gd-20220703

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 3, 2022

[☐] 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

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

INDEX



PART I -	FINANCIAL INFORMATION	PAGE
Item 1 -	Unaudited Consolidated Financial Statements
	Consolidated Statement of Earnings (Three Months)	3
	Consolidated Statement of Earnings (Six Months)	4
	Consolidated Statement of Comprehensive Income (Three and Six Months)	5
	Consolidated Balance Sheet	6
	Consolidated Statement of Cash Flows	7
	Consolidated Statement of Shareholders’ Equity (Three and Six Months)	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4 -	Controls and Procedures	43
	FORWARD-LOOKING STATEMENTS	44
PART II -	OTHER INFORMATION	45
Item 1 -	Legal Proceedings	45
Item 1A -	Risk Factors	45
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6 -	Exhibits	46
	SIGNATURES	47

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)	July 3, 2022		July 4, 2021
Revenue:
Products	$	5,057	$	5,160
Services	4,132		4,060
	9,189		9,220
Operating costs and expenses:
Products	(4,169)		(4,259)
Services	(3,428)		(3,446)
General and administrative (G&A)	(614)		(556)
	(8,211)		(8,261)
Operating earnings	978		959
Other, net	40		31
Interest, net	(95)		(109)
Earnings before income tax	923		881
Provision for income tax, net	(157)		(144)
Net earnings	$	766	$	737

Earnings per share
Basic	$	2.77	$	2.63
Diluted	$	2.75	$	2.61

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

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)


	Six Months Ended
(Dollars in millions, except per-share amounts)	July 3, 2022		July 4, 2021
Revenue:
Products	$	10,266	$	10,515
Services	8,315		8,094
	18,581		18,609
Operating costs and expenses:
Products	(8,481)		(8,697)
Services	(6,974)		(6,900)
G&A	(1,240)		(1,115)
	(16,695)		(16,712)
Operating earnings	1,886		1,897
Other, net	79		61
Interest, net	(193)		(232)
Earnings before income tax	1,772		1,726
Provision for income tax, net	(276)		(281)
Net earnings	$	1,496	$	1,445

Earnings per share
Basic	$	5.41	$	5.12
Diluted	$	5.35	$	5.10

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended				Six Months Ended
(Dollars in millions)	July 3, 2022		July 4, 2021		July 3, 2022		July 4, 2021
Net earnings	$	766	$	737	$	1,496	$	1,445
Changes in unrealized cash flow hedges	(102)		5		(156)		(86)

Foreign currency translation adjustments	(251)		68		(189)		30
Changes in retirement plans’ funded status	47		71		89		172
Other comprehensive (loss) income, pretax	(306)		144		(256)		116
Benefit (provision) for income tax, net	18		(13)		23		(13)
Other comprehensive (loss) income, net of tax	(288)		131		(233)		103
Comprehensive income	$	478	$	868	$	1,263	$	1,548

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

CONSOLIDATED BALANCE SHEET


	(Unaudited)
(Dollars in millions)	July 3, 2022		December 31, 2021

ASSETS
Current assets:
Cash and equivalents	$	2,223	$	1,603
Accounts receivable	3,213		3,041
Unbilled receivables	7,819		8,498
Inventories	6,158		5,340
Other current assets	1,166		1,505
Total current assets	20,579		19,987
Noncurrent assets:
Property, plant and equipment, net	5,479		5,417
Intangible assets, net	1,867		1,978
Goodwill	20,002		20,098
Other assets	2,554		2,593
Total noncurrent assets	29,902		30,086
Total assets	$	50,481	$	50,073

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	1,754	$	1,005
Accounts payable	3,138		3,167
Customer advances and deposits	6,531		6,266
Other current liabilities	3,313		3,540
Total current liabilities	14,736		13,978
Noncurrent liabilities:
Long-term debt	9,741		10,490
Other liabilities	8,623		7,964
Commitments and contingencies (see Note J)
Total noncurrent liabilities	18,364		18,454
Shareholders’ equity:
Common stock	482		482
Surplus	3,466		3,278
Retained earnings	36,218		35,420
Treasury stock	(20,632)		(19,619)
Accumulated other comprehensive loss	(2,153)		(1,920)
Total shareholders’ equity	17,381		17,641
Total liabilities and shareholders’ equity	$	50,481	$	50,073

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	Six Months Ended
(Dollars in millions)	July 3, 2022		July 4, 2021
Cash flows from operating activities - continuing operations:
Net earnings	$	1,496	$	1,445
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation of property, plant and equipment	278		280
Amortization of intangible and finance lease right-of-use assets	147		159
Equity-based compensation expense	120		72
Deferred income tax benefit	(218)		(37)
(Increase) decrease in assets, net of effects of business acquisitions:
Accounts receivable	(172)		(94)
Unbilled receivables	695		134
Inventories	(816)		(58)
Increase (decrease) in liabilities, net of effects of business acquisitions:
Accounts payable	(29)		(364)
Customer advances and deposits	1,402		(226)



Other, net	(276)		(193)
Net cash provided by operating activities	2,627		1,118
Cash flows from investing activities:
Capital expenditures	(365)		(306)

Other, net	—		(2)
Net cash used by investing activities	(365)		(308)
Cash flows from financing activities:
Purchases of common stock	(1,094)		(1,352)
Dividends paid	(679)		(651)
Repayment of fixed-rate notes	—		(2,000)
Proceeds from commercial paper, gross (maturities greater than 3 months)	—		1,997
Proceeds from fixed-rate notes	—		1,497

Repayment of floating-rate notes	—		(500)


Other, net	110		338
Net cash used by financing activities	(1,663)		(671)
Net cash provided (used) by discontinued operations	21		(13)
Net increase in cash and equivalents	620		126
Cash and equivalents at beginning of period	1,603		2,824
Cash and equivalents at end of period	$	2,223	$	2,950
Supplemental cash flow information:
Income tax payments, net	$	(565)	$	(245)
Interest payments	$	(191)	$	(228)

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

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
April 3, 2022	$	482	$	3,434	$	35,800	$	(19,837)	$	(1,865)	$	18,014

Net earnings	—		—		766		—		—		766
Cash dividends declared	—		—		(348)		—		—		(348)
Equity-based awards	—		32		—		10		—		42
Shares purchased	—		—		—		(805)		—		(805)
Other comprehensive loss	—		—		—		—		(288)		(288)
July 3, 2022	$	482	$	3,466	$	36,218	$	(20,632)	$	(2,153)	$	17,381

April 4, 2021	$	482	$	3,152	$	33,869	$	(18,585)	$	(3,578)	$	15,340

Net earnings	—		—		737		—		—		737
Cash dividends declared	—		—		(333)		—		—		(333)
Equity-based awards	—		42		—		19		—		61
Shares purchased	—		—		—		(615)		—		(615)
Other comprehensive income	—		—		—		—		131		131
July 4, 2021	$	482	$	3,194	$	34,273	$	(19,181)	$	(3,447)	$	15,321


	Six 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	—		—		1,496		—		—		1,496
Cash dividends declared	—		—		(698)		—		—		(698)
Equity-based awards	—		188		—		84		—		272
Shares purchased	—		—		—		(1,097)		—		(1,097)
Other comprehensive loss	—		—		—		—		(233)		(233)
July 3, 2022	$	482	$	3,466	$	36,218	$	(20,632)	$	(2,153)	$	17,381

December 31, 2020	$	482	$	3,124	$	33,498	$	(17,893)	$	(3,550)	$	15,661
Net earnings	—		—		1,445		—		—		1,445
Cash dividends declared	—		—		(670)		—		—		(670)
Equity-based awards	—		70		—		71		—		141
Shares purchased	—		—		—		(1,359)		—		(1,359)
Other comprehensive income	—		—		—		—		103		103
July 4, 2021	$	482	$	3,194	$	34,273	$	(19,181)	$	(3,447)	$	15,321

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

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- and six-month periods ended July 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- and six-month periods ended July 3, 2022, and July 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:


	July 3, 2022		December 31, 2021
PP&E	$	11,727	$	11,464
Accumulated depreciation	(6,248)		(6,047)
PP&E, net	$	5,479	$	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.

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- and six-month periods ended July 3, 2022, and 81% and 80% of our revenue for the three- and six-month periods ended July 4, 2021, respectively. 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- and six-month periods ended July 3, 2022, and 19% and 20% of our revenue for the three- and six-month periods ended July 4, 2021, respectively. 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 July 3, 2022, we had $87.6 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 50% 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

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				Six Months Ended
	July 3, 2022		July 4, 2021		July 3, 2022		July 4, 2021
Revenue	$	112	$	75	$	219	$	160
Operating earnings	101		76		206		139
Diluted earnings per share	$	0.29	$	0.21	$	0.58	$	0.39

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 3, 2022, or July 4, 2021.

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

Revenue by major products and services was as follows:


	Three Months Ended				Six Months Ended
	July 3, 2022		July 4, 2021		July 3, 2022		July 4, 2021
Aircraft manufacturing	$	1,112	$	1,072	$	2,374	$	2,444
Aircraft services	755		550		1,396		1,065
Total Aerospace	1,867		1,622		3,770		3,509
Nuclear-powered submarines	1,710		1,679		3,472		3,398
Surface ships	611		585		1,204		1,113
Repair and other services	330		272		626		508
Total Marine Systems	2,651		2,536		5,302		5,019
Military vehicles	1,084		1,231		2,179		2,434
Weapons systems, armament and munitions	418		511		834		971
Engineering and other services	164		157		328		314
Total Combat Systems	1,666		1,899		3,341		3,719
Information technology (IT) services	2,010		2,071		4,150		4,156
C5ISR* solutions	995		1,092		2,018		2,206
Total Technologies	3,005		3,163		6,168		6,362
Total revenue	$	9,189	$	9,220	$	18,581	$	18,609

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

Revenue by contract type was as follows:


Three Months Ended July 3, 2022	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
Fixed-price	$	1,614	$	1,609	$	1,441	$	1,286	$	5,950
Cost-reimbursement	—		1,042		211		1,256		2,509
Time-and-materials	253		—		14		463		730
Total revenue	$	1,867	$	2,651	$	1,666	$	3,005	$	9,189
Three Months Ended July 4, 2021
Fixed-price	$	1,440	$	1,810	$	1,668	$	1,304	$	6,222
Cost-reimbursement	—		726		216		1,363		2,305
Time-and-materials	182		—		15		496		693
Total revenue	$	1,622	$	2,536	$	1,899	$	3,163	$	9,220


Six Months Ended July 3, 2022	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
Fixed-price	$	3,287	$	3,210	$	2,906	$	2,624	$	12,027
Cost-reimbursement	—		2,092		408		2,584		5,084
Time-and-materials	483		—		27		960		1,470
Total revenue	$	3,770	$	5,302	$	3,341	$	6,168	$	18,581
Six Months Ended July 4, 2021
Fixed-price	$	3,149	$	3,594	$	3,237	$	2,644	$	12,624
Cost-reimbursement	—		1,425		451		2,726		4,602
Time-and-materials	360		—		31		992		1,383
Total revenue	$	3,509	$	5,019	$	3,719	$	6,362	$	18,609

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.

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 July 3, 2022	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
U.S. government:
Department of Defense (DoD)	$	80	$	2,620	$	940	$	1,667	$	5,307
Non-DoD	—		—		3		1,178		1,181
Foreign military sales (FMS)	49		29		50		6		134
Total U.S. government	129		2,649		993		2,851		6,622
U.S. commercial	1,088		1		60		53		1,202
Non-U.S. government	179		1		590		93		863
Non-U.S. commercial	471		—		23		8		502
Total revenue	$	1,867	$	2,651	$	1,666	$	3,005	$	9,189
Three Months Ended July 4, 2021
U.S. government:
DoD	$	72	$	2,492	$	954	$	1,758	$	5,276
Non-DoD	—		—		3		1,295		1,298
FMS	18		41		62		6		127
Total U.S. government	90		2,533		1,019		3,059		6,701
U.S. commercial	982		1		42		36		1,061
Non-U.S. government	50		—		822		64		936
Non-U.S. commercial	500		2		16		4		522
Total revenue	$	1,622	$	2,536	$	1,899	$	3,163	$	9,220


Six Months Ended July 3, 2022	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
U.S. government:
DoD	$	160	$	5,225	$	1,795	$	3,418	$	10,598
Non-DoD	—		1		5		2,421		2,427
FMS	82		73		119		16		290
Total U.S. government	242		5,299		1,919		5,855		13,315
U.S. commercial	2,198		1