GENERAL DYNAMICS CORP (GD)

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, weapon 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 War (DoW), the intelligence community and other U.S. government agencies. 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 Annual Report on Form 10-K for the year ended December 31, 2025, and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

BUSINESS ENVIRONMENT

As a global aerospace and defense company, we compete in domestic and international markets, serving both government and commercial customers. Our financial performance is significantly influenced by U.S. government spending levels, administration priorities and the overall economy. In the federal market, defense spending has been at increased levels, and the administration has publicly stated support for further increases.

There is significant demand in U.S. Navy shipbuilding, particularly submarines. We have invested significantly in our facilities and workforce to increase production capacity to meet this demand, and expect to continue to do so. The increased demand has placed pressure on the shipbuilding industrial base, which was already impacted by significant demographic issues coming out of the global pandemic. Together with the Navy customer, we have been working to stabilize and grow the supply chain to meet this heightened demand.

We have also been investing in the development of the next generation of combat vehicles and artillery. While the U.S. Army is reviewing its funding priorities and begins transitioning to next-generation combat vehicles, we expect short-term combat vehicle production volumes to be down slightly. Demand for our munitions products has been high and is expected to remain at an elevated level given ongoing conflicts and the administration's support for further increases.

Internationally, as a result of ongoing regional conflicts and the overall threat environment, we have seen increased demand, particularly in Europe, for our Combat Systems military products and services. This provides opportunities for our European businesses established in local markets as well as exports from our North American businesses. To meet this expected demand, there will be increased pressure on the supply chain and our hiring of skilled workers.

In our principal commercial market, our Aerospace group is experiencing strong demand for business jets. We believe our investments in a new family of Gulfstream aircraft will continue to fuel demand. The most recent addition is the G800, which entered into service last year. In addition, we

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expect the growing installed base of aircraft will continue to lead to increased demand for global aircraft services. The ongoing sanctions on Russia have restricted access to a segment of the market.

Our ability to produce new aircraft is dependent on our supply chain, and while performance has improved and the overall supply chain has stabilized, we have experienced some delays including at our Israel-based supplier of mid-cabin airframes caused by conflicts in the Middle East.

Our Aerospace business has been impacted by inflationary pressures and ongoing tariffs. In February 2026, the U.S. Supreme Court held that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unauthorized, and a phased process was developed to refund the previously paid tariffs. To date, we have received refunds of some of these tariffs. However, the timing of collection of remaining tariff refunds is uncertain. Overall, tariffs as applied in their current form and tariffs yet to be refunded are not material to our results of operations.

RESULTS OF OPERATIONS

INTRODUCTION

The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results.

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

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

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

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

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

CONSOLIDATED OVERVIEW

Our consolidated revenue increased in the second quarter and first six months of 2026 driven by growth across all four operating segments, primarily in our Aerospace and Marine Systems segments. Operating margin increased 40 basis points in the second quarter and 20 basis points in the first six months of 2026 due to improved operating performance in our Aerospace and Marine Systems segments.

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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

Operating Results

The increase in the Aerospace segment’s revenue in the second quarter and first six months of 2026 consisted of the following:

Aircraft manufacturing revenue increased in the second quarter and first six months of 2026 due primarily to the number and mix of aircraft deliveries. Aircraft services revenue was up in the second quarter and first six months of 2026 due primarily to higher fixed-base operator (FBO) activity and i

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

For an overview of our operating segments, including a discussion of our major products and services, see the Business discussion contained in Item 1. The following discussion of our financial condition and results of operations for 2025 compared with 2024 should be read in conjunction with our Consolidated Financial Statements included in Item 8, while a discussion of 2024 compared with 2023 can be found in Item 7 of our annual report on Form 10-K for the year ended December 31, 2024.

BUSINESS ENVIRONMENT

As a global aerospace and defense company, we compete in domestic and international markets, serving both government and commercial customers. Our financial performance is significantly influenced by U.S. government spending levels, administration priorities and the overall economy.

In the federal market, defense spending has been at elevated levels, and the administration has publicly stated support for further increases in fiscal year (FY) 2027. This is reflected in the significant demand in U.S. Navy shipbuilding, particularly submarines. We have invested in our facilities and workforce to increase production capacity to meet this demand, and expect to continue to do so. The increased demand has placed great pressure on the shipbuilding supply chain, which was already impacted by significant demographic issues coming out of the global pandemic. Together with the Navy customer, we have been working to stabilize and grow the supply chain to meet this heightened demand.

We have also been investing in the development of the next generation of combat vehicles and artillery. While the U.S. Army is reviewing its funding priorities and begins transitioning to next-generation combat vehicles, we expect short-term production volumes to be down slightly. Demand for our munitions products has been high and is expected to remain at an elevated level given ongoing conflicts and regional threats.

The administration began taking steps in 2025 to address federal spending and reduce the size of the government. These actions resulted in federal government staff reductions, contract modifications and terminations, and award delays. We experienced some impact from these actions which were largely limited to our IT services business. Our IT services business was also somewhat impacted by the government shutdown at the start of the current fiscal year. We expect some limited ongoing impact from these actions.

We entered 2026 with the government operating under a continuing resolution that expires on January 30. Our outlook for the year assumes that the FY26 budget is approved without significant delay or another prolonged shutdown.

Internationally, as a result of ongoing regional conflicts and the overall threat environment, we have seen increased demand, particularly in Europe, for our Combat Systems military products and services. This provides opportunities for our European businesses present in local markets as well as exports from our North American businesses. To meet this expected demand, there will be increased pressure on the supply chain and our hiring of skilled workers.

In our principal commercial market, Aerospace is experiencing strong demand for business jets. Our ability to produce new aircraft is dependent on our supply chain, and while performance has improved

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and the overall supply chain has stabilized, we have experienced some challenges in terms of delay including at our Israel-based supplier of mid-cabin airframes caused by the conflict with Hamas.

Our Aerospace business has been impacted by inflationary pressures and the administration’s implementation of tariffs. To date, the tariffs have not had a material impact on our results but did reduce the Aerospace operating margins by 30 basis points in 2025. The duration and extent of the tariffs continue to evolve. The ongoing sanctions on Russia have also restricted access to a segment of the market.

Overall, we believe our investments in a new family of Gulfstream aircraft will continue to fuel demand. The most recent addition is the G800, which entered service in 2025. In addition, we expect the growing installed base of aircraft will continue to lead to increased demand for global aircraft services.

RESULTS OF OPERATIONS

INTRODUCTION

The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results.

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

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

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

In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

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Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual contracts. Because costs are used as a measure of progress, year-over-year variances in costs result in corresponding variances in revenue, which we generally refer to as volume.

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

CONSOLIDATED OVERVIEW

2025 IN REVIEW

•Strong operating performance:

◦Revenue of $52.6 billion, an increase of 10.1% from 2024

◦Operating earnings of $5.4 billion, an increase of 11.7% from 2024, with sequential growth throughout the year

◦Diluted earnings per share of $15.45, up 13.4% from 2024

◦Cash provided by operating activities of $5.1 billion, or 122% of net earnings

•Backlog of $118 billion, an increase of 30% from 2024, supports our long-term growth expectations:

◦Strong Gulfstream aircraft order activity, including orders across all aircraft models

◦Several significant contract awards received in our defense segments, including $20.1 billion of combined awards from the U.S. Navy for the Virginia-class and Columbia-class submarine programs and $9.2 billion of combined awards for wheeled and tracked vehicles for international customers

Our consolidated revenue increased in 2025 driven by growth across all segments, including double-digit percentage growth in our Aerospace and Marine Systems segments. Operating margin increased 10 basis points.

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REVIEW OF OPERATING SEGMENTS

Following is a discussion of operating results and outlook for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note O to the Consolidated Financial Statements in Item 8.

AEROSPACE

Operating Results

The increase in the Aerospace segment’s revenue in 2025 consisted of the following:

Aircraft manufacturing revenue increased in 2025 due to additional G700 deliveries. Initial deliveries of the new G800 largely offset the decrease in G650 revenue with its final deliveries in 2025. Aircraft services revenue was higher in 2025 due to increased customer demand for aircraft maintenance based on established maintenance cycles, a larger installed base and customer flight activity.

The increase in the segment’s operating earnings in 2025 consisted of the following:

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