# GENERAL DYNAMICS CORP (GD) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GENERAL DYNAMICS CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/40533/000004053322000007/gd-20211231.htm
Accession: 0000040533-22-000007
Filing date: 2022-02-09
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/GD/
All MD&A years: /company/GD/mda/
Next year: /company/GD/mda/fy2022/ (FY 2022)

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 2021 compared with 2020 should be read in conjunction with our Consolidated Financial Statements included in Item 8, while a discussion of 2020 compared with 2019 can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

BUSINESS ENVIRONMENT

GLOBAL PANDEMIC UPDATE

The coronavirus (COVID-19) pandemic has caused significant disruptions to national and global economies and government activities since March 2020. During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers. Consistent with our prioritization of the health and safety of our employees, we continue to encourage and promote vaccination across the company. Any long-term impact to our business is currently unknown due to the uncertainty around the pandemic’s duration and its broader impact. For additional information, see the Risk Factors in Part I, Item 1A.

The United States and other governments have taken several steps to respond to the pandemic. On September 9, 2021, the president signed Executive Order 14042, initiating a process whereby covered federal contractors and subcontractors must implement federally required vaccine mandates. A clause implementing the federal contractor vaccine mandate has been incorporated into a number of our federal contracts. In light of certain court orders, however, the Office of Management and Budget has stated that the U.S. government will not take action to enforce this clause until further notice. If ultimately upheld, this federal contract requirement may affect various business units differently. We are working closely with our customer to ensure that we minimize disruptions and potential employee attrition in the event that applicable contract modifications are enforceable and as additional modifications are received that could trigger implementation. To the extent that we or our subcontractors experience employee attrition and/or work stoppages, our costs could increase, schedules could slip on affected programs and our ability to perform under some contracts could be negatively affected, particularly in those instances where we cannot receive cost reimbursement.

Our Aerospace segment’s operating results have experienced the most significant impact from the pandemic. New aircraft deliveries in 2021 reflected our decision in 2020 to reduce production rates to accommodate supply chain challenges and reduced demand due to the pandemic. However, aircraft demand has been strong in 2021, with orders reaching their highest level in over a decade. Similarly, demand for aircraft services has improved as air travel has increased, but remains below pre-pandemic levels in some regions of the world. Our U.S. government business continues to experience some disruption from the COVID-19 pandemic, particularly in our Technologies segment. The Review of Operating Segments includes additional information on the impacts of the pandemic for the affected segments.

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OUR MARKETS

With approximately 70% of our revenue from the U.S. government, government spending levels — particularly defense spending — influence our financial performance. The Congress has not yet passed a defense appropriations bill for the government’s fiscal year (FY) 2022 despite the fact that the new year began on October 1, 2021. However, on December 3, 2021, a continuing resolution (CR) was signed into law, providing funding for federal agencies through February 18, 2022. When the government operates under a CR, all programs of record are funded at the prior year’s appropriated levels, and the Department of Defense (DoD) is prohibited from starting new programs. While this could result in delayed revenue growth as programs that were expected to have increased funding levels continue to operate at the prior-year levels until the current-year appropriations bill is passed, we do not anticipate that the current CR, or any subsequent extensions, will have a material impact on our results of operations, financial condition or cash flows.

The long-term outlook for our U.S. defense business is influenced by the U.S. military’s funding priorities, the diversity of our programs and customers, our insight into customer requirements stemming from our incumbency on core programs, our ability to evolve our products to address a fast-changing threat environment and our proven track record of successful contract execution.

International demand for military equipment and technologies presents opportunities for our non-U.S. operations and exports from our North American businesses. While the revenue potential can be significant, there are risks to doing business in foreign countries, including changing budget priorities and overall spending pressures unique to each country.

In our Aerospace segment, we expect our investment in the development of new aircraft products and technologies to support the segment’s long-term growth. Similarly, we believe the aircraft services business will be a source of steady revenue growth as the global business jet fleet continues to grow and the impact of the pandemic subsides.

OTHER LEGISLATIVE ACTIVITY

In November 2021, the U.S. House of Representatives passed the Build Back Better Act (BBBA), which provides for changes to U.S. corporate income taxation. BBBA would delay until 2026 the requirement to capitalize and amortize over five years certain research and experimental expenditures beginning in 2022 that were previously deductible immediately.

We cannot determine whether some or all of the proposals that were included in BBBA will be enacted into law or what, if any, change may be made to such proposals prior to enactment. If the requirement to capitalize and amortize research and experimental expenditures were delayed via passage of BBBA or other legislation, it would delay the temporary increase in our tax payments otherwise beginning in 2022 that would be caused by the capitalization requirement.

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

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outfitted aircraft. Revenue associated with the segment’s custom completions of narrow-body and wide-body aircraft and the segment’s services businesses is recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, progress on aircraft completions, and the level and type of aircraft services performed during the period.

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

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

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

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

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CONSOLIDATED OVERVIEW

2021 IN REVIEW

•Strong operating performance:

◦Revenue of $38.5 billion, an increase of 1.4% from 2020.

◦Operating earnings of $4.2 billion with sequential growth throughout the year.

◦Diluted earnings per share of $11.55, up 5% from 2020.

◦Cash provided by operating activities of $4.3 billion, or 131% percent of net earnings.

•Backlog of $87.6 billion, supporting our long-term growth expectations:

◦Significant Gulfstream aircraft order activity, including orders for the recently announced G400 and G800 aircraft.

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","Variance"],["Revenue","$","38,469","","","$","37,925","","","$","544","","","1.4","%"],["Operating costs and expenses","(34,306)","","","(33,792)","","","(514)","","","1.5","%"],["Operating earnings","4,163","","","4,133","","","30","","","0.7","%"],["Operating margin","10.8","%","","10.9","%"]]
[[/GREPCENT_TABLE]]

Our consolidated revenue increased in 2021 driven by growth in U.S. Navy ship construction in our Marine Systems segment. Higher aircraft services activity was offset by a planned reduction in aircraft deliveries in our Aerospace segment. Lower C5ISR solutions revenue was offset partially by increased IT services activity in our Technologies segment and international vehicle revenue in our Combat Systems segment. Operating margin remained steady in 2021.

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

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","Variance"],["Revenue","$","8,135","","","$","8,075","","","$","60","","","0.7","%"],["Operating earnings","1,031","","","1,083","","","(52)","","","(4.8)","%"],["Operating margin","12.7","%","","13.4","%"],["Gulfstream aircraft deliveries (in units)","119","","","127","","","(8)","","(6.3)","%"]]
[[/GREPCENT_TABLE]]

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Operating Results

The increase in the Aerospace segment’s revenue in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["Aircraft services","$","311"],["Aircraft manufacturing","(251)"],["Total increase","$","60"]]
[[/GREPCENT_TABLE]]

Aircraft services revenue was higher in 2021 due to increased air travel driving additional demand for maintenance work and activity at our fixed-base operator (FBO) facilities. Aircraft manufacturing revenue decreased in 2021 due to fewer aircraft deliveries, reflecting the full impact of our decision in 2020 to reduce aircraft production rates in response to the COVID-19 pandemic.

The change in the segment’s operating earnings in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["Aircraft manufacturing","$","(160)"],["Aircraft services","122"],["Impact of 2020 restructuring charge","59"],["G&A/other expenses","(73)"],["Total decrease","$","(52)"]]
[[/GREPCENT_TABLE]]

Aircraft manufacturing operating earnings were down in 2021 due to the planned reduced aircraft production and delivery rates and mark-to-market adjustments related to G500 test aircraft. In 2021, aircraft manufacturing operating earnings were also impacted negatively by the settlement of claims with a supplier related to the assignment of warranties following the end of G550 production.

These decreases were offset partially by increased aircraft services operating earnings due to higher volume and a favorable mix of aircraft services. The operating earnings variance also reflects restructuring actions taken in 2020 to adjust the workforce size to the revised production levels.

Operating earnings in 2021 reflected higher G&A/other expenses due primarily to increased R&D expenses associated with ongoing product development efforts, including flight test activities for the G700, which is scheduled to enter service in the fourth quarter of 2022. In total, the Aerospace segment’s operating margin decreased 70 basis points in 2021 to 12.7%.

2022 Outlook

We expect the Aerospace segment’s 2022 revenue to increase to approximately $8.4 billion due to increased new aircraft deliveries with operating margin of approximately 12.8%. We expect aircraft deliveries to continue to increase in 2023 and 2024, resulting in additional revenue growth of $2 billion in 2023 and $1.6 billion in 2024 and operating margin expansion of 200 basis points and 100 basis points, respectively.

MARINE SYSTEMS

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","Variance"],["Revenue","$","10,526","","","$","9,979","","","$","547","","","5.5","%"],["Operating earnings","874","","","854","","","20","","","2.3","%"],["Operating margin","8.3","%","","8.6","%"]]
[[/GREPCENT_TABLE]]

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Operating Results

The increase in the Marine Systems segment’s revenue in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["U.S. Navy ship construction","$","716"],["Commercial ship construction","(89)"],["U.S. Navy ship engineering, repair and other services","(80)"],["Total increase","$","547"]]
[[/GREPCENT_TABLE]]

Revenue from U.S. Navy ship construction was up across our shipyards in 2021 due to increased volume on the Columbia-class submarine program, the John Lewis-class (T-AO-205) fleet replenishment oiler program and the Arleigh Burke-class (DDG-51) destroyer program. These increases were offset partially by delivery of our last commercial containership in backlog in 2020 and lower volume on the Columbia-class design contract. Overall, the Marine Systems segment’s operating margin decreased 30 basis points in 2021, reflecting the shift in mix to early work on new submarine programs with typical lower initial profit rates.

2022 Outlook

We expect the Marine Systems segment’s 2022 revenue to be approximately $10.8 billion. Operating margin is expected to be approximately 8.6% as each shipyard continues to come down the learning curve on their major construction programs.

COMBAT SYSTEMS

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","Variance"],["Revenue","$","7,351","","","$","7,223","","","$","128","","","1.8","%"],["Operating earnings","1,067","","","1,041","","","26","","","2.5","%"],["Operating margin","14.5","%","","14.4","%"]]
[[/GREPCENT_TABLE]]

Operating Results

The increase in the Combat Systems segment’s revenue in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["International military vehicles","$","100"],["Weapons systems and munitions","15"],["U.S. military vehicles","13"],["Total increase","$","128"]]
[[/GREPCENT_TABLE]]

Revenue was up in the Combat Systems segment in 2021 due to higher volume on international wheeled vehicle programs, including contracts to produce armored combat support vehicles (ACSVs) and light armored vehicles (LAVs) for the Canadian government and a variety of wheeled and tactical vehicles for a number of European customers. Volume was also up on U.S. Stryker wheeled combat vehicles, particularly in support of the maneuver short-range air defense (M-SHORAD) variant. The Combat Systems segment’s operating margin increased 10 basis points compared with 2020 driven by favorable contract mix and strong operating performance.

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2022 Outlook

We expect the Combat Systems segment’s 2022 revenue to be between $7.15 and $7.25 billion with operating margin of approximately 14.5%.

TECHNOLOGIES

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","Variance"],["Revenue","$","12,457","","","$","12,648","","","$","(191)","","","(1.5)","%"],["Operating earnings","1,275","","","1,211","","","64","","","5.3","%"],["Operating margin","10.2","%","","9.6","%"]]
[[/GREPCENT_TABLE]]

Operating Results

The change in the Technologies segment’s revenue in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["C5ISR* solutions","$","(368)"],["IT services","177"],["Total decrease","$","(191)"]]
[[/GREPCENT_TABLE]]

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

C5ISR solutions revenue decreased due to timing on several international programs, and supply chain shortages and impacts to U.S. government acquisition cycles resulting from the COVID-19 pandemic. The decrease in C5ISR solutions revenue was also due to approximately $115 of revenue in 2020 from a satellite communications business that was sold in the second quarter of that year. These decreases were offset partially by increased IT services revenue due to the ramp up of several new programs and higher volume on existing programs due to the reopening of, and increased access to, customer sites following limitations imposed in 2020 due to the pandemic.

The Technologies segment’s operating margin increased 60 basis points compared with 2020 due to favorable contract mix and reduced COVID-related impacts in our IT services business, particularly customer reimbursement of idle workforce cost at zero fee in 2020 and early 2021. Additionally, operating results in 2020 included an approximate $40 loss on a contract with a non-U.S. customer from schedule delays caused by COVID-related travel restrictions, offset partially by a gain on the sale of the satellite communications business.

2022 Outlook

We expect the Technologies segment’s 2022 revenue to be between $12.8 and $13 billion with operating margin of around 10%.

CORPORATE

Corporate operating results totaled $84 in 2021 and $56 in 2020 and consisted primarily of equity-based compensation expense. Corporate operating costs are expected to be approximately $110 in 2022, driven by accelerated recognition of stock option expense.

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OTHER INFORMATION

PRODUCT AND SERVICE REVENUE AND OPERATING COSTS

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","Variance"],["Revenue:"],["Products","$","22,428","","","$","22,188","","","$","240","","","1.1","%"],["Services","16,041","","","15,737","","","304","","","1.9","%"],["Operating Costs:"],["Products","$","(18,524)","","","$","(18,192)","","","$","(332)","","","1.8","%"],["Services","(13,537)","","","(13,408)","","","(129)","","","1.0","%"]]
[[/GREPCENT_TABLE]]

The increase in product revenue in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["Ship construction","$","627"],["Aircraft manufacturing","(251)"],["C5ISR solutions divestiture in 2020","(115)"],["Other, net","(21)"],["Total increase","$","240"]]
[[/GREPCENT_TABLE]]

Ship construction revenue increased driven by higher U.S. Navy ship construction volume across our shipyards. This increase was offset partially by lower aircraft manufacturing revenue due to fewer aircraft deliveries and revenue in 2020 from a satellite communications business that was sold in the second quarter of that year. In 2021, the primary drivers of the changes in product operating costs were the changes in volume described above.

The increase in service revenue in 2021 consisted of the following:

[[GREPCENT_TABLE]]
[["Aircraft services","$","311"],["IT services","177"],["Other, net","(184)"],["Total increase","$","304"]]
[[/GREPCENT_TABLE]]

Services revenue increased due to higher aircraft services revenue driven by additional maintenance work and FBO activity, and the ramp up of several new IT services programs and higher volume on existing programs. In 2021, the primary drivers of the changes in service operating costs were the changes in volume described above.

G&A EXPENSES

As a percentage of revenue, G&A expenses were 5.8% in 2021 and 2020. We expect G&A expenses as a percentage of revenue in 2022 to be generally consistent with 2021.

OTHER, NET

Net other income was $134 in 2021 and $82 in 2020 and represents primarily the non-service components of pension and other post-retirement benefits. In 2022, we expect net other income to be approximately $170, reflecting continued growth in income from the non-service components of pension and other post-retirement benefits.

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INTEREST, NET

Net interest expense was $424 in 2021 and $477 in 2020. See Note K to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including interest rates. We expect 2022 net interest expense to be approximately $380, reflecting repayment of our scheduled debt maturities in 2021.

PROVISION FOR INCOME TAX, NET

Our effective tax rate was 15.9% in 2021 and 15.3% in 2020. For further discussion, including a reconciliation of our effective tax rate from the statutory federal rate, see Note D to the Consolidated Financial Statements in Item 8. For 2022, we anticipate a full-year effective tax rate of approximately 16%.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was $87.6 billion 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 Consolidated Financial Statements in Item 8. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $127.5 billion on December 31, 2021.

The following table details the backlog and estimated potential contract value of each segment at the end of 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Funded","","Unfunded","","Total Backlog","","Estimated Potential Contract Value","","Total Estimated Contract Value"],["","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"],["","December 31, 2020"],["Aerospace","$","11,308","","","$","318","","","$","11,626","","","$","2,800","","","$","14,426"],["Marine Systems","23,646","","","26,336","","","49,982","","","4,876","","","54,858"],["Combat Systems","14,341","","","226","","","14,567","","","9,774","","","24,341"],["Technologies","9,488","","","3,826","","","13,314","","","27,727","","","41,041"],["Total","$","58,783","","","$","30,706","","","$","89,489","","","$","45,177","","","$","134,666"]]
[[/GREPCENT_TABLE]]

For additional information about our major products and services in backlog see the Business discussion contained in Item 1.

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

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provide future aircraft maintenance and support services. The Aerospace segment ended 2021 with backlog of $16.3 billion, up 40% from $11.6 billion at year-end 2020.

Reflecting strong demand across our aircraft portfolio, orders in 2021 were the highest in more than a decade. The segment’s book-to-bill ratio (orders divided by revenue) was 1.6-to-1 in 2021. Our December 31, 2021, backlog included orders for the new G400 and G800 aircraft, which are scheduled to enter service in 2025 and 2023, respectively.

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 December 31, 2021, estimated potential contract value in the Aerospace segment was $1.7 billion.

Demand for Gulfstream aircraft remains strong across customer types and geographic regions, generating orders from public and privately held companies, individuals, and governments around the world. Geographically, U.S. customers represented approximately 70% of the segment’s orders in 2021 and 57% of the segment’s backlog on December 31, 2021, demonstrating continued strong domestic demand.

The following represents Gulfstream aircraft (in units) in backlog by region on 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 $71.3 billion on December 31, 2021, compared with $77.9 billion at year-end 2020, due primarily to continued performance on significant multi-year contracts in the Marine Systems segment. The Technologies segment achieved a book-to-bill ratio of 1-to-1 in 2021. Estimated potential contract value in our defense segments was $38.2 billion on December 31, 2021, compared with $42.4 billion at year-end 2020.

MARINE SYSTEMS

The Marine Systems segment’s backlog consists of very long-term submarine and surface ship construction programs, as well as numerous engineering and repair contracts. The segment’s backlog and estimated potential contract value were down compared with year-end 2020 due to continued performance on significant multi-year contracts.

We received the following significant contract awards in the Marine Systems segment during 2021:

•$1.9 billion from the Navy for the construction of a tenth submarine in Block V of the Virginia-class submarine program.

•$1.4 billion from the Navy to provide ongoing lead yard services for the Virginia-class and Columbia-class submarine programs.

•$385 from the Navy for advanced nuclear plant studies (ANPS) in support of the Columbia-class submarine program.

•$355 from the Navy to provide maintenance and repair services for the DDG-51 destroyer, San Antonio-class amphibious transport dock, Ticonderoga-class guided-missile cruiser, Whidbey Island-class dock landing ship, Los Angeles-class submarine and Nimitz-class aircraft carrier programs.

•$140 from the Navy to provide ongoing planning and lead yard services for the DDG-51 destroyer program.

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The following represents the Marine Systems segment’s total estimated contract value by major program on December 31, 2021:

COMBAT SYSTEMS

The Combat Systems segment’s backlog consists of a mix of U.S. and international combat vehicles, weapons systems and munitions programs. The vehicle programs are generally long-term, franchise programs, while the weapons systems and munitions programs tend to be shorter-term in nature. The segment’s backlog and estimated potential contract value were down compared with year-end 2020 due to continued performance on significant multi-year contracts.

We received the following significant contract awards in the Combat Systems segment during 2021:

•$845 from the U.S. Army for Stryker vehicle upgrades, inventory management and support services.

•$665 for various munitions, ordnance and missile subcomponents.

•$555 to produce Piranha 5 wheeled armored vehicles and provide associated support services to the Romanian Armed Forces.

•$435 from the Army to produce Stryker M-SHORAD vehicles.

•$360 from the Army for Abrams main battle tank upgrades, mission control units and systems technical support.

•$305 for the production of an M1A2 Abrams tank variant for an international customer.

•$175 from the Army for the production of Hydra-70 rockets.

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The following represents the Combat Systems segment’s total estimated contract value by market on December 31, 2021:

TECHNOLOGIES

The Technologies segment’s backlog consists of thousands of contracts and task orders across a mix of U.S. and non-U.S. government and commercial customers. These contracts can be shorter-cycle or span multiple years, but commonly include a small, initially funded order. Therefore, our estimated potential contract value of $27 billion is an important indicator of future orders and revenue. In 2021, approximately 60% of the segment’s orders were from additional work on IDIQ contracts or the exercise of options. Our total estimated contract value decreased slightly in 2021 driven by impacts to customer acquisition cycles resulting from the COVID-19 pandemic.

We received the following significant contract awards in the Technologies segment during 2021:

•A contract to provide IT and technical support services to the Defense Intelligence Agency (DIA) and the National Geospatial-Intelligence Agency (NGA) under the Solutions for the Information Technology Enterprise (SITE) III program. The program has a maximum potential value of $12.6 billion among multiple awardees.

•$2.5 billion for several key contracts for classified customers and additional IDIQ awards with a maximum potential value of $4.2 billion among multiple awardees.

•An IDIQ contract to provide ship, carrier, submarine and service craft modernization for the Navy. The program has a maximum potential value of $805 among multiple awardees.

•$355 to design, develop, implement and operate a state’s healthcare exchange. The contract has a maximum potential value of $600.

•$35 for hardware, software and logistics sustainment support for the Army. The contract has a maximum potential value of $535.

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•$395 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.

•$285 from the Centers for Medicare and Medicaid Services (CMS) for several contracts, including work to provide cloud services and software tools.

The following represents the Technologies segment’s total estimated contract value by customer on December 31, 2021:

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.

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We ended 2021 with a cash and equivalents balance of $1.6 billion compared with $2.8 billion at the end of 2020. The following is a discussion of our major operating, investing and financing activities in 2021 and 2020, as classified on the Consolidated Statement of Cash Flows in Item 8:

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020"],["Net cash provided by operating activities","$","4,271","","","$","3,858"],["Net cash used by investing activities","(882)","","","(974)"],["Net cash used by financing activities","(4,590)","","","(903)"]]
[[/GREPCENT_TABLE]]

OPERATING ACTIVITIES

Cash provided by operating activities was $4.3 billion in 2021 compared with $3.9 billion in 2020. The primary driver of cash inflows in both years was net earnings. Cash flows in 2021 were affected positively by an increase in customer deposits driven by Gulfstream aircraft orders and the continued reduction in inventory from the sale of G500 flight-test aircraft in our Aerospace segment. Cash flows in 2020 were affected negatively by the change in customer deposits and inventory in our Aerospace segment due to our position in the development and production cycles of our Gulfstream aircraft models.

INVESTING ACTIVITIES

Cash used by investing activities was $882 in 2021 and $974 in 2020. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales.

Capital Expenditures. The primary use of cash for investing activities in both years was capital expenditures. Capital expenditures were $887 in 2021 and $967 in 2020. Capital expenditures have been at an elevated level the past two years as we continue to invest in our shipyards, particularly for the planned growth in submarine construction. Other capital expenditures include equipment and facility enhancements to support new and existing programs across our businesses. We expect capital expenditures to be approximately 2.5% of revenue in 2022.

FINANCING ACTIVITIES

Cash used by financing activities was $4.6 billion in 2021 and $903 in 2020. 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.

Dividends. On March 3, 2021, our board of directors declared an increased quarterly dividend of $1.19 per share, the 24th consecutive annual increase. Previously, the board had increased the quarterly dividend to $1.10 per share in March 2020. Cash dividends paid were $1.3 billion in 2021 and $1.2 billion in 2020.

Share Repurchases. Our board of directors from time to time authorizes management to repurchase outstanding shares of our common stock on the open market. We paid $1.8 billion and $587 in 2021 and 2020, respectively, to repurchase our outstanding shares. On December 31, 2021, 12.1 million shares remained authorized by our board of directors for repurchase, representing 4.3% of our total shares outstanding.

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Debt Issuances and Repayments. In May 2021, we issued $1.5 billion of fixed-rate notes. The proceeds, together with cash on hand and commercial paper issuances, were used to repay fixed- and floating-rate notes totaling $2.5 billion that matured in May 2021 and for general corporate purposes. In July 2021, we repaid an additional $500 of fixed-rate notes at the scheduled maturity. Fixed-rate notes of $1 billion mature in November 2022, and we currently plan to repay these notes using cash on hand, potentially supplemented by commercial paper or other borrowings. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note K to the Consolidated Financial Statements in Item 8.

On December 31, 2021, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. We also have an effective shelf registration on file with the Securities and Exchange Commission (SEC) that allows us to access the debt markets.

NON-GAAP FINANCIAL MEASURES

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

Free Cash Flow. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the Consolidated Statement of Cash Flows in Item 8:

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","2019"],["Net cash provided by operating activities","$","4,271","","","$","3,858","","","$","2,981"],["Capital expenditures","(887)","","","(967)","","","(987)"],["Free cash flow from operations","$","3,384","","","$","2,891","","","$","1,994"],["Cash flows as a percentage of net earnings:"],["Net cash provided by operating activities","131","%","","122","%","","86","%"],["Free cash flow from operations","104","%","","91","%","","57","%"]]
[[/GREPCENT_TABLE]]

Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as net earnings plus after-tax interest and amortization expense, calculated using the

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statutory federal income tax rate. Average invested capital is defined as the sum of the average debt and average shareholders’ equity excluding accumulated other comprehensive loss. Average debt and average shareholders’ equity excluding accumulated other comprehensive loss are calculated using the respective balances at the end of the preceding year and the respective balances at the end of each of the four quarters of the year presented. ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of company performance.

ROIC is calculated as follows:

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021","","2020","","2019"],["Net earnings","$","3,257","","","$","3,167","","","$","3,484"],["After-tax interest expense","340","","","386","","","373"],["After-tax amortization expense","254","","","280","","","287"],["Net operating profit after taxes","$","3,851","","","$","3,833","","","$","4,144"],["Average invested capital","$","32,270","","","$","32,431","","","$","29,620"],["Return on invested capital","11.9","%","","11.8","%","","14.0","%"]]
[[/GREPCENT_TABLE]]

CASH REQUIREMENTS

The following is a discussion of how we expect to meet the future cash requirements from known contractual and other obligations.

The majority of our revenue is derived from long-term contracts and programs that can span several years. We similarly enter into long-term agreements with suppliers and subcontractors for goods and services in support of these contracts and programs with payment terms that are generally aligned with the payment terms from our customers. In some instances, we require advance payments or deposits from our customers, which help fund our purchase commitments and reduce the risk of customer performance.

Additionally, we have significant liabilities under our defined benefit retirement plans. As these liabilities are settled using plan assets, our future cash requirements associated with these liabilities are generally limited to the annual cash contributions to these plans required in accordance with Internal Revenue Service (IRS) regulations. See Note S to the Consolidated Financial Statements in Item 8 for additional information.

Other obligations, such as scheduled principal and interest payments on our fixed-rate notes, and scheduled payments in accordance with our lease agreements are expected to be satisfied using cash generated from operations. See Notes J and K to the Consolidated Financial Statements in Item 8 for additional information.

ADDITIONAL FINANCIAL INFORMATION

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the 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

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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.

In our opinion, the following policies are critical and require the use of significant judgment in their application:

Revenue. 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. Our performance obligations are satisfied over time as work progresses or at a point in time.

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.

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.

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

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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. The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by $377 ($1.06) in 2021 and $283 ($0.78) in 2020. No adjustment on any one contract was material to the Consolidated Financial Statements in 2021 or 2020.

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. 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. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.

Long-lived Assets and Goodwill. We review long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over the estimated fair value as determined by discounted cash flows.

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. Our reporting units are consistent with our operating segments in Note O to the Consolidated Financial Statements in Item 8. We use both qualitative and quantitative approaches when testing goodwill for impairment. When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments. Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events. If, based on the qualitative assessment, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary. However, if a quantitative assessment is determined to be necessary, we compare the fair value of a reporting unit to its carrying value and, if necessary, recognize an impairment loss for the amount by which the carrying value exceeds the reporting unit’s fair value.

Our estimate of fair value is based primarily on the discounted cash flows of the underlying operations and requires the use of judgment by management. The process requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal-value growth rates applied to the final year of projected cash flows. Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis. To assess the reasonableness of our discounted cash flows, we compare the sum of our reporting units’ fair value to our market capitalization. Additionally, we evaluate the reasonableness of each reporting unit’s fair value by comparing the fair value to peer companies and recent relevant market transactions.

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As of December 31, 2021, we completed qualitative assessments for our reporting units as the estimated fair values of each of the reporting units significantly exceeded the respective carrying values based on our most recent quantitative assessments, which were performed as of December 31, 2018, for the Aerospace, Marine Systems and Combat Systems reporting units, and as of December 31, 2020, for the Technologies reporting unit. Our qualitative assessments, including consideration of the impact of the COVID-19 pandemic, did not present indicators of impairment for the reporting units.

Commitments and Contingencies. We are subject to litigation and other legal proceedings arising either from the normal course of business or under provisions relating to the protection of the environment. Estimating liabilities and costs associated with these matters requires the use of judgment. We record a charge against earnings when a liability associated with claims or pending or threatened litigation is probable and when our exposure is reasonably estimable. The ultimate resolution of our exposure related to these matters may change as further facts and circumstances become known.

Retirement Plans. Our pension and other post-retirement benefit costs and obligations depend on several assumptions and estimates, which are based on our best judgment, including consideration of current and future market conditions. For a discussion of our assumptions and any changes to these assumptions, as well as the impact of these changes, which is reported as an actuarial gain or loss in the reconciliation of the change in the benefit obligation, see Note S to the Consolidated Financial Statements in Item 8. The key assumption is the interest rates used to discount estimated future pension benefits. We base the discount rates on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period. The effect of a 25-basis-point increase or decrease in the discount rate assumption on the December 31, 2021, pension benefit obligation is ($509) and $536, respectively.

As described under Other Contract Costs in Note A to the Consolidated Financial Statements in Item 8, our contractual arrangements with the U.S. government provide for the recovery of benefit costs for our government retirement plans. We have elected to defer recognition of the benefit costs until such costs can be allocated to contracts. Therefore, the impact of annual changes in financial reporting assumptions on the retirement benefit cost for these plans does not immediately affect our operating results.

GUARANTOR FINANCIAL INFORMATION

The outstanding notes described in Note K to the Consolidated Financial Statements in Item 8, 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-K.

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

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indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the parent or any of its subsidiaries) or (2) there occurs a transfer, sale or other disposition of the voting stock of a guarantor so that the guarantor is no longer a subsidiary of the parent, then the guarantor or the entity acquiring the assets (in the event of the sale or other disposition of all or substantially all of the assets of a guarantor) will be released and relieved of any obligations under the guarantee.

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

STATEMENT OF EARNINGS INFORMATION

[[GREPCENT_TABLE]]
[["Year Ended December 31","2021"],["Revenue","$","13,444"],["Operating costs and expenses, excluding G&A","(11,604)"],["Net earnings","687"]]
[[/GREPCENT_TABLE]]

BALANCE SHEET INFORMATION

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["Cash and equivalents","$","925","","","$","1,952"],["Other current assets","3,149","","","2,894"],["Noncurrent assets","3,597","","","3,082"],["Total assets","$","7,671","","","$","7,928"],["Short-term debt and current portion of long-term debt","$","999","","","$","2,998"],["Other current liabilities","3,190","","","2,944"],["Long-term debt","10,424","","","9,922"],["Other noncurrent liabilities","3,844","","","5,645"],["Total liabilities","$","18,457","","","$","21,509"]]
[[/GREPCENT_TABLE]]

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.

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