPA) for managed application, information, networking, enterprise and security services. The contract has a maximum potential value of $660.
•$260 for several key classified contracts.
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•$190 from the U.S. Air Force for the Battlefield Information Collection and Exploitation System (BICES) program to provide intelligence information sharing capabilities and engineering services.
•$40 from the Defense Information Systems Agency (DISA) for an Identity, Credential and Access Management (ICAM) solution to provide secure identity, access and account management for DoD applications. The contract has a maximum potential value of $160.
•$130 to provide flight simulation services for the Army.
•$15 from the U.S. Department of Education to develop the Award Eligibility Determination system. The contract has a maximum potential value of $120.
•$110 to manufacture and deliver hardware in support of the SPY-6 radar program.
•$90 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.
•$85 from the Army to provide continued software support and engineering for the Warfighter Information Network-Tactical (WIN-T) Increment 2 program.
•$85 from the North Carolina Department of Health and Human Services in support of the Medicaid Management Information System.
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 first quarter of 2022 with a cash and equivalents balance of $2.9 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 three months of 2022 and 2021, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1:
| Three Months Ended | April 3, 2022 | April 4, 2021 | |||||||||
| Net cash provided by operating activities | $ | 1,968 | $ | 3 | |||||||
| Net cash used by investing activities | (147) | (131) | |||||||||
| Net cash used by financing activities | (517) | (873) | |||||||||
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OPERATING ACTIVITIES
Cash provided by operating activities was $2 billion in the first three months of 2022 compared with $3 million in the same period in 2021. The primary driver of cash inflows in both periods was net earnings. Cash flows in the first three 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 three 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 $147 in the first three months of 2022 compared with $131 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 $141 in the first three months of 2022 compared with $134 in the same period in 2021.
FINANCING ACTIVITIES
Cash used by financing activities was $517 in the first three months of 2022 compared with $873 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 a source of cash from 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 $330 in the first three months of 2022 compared with $315 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 $294 and $759 in the first three months of 2022 and 2021, respectively, to repurchase our outstanding shares. On April 3, 2022, 10.8 million shares remained authorized by our board of directors for repurchase, representing 3.9% of our total shares outstanding.
On April 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. 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.
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
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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:
| Three Months Ended | April 3, 2022 | April 4, 2021 | |||||||||
| Net cash provided by operating activities | $ | 1,968 | $ | 3 | |||||||
| Capital expenditures | (141) | (134) | |||||||||
| Free cash flow | $ | 1,827 | $ | (131) | |||||||
| Cash flows as a percentage of net earnings: | |||||||||||
| Net cash provided by operating activities | 270 | % | — | % | |||||||
| Free cash flow | 250 | % | (19) | % | |||||||
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.
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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 $105 ($0.30) and $63 ($0.17) for the three-month periods ended April 3, 2022, and April 4, 2021, respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended April 3, 2022, or April 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.
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STATEMENT OF EARNINGS INFORMATION
| Three Months Ended April 3, 2022 | Year Ended December 31, 2021 | ||||||||||
| Revenue | $ | 3,275 | $ | 13,444 | |||||||
| Operating costs and expenses, excluding G&A | (2,851) | (11,604) | |||||||||
| Net earnings | 133 | 687 | |||||||||
BALANCE SHEET INFORMATION
| April 3, 2022 | December 31, 2021 | ||||||||||
| Cash and equivalents | $ | 1,905 | $ | 925 | |||||||
| Other current assets | 2,975 | 3,149 | |||||||||
| Noncurrent assets | 3,851 | 3,597 | |||||||||
| Total assets | $ | 8,731 | $ | 7,671 | |||||||
| Short-term debt and current portion of long-term debt | $ | 1,000 | $ | 999 | |||||||
| Other current liabilities | 3,114 | 3,190 | |||||||||
| Long-term debt | 10,428 | 10,424 | |||||||||
| Other noncurrent liabilities | 3,817 | 3,844 | |||||||||
| Total liabilities | $ | 18,359 | $ | 18,457 | |||||||
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 4. CONTROLS AND PROCEDURES
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 April 3, 2022. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on April 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 April 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.
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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.
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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.
ITEM 1A. RISK FACTORS
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 first-quarter purchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
| Period | Total Number of Shares | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Number of Shares That May Yet Be Purchased Under the Program | ||||||||||||||||||||||
| Shares Purchased Pursuant to Share Buyback Program | ||||||||||||||||||||||||||
| 1/1/22-1/30/22 | — | $ | — | — | 12,054,937 | |||||||||||||||||||||
| 1/31/22-2/27/22 | 665,955 | 213.13 | 665,955 | 11,388,982 | ||||||||||||||||||||||
| 2/28/22-4/3/22 | 632,308 | 237.22 | 632,308 | 10,756,674 | ||||||||||||||||||||||
| Shares Delivered or Withheld Pursuant to Restricted Stock Vesting* | ||||||||||||||||||||||||||
| 1/1/22-1/30/22 | 690 | 207.85 | ||||||||||||||||||||||||
| 1/31/22-2/27/22 | — | — | ||||||||||||||||||||||||
| 2/28/22-4/3/22 | 128,658 | 242.77 | ||||||||||||||||||||||||
| 1,427,611 | $ | 226.47 | ||||||||||||||||||||||||
*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 first quarter of 2022.
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ITEM 6. EXHIBITS
10.1* Form of Non-Statutory Stock Option Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants to executive officers beginning March 2, 2022, and including, as indicated therein, provisions for certain executive officers who are subject to the company’s Compensation Recoupment Policy)**
10.2* Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants to executive officers beginning March 2, 2022, and including, as indicated therein, provisions for certain executive officers who are subject to the company’s Compensation Recoupment Policy)**
10.3* Form of Performance Stock Unit Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (for grants to executive officers beginning March 2, 2022, and including, as indicated therein, provisions for certain executive officers who are subject to the company’s Compensation Recoupment Policy)**
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)
* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 6 of Form 10-Q.
** Filed or furnished electronically herewith.
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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.
| GENERAL DYNAMICS CORPORATION | ||||||||
| by | /s/ William A. Moss | |||||||
| William A. Moss | ||||||||
| Vice President and Controller | ||||||||
| (Authorized Officer and Chief Accounting Officer) | ||||||||
| Dated: April 27, 2022 | ||||||||
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