GENERAL DYNAMICS CORPORATION 
BUSINESS OVERVIEWGeneral Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; information technology (IT) services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) solutions; and shipbuilding and ship repair. Our company is organized into five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We refer to the latter four segments collectively as our defense segments. Our primary customer is theU.S. government, including theDepartment of Defense (DoD ), the intelligence community and otherU.S. government customers. We also have significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business-jet aircraft and related services. The following discussion should be read in conjunction with our 2019 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q. BUSINESS ENVIRONMENT The ongoing outbreak of Coronavirus (COVID-19) has caused significant disruptions to national and global economies. As an essential business, we have continued to conduct our operations to the fullest extent possible, while responding to the outbreak with actions that include: • implementing measures to protect the health and safety of our employees;
• modifying employee work locations and schedules where possible and permitted
under our contracts;
• coordinating closely with our suppliers and customers;
• instituting various aspects of our business continuity programs; and
• planning for and working aggressively to mitigate disruptions that may occur.
While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak's duration and its broader impact. See the Risk Factors in Part II, Item 1A, regarding the COVID-19 outbreak, as well as set forth in our most recent Form 10-K filing addressing additional risks facing our business, which may be affected by the COVID-19 outbreak.The United States and other governments have taken a number of steps to respond to the outbreak and to support economic activity and liquidity in the capital markets. Inthe United States , the adoption of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) provides various forms of relief. The CARES Act includes provisions that allow agencies to reimburse contractors for payment to workers who are prevented from working due to COVID-19 facility closures or other restrictions. In addition, ourU.S. -based businesses have been designated as critical infrastructure by theU.S. Department of Homeland Security and, as such, have been required to stay open. TheDoD has issued guidance on managing the 25 -------------------------------------------------------------------------------- impacts of COVID-19 on defense contracts, such as requests for equitable adjustments and other contractual mechanisms to address cost, schedule and performance impacts on contracts. In lateMarch 2020 , theDoD also increased progress payment rates and reduced retention rates on certain contracts to provide liquidity to federal contractors and their suppliers. Outside ofthe United States , other governments have established various government workforce programs, which can support business continuity for our foreign operations. We are assessing the benefits and limitations of the actions taken bythe United States and other governments and will continue to monitor these developments as they evolve. See also Note A to the unaudited Consolidated Financial Statements in Part I, Item 1 for additional information about our use of estimates and other uncertainties. OurU.S. government business experienced minimal disruptions in the first quarter, though we did experience, to a degree, reduced activities toward the end of the quarter due to select customer site closures and limited access to sites, slowdowns in the provision of materials from suppliers, and lower man-hours at manufacturing sites. Internationally, our defense business has experienced site closures in some countries. Within our Aerospace segment, quarantine and travel restrictions in connection with the outbreak delayed Gulfstream aircraft deliveries in the first quarter. Order activity for new aircraft was progressing well until the last two weeks of the quarter, when activity largely ceased. Typically, the last few weeks of a quarter experience the most order activity. The Review of Operating Segments includes additional information on the first quarter results for each of our segments. Looking forward into the remainder of 2020, COVID-19 will continue to impact our businesses. We believe the continued support by theDoD , and theU.S. government generally, of the defense industrial base will help mitigate any effects of program disruptions on ourU.S. defense business. However, we will closely monitor our supply chain, continue to implement measures to provide a healthy and safe work environment and ensure we have an adequate employee base to meet our customers' demands. Our non-U.S. defense business will be impacted to varying degrees based on the response of each country. In our Aerospace segment, wide-spread extension of travel restrictions will continue to impact aircraft service volume and could delay some future deliveries if customers have difficulty traveling to take possession of their aircraft. In addition, while we continue to work closely with suppliers to mitigate COVID-19 impacts, some suppliers could experience additional delays. The supplier disruptions along with efficiency impacts resulting from our efforts to comply with theCenters for Disease Control and Prevention (CDC ) protocols in our facilities have impacted our productivity. In addition, should the large economies of the world experience a significant extended downturn from the pandemic, demand for our aerospace products would likely be impacted. We will continue to assess further potential consequences to our employees, business, supply chain and customers, and take actions to mitigate adverse outcomes. We took actions in the first quarter to strengthen our liquidity and financial condition. InMarch 2020 , we issued$4 billion of fixed-rate notes to repay$2.5 billion of fixed- and floating-rate notes that mature inMay 2020 and for general corporate purposes, including the repayment of a portion of our borrowings under our commercial paper program as they mature. In addition to this long-term borrowing, we renewed our access to$5 billion of credit facilities throughMarch 2021 . While part of our pre-COVID-19 planning, this liquidity preserves our financial flexibility during the pandemic. We believe that our cash flows from operations and borrowing capacity are sufficient to support our short and long-term liquidity needs. 26 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS INTRODUCTION An understanding of our accounting practices is necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results. In the Aerospace segment, we record revenue on contracts for new aircraft when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. Revenue associated with the segment's custom completions of narrow-body and wide-body aircraft and the segment's services businesses is recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, progress on aircraft completions, and the level and type of aircraft services performed during the period. The majority of the Aerospace segment's operating costs relates to new aircraft production on firm orders and consists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at aircraft delivery based on the estimated average unit cost in a production lot. While changes in the estimated average unit cost for a production lot impact the level of operating costs, the amount of operating costs reported in a given period is based largely on the number and type of aircraft delivered. Operating costs in the Aerospace segment's completions and services businesses are recognized generally as incurred. For new aircraft, operating earnings and margin are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft, and the mix of ultra-large-cabin, large-cabin and mid-cabin aircraft deliveries. Aircraft mix can also refer to the stage of program maturity for our aircraft models. A new aircraft model typically has lower margins in its initial production lots, and then margins generally increase as we realize efficiencies in the production process. Additional factors affecting the segment's earnings and margin include the volume, mix and profitability of completions and services work performed, the market for pre-owned aircraft, and the level of general and administrative (G&A) and net research and development (R&D) costs incurred by the segment. In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred 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 27 -------------------------------------------------------------------------------- number of factors, including contract type (e.g., fixed-price/cost-reimbursable) and type of work (e.g., development/production). Contract mix can also refer to the stage of program maturity for our long-term production contracts. New long-term production contracts typically have lower margins initially, and then margins generally increase as we achieve learning curve improvements or realize other cost reductions. CONSOLIDATED OVERVIEW Three Months Ended March 29, 2020 March 31, 2019 Variance Revenue$ 8,749 $ 9,261 $ (512 ) (5.5 )% Operating costs and expenses (7,808 ) (8,247 ) 439 (5.3 )% Operating earnings 941 1,014 (73 ) (7.2 )% Operating margin 10.8 % 10.9 % Our consolidated revenue and operating earnings decreased in the first quarter of 2020 driven by delays in aircraft deliveries in our Aerospace segment due to the COVID-19 outbreak. Operating margin decreased slightly in the first quarter of 2020 due to the reduced aircraft deliveries and a less favorable aircraft delivery mix in our Aerospace segment. 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 unaudited Consolidated Financial Statements in Part I, Item 1. AEROSPACE Three Months Ended March 29, 2020 March 31, 2019 Variance Revenue $ 1,691 $ 2,240$ (549 ) (24.5 )% Operating earnings 240 328 (88 ) (26.8 )% Operating margin 14.2 % 14.6 % Gulfstream aircraft deliveries (in units) 23 34 (11 ) (32.4 )% Operating Results The change in the Aerospace segment's revenue in the first quarter of 2020 consisted of the following: Aircraft manufacturing$ (552 ) Aircraft services and completions 3 Total decrease$ (549 )
Revenue was down in our Aerospace segment driven by delays in Gulfstream aircraft deliveries. Customers were unable to take delivery of 11 aircraft scheduled for delivery in the first quarter due to quarantine and travel restrictions resulting from the COVID-19 outbreak. The impact of these restrictions
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on aircraft service activity was less pronounced as the impact was not felt
until the latter weeks of the quarter and was offset by strong service activity
in the beginning of the quarter.
The change in the segment's operating earnings in the first quarter of 2020
consisted of the following:
Aircraft manufacturing $ (139 )
Aircraft services and completions (1 )
G&A/other expenses 52
Total decrease $ (88 )
Operating earnings were down due to the delayed aircraft deliveries. This
decrease was offset partially by lower net G&A/other expenses, including reduced
R&D expenses. Overall, R&D expenses have been trending downward with the
completion of the G500 and G600 aircraft test programs, and the first quarter of
2020 included higher supplier launch assistance associated with our aircraft
development programs. In total, the Aerospace segment's operating margin
decreased 40 basis points due to the reduced number and mix of Gulfstream
aircraft deliveries.
2020 Outlook
For the year, we had anticipated delivery of somewhat in excess of 150
Gulfstream aircraft. Due to supply chain disruptions and efficiency impacts
resulting from our efforts to comply with CDC protocols, we have adjusted our
production rate to 125-130 deliveries. Based on the reduction in deliveries and
the anticipated impact of travel restrictions on the volume of aircraft
services, we now expect the Aerospace segment's 2020 revenue to be around $8.5
billion with operating earnings of approximately $1.15 billion .
COMBAT SYSTEMS
Three Months Ended March 29, 2020 March 31, 2019 Variance
Revenue $ 1,708 $ 1,636 $ 72 4.4 %
Operating earnings 223 206 17 8.3 %
Operating margin 13.1 % 12.6 %
Operating Results
The increase in the Combat Systems segment's revenue in the first quarter of
2020 consisted of the following:
U.S. military vehicles $ 65
Weapons systems and munitions 49
International military vehicles (42 )
Total increase $ 72
Revenue from U.S. military vehicles increased due primarily to higher volume on
the U.S. Army's Abrams M1A2 System Enhancement Package Version 3 (SEPv3) tank
program. Weapons systems and munitions revenue was up due to increased volume on
several products, including artillery and missile subcomponents. Revenue from
international military vehicles decreased due to lower volume on various wheeled
armored vehicle programs, offset partially by increased volume on the British
Army's AJAX armored fighting vehicle program.
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The Combat Systems segment's operating earnings and margin were up due to the
increased revenue as well as an unfavorable settlement in the first quarter of
2019 relating to a lease at a former operating site outside the United States.
INFORMATION TECHNOLOGY
Three Months Ended March 29, 2020 March 31, 2019 Variance
Revenue $ 1,988 $ 2,169 $ (181 ) (8.3 )%
Operating earnings 150 156 (6 ) (3.8 )%
Operating margin 7.5 % 7.2 %
Operating Results
The change in the Information Technology segment's revenue in the first quarter
of 2020 consisted of the following:
Intelligence and homeland security $ (135 )
Defense (32 )
Federal civilian (14 )
Total decrease $ (181 )
Revenue was down across the Information Technology segment due to the exit of
non-core lines of business in 2019, the closure of some customer sites to all
but mission critical personnel in connection with the COVID-19 outbreak, and the
completion of several legacy programs in 2019 versus the start-up of new
programs. The Information Technology segment's operating margin was up 30 basis
points compared with the prior-year period, reflecting improved performance and
mix.
MISSION SYSTEMS
Three Months Ended March 29, 2020 March 31, 2019 Variance
Revenue $ 1,116 $ 1,158 $ (42 ) (3.6 )%
Operating earnings 148 148 - - %
Operating margin 13.3 % 12.8 %
Operating Results
The change in the Mission Systems segment's revenue in the first quarter of 2020
consisted of the following:
Space, intelligence and cyber systems $ (33 )
Ground systems and products (18 )
Naval, air and electronic systems 9
Total decrease $ (42 )
Revenue in the Mission Systems segment was down slightly in the first quarter of
2020 due to delayed customer shipments caused in part by customer site closures
due to the COVID-19 outbreak. The Mission Systems segment's operating margin
increased 50 basis points due to favorable program mix, particularly in our
ground systems and products business.
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MARINE SYSTEMS
Three Months Ended March 29, 2020 March 31, 2019 Variance
Revenue $ 2,246 $ 2,058 $ 188 9.1 %
Operating earnings 184 180 4 2.2 %
Operating margin 8.2 % 8.7 %
Operating Results
The increase in the Marine Systems segment's revenue in the first quarter of
2020 consisted of the following:
U.S. Navy ship construction $ 152
(2 )
Total increase $ 188
Revenue from U.S. Navy ship construction was up due to higher volume on Block V
of the Virginia-class submarine program and the Columbia-class submarine
program, offset somewhat by lower Virginia-class Block IV volume timing and
absenteeism at Bath Iron Works . Revenue from U.S. Navy ship engineering, repair
and other services increased, driven by a higher volume of surface ship repair
work.
The Marine Systems segment's operating margin decreased 50 basis points due to a
shift in mix and delays on a commercial ship contract.
2020 DEFENSE SEGMENTS OUTLOOK
As discussed, the impact of COVID-19 on our defense segments has not been
material. While there is some modest pressure on revenue based on our experience
to date, at current levels the impact is not sufficient to affect our full-year
earnings for these businesses. Therefore, the full-year outlook for our defense
businesses remains unchanged.
CORPORATE
Corporate operating results consisted of the following:
March 29, 2020 March 31, 2019 Operating expense $ (4 ) $ (4 )
Corporate operating results have two primary components: pension and other
post-retirement benefit income, and stock option expense. We are required to
report the non-service cost components of pension and other post-retirement
benefit cost (e.g., interest cost) in other income (expense) in the Consolidated
Statement of Earnings. In our defense segments, pension and other
post-retirement benefit costs are recoverable contract costs. Therefore, the
non-service cost components are included in the operating results of these
segments, but an offset is reported in Corporate. In both periods, our stock
option expense exceeded this offset.
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OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
Three Months Ended March 29, 2020 March 31, 2019 Variance
Revenue $ 4,890 $ 5,251 $ (361 ) (6.9 )%
Operating costs (3,983 ) (4,235 ) 252 (6.0 )%
The change in product revenue in the first quarter of 2020 consisted of the
following:
Aircraft manufacturing $ (552 )
Ship construction 148
Other, net 43
Total decrease $ (361 )
Aircraft manufacturing revenue decreased due to delays in aircraft deliveries
resulting from the COVID-19 outbreak. Revenue from ship construction increased
due to higher volume on Block V of the Virginia-class submarine program and the
Columbia-class submarine program, offset partially by lower Virginia-class Block
IV volume timing. The primary drivers of the decrease in product operating costs
were the changes in volume on the programs described above.
SERVICE REVENUE AND OPERATING COSTS
Three Months Ended March 29, 2020 March 31, 2019 Variance
Revenue $ 3,859 $ 4,010 $ (151 ) (3.8 )%
Operating costs (3,278 ) (3,398 ) 120 (3.5 )%
The change in service revenue in the first quarter of 2020 consisted of the following: IT services
$ (181 )
Ship engineering, repair and other services 41 Other, net
(11 )
Total decrease $ (151 )
IT services revenue decreased due to the exit of non-core lines of business and
the completion of several legacy programs in 2019 versus the start-up of new
programs. Ship engineering, repair and other services revenue increased, driven
by a higher volume of surface ship repair work. The primary drivers of the
decrease in service operating costs were the changes in volume on the programs
described above.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.3% in the first three months of
2020 compared with 6.6% in the first three months of 2019.
INTEREST, NET
Net interest expense was $107 in the first three months of 2020 compared with
$117 in the prior-year period, reflecting lower interest expense associated with
commercial paper issuances. See Note I to the unaudited Consolidated Financial
Statements in Part I, Item 1, for additional information regarding our debt
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obligations, including interest rates. We expect 2020 net interest expense to be
approximately $490 , reflecting the issuance of $4 billion of fixed-rate notes in
March 2020 .
OTHER, NET
Net other income was $14 in the first three months of 2020 compared with $18 in
the first three months of 2019. These amounts represent primarily the
non-service cost components of pension and other post-retirement benefits, which
were net income items in both periods.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 16.7% in the first three months of 2020 compared with
18.6% in the prior-year period. The decrease is due to a variety of factors,
including lower international taxes and slightly increased research tax credits.
For 2020, we anticipate a full-year effective tax rate of approximately 17%.
BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $85.7 billion at
the end of the first quarter of 2020 compared with $86.9 billion on December 31,
2019 . Our total backlog is equal to our remaining performance obligations under
contracts with customers as discussed in Note C to the unaudited Consolidated
Financial Statements in Part I, Item 1. Our total estimated contract value,
which combines total backlog with estimated potential contract value, was $123.9
billion on March 29, 2020 .
The following table details the backlog and estimated potential contract value
of each segment at the end of the first quarter of 2020 and fourth quarter of
2019:
Estimated Total
Potential Estimated
Funded Unfunded Total Backlog Contract Value Contract Value
March 29, 2020
Aerospace $ 12,998 $ 274 $ 13,272 $ 2,837 $ 16,109
Combat Systems 14,373 244 14,617 4,253 18,870
Information Technology 5,375 4,127 9,502 18,638 28,140
Mission Systems 4,947 229 5,176 7,957 13,133
Marine Systems 26,112 17,053 43,165 4,460 47,625
Total $ 63,805 $ 21,927 $ 85,732 $ 38,145 $ 123,877
December 31, 2019
Aerospace $ 13,168 $ 181 $ 13,349 $ 2,989 $ 16,338
Combat Systems 14,474 439 14,913 4,322 19,235
Information Technology 4,839 4,294 9,133 19,003 28,136
Mission Systems 5,037 326 5,363 7,482 12,845
Marine Systems 20,012 24,175 44,187 5,453 49,640
Total $ 57,530 $ 29,415 $ 86,945 $ 39,249 $ 126,194
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AEROSPACE
Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace segment ended the first quarter of 2020 with backlog of$13.3 billion , consistent withDecember 31, 2019 . Order activity for new aircraft was progressing well until the last two weeks of the quarter, when activity largely ceased due to the COVID-19 outbreak. Typically, the last few weeks of a quarter experience the most order activity. Despite this, orders in the first quarter of 2020 reflected demand across our product and services portfolio, and the segment's book-to-bill ratio (orders divided by revenue) was 1.1-to-1. 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. OnMarch 29, 2020 , estimated potential contract value in the Aerospace segment was$2.8 billion . 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 theU.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 that 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. 34 -------------------------------------------------------------------------------- Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value. Total backlog in our defense segments was$72.5 billion onMarch 29, 2020 , compared with$73.6 billion onDecember 31, 2019 . After experiencing a book-to-bill ratio of 1.1-to-1 in 2019, the Information Technology segment started 2020 with another quarter of strong orders, achieving a book-to-bill ratio of 1.2-to-1. Estimated potential contract value in our defense segments was$35.3 billion onMarch 29, 2020 . We received the following significant contract awards during the first quarter of 2020: Combat Systems: •$300 from theU.S. Army to upgrade Abrams tanks to the M1A2 SEPv3 configuration. •$225 from the Army to provide spare parts and inventory management services for the Stryker wheeled combat-vehicle program. •$145 from the Army to provide systems technical support for Abrams main battle tanks.
•
•
Information Technology:
•
Atmospheric Administration's (NOAA) Weather and Climate Operational Supercomputing System (WCOSS) contract. The contract has a maximum potential value of$505 . •$80 to provide sustainment support, maintenance and logistics for the Army. The contract has a maximum potential value of$455 .
• An IDIQ contract to provide development, program management and support
services for enterprise-wide application development functions for a
federal agency. The contract has a maximum potential value of $250 .
• $150 for several key contracts to provide intelligence services to
classified customers.
• A contract to provide IT infrastructure and engineering support for the
Mission Systems: • An IDIQ contract to modernize the Army's training programs. The contract
has a maximum potential value of $885 .
• $65 from the Army for computing and communications equipment under the
Common Hardware Systems-5 (CHS-5) program.
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•
and Missile Defense Radar (AMDR) program.
• $40 from the Navy to provide nuclear weapons security maintenance and
sustainment services.
•
for the Warfighter Information Network-Tactical (WIN-T) Increment 2
program.
Marine Systems: •$875 for the construction of two additional NavyJohn Lewis -class (T-AO-205) fleet replenishment oilers. •$70 from theNavy to provide maintenance and repair services for the
Ticonderoga-class guided-missile cruiser and
guided-missile destroyer programs.
• $60 from the Navy to produce a large vertical array fixture for Navy
submarine acoustic detection efforts.
• $40 from the Navy to provide maintenance for submarines at the Naval
Submarine Base New London in Connecticut .
• $40 from the Navy for on-board repair parts for two Virginia-class
submarines under Block IV of the program.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2020 with a cash balance of $5.3 billion compared
with $902 at the end of 2019. Our net debt position, defined as debt less cash
and equivalents and marketable securities, was $12.7 billion at the end of the
first quarter of 2020 compared with $11 billion at the end of 2019. The
following is a discussion of our major operating, investing and financing
activities in the first three months of 2020 and 2019, as classified on the
unaudited Consolidated Statement of Cash Flows in Part I, Item 1.
OPERATING ACTIVITIES
Cash used for operating activities was $666 in the first three months of 2020
compared with $795 in the same period in 2019. Cash flows in both periods were
affected negatively by net growth in operating working capital (OWC),
particularly our position in the development, production and cash collection
cycles of our Gulfstream aircraft models in our Aerospace segment. In the first
quarter of 2020, cash flows were also impacted negatively by fewer aircraft
deliveries and reduced aircraft orders due to the COVID-19 outbreak. Cash flows
in the first three months of 2019 were also affected negatively by growth in OWC
in our Combat Systems segment due to the timing of payments on a large
international wheeled armored vehicle contract. For additional information about
the unbilled receivables balance and activity associated with this contract, see
Note G to the unaudited Consolidated Financial Statements in Part I, Item 1.
INVESTING ACTIVITIES
Cash used for investing activities was $177 in the first three months of 2020
compared with $187 in the same period in 2019. Our investing activities include
cash paid for capital expenditures and business acquisitions; purchases, sales
and maturities of marketable securities; and proceeds from asset sales. The
primary use of cash for investing activities in both periods was capital
expenditures. Capital expenditures were $185 in the first three months of 2020
compared with $181 in the same period in 2019.
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FINANCING ACTIVITIES
Cash provided by financing activities was $5.3 billion in the first three months
of 2020 compared with $697 in the same period in 2019. Net cash from financing
activities includes proceeds received from debt and commercial paper issuances
and employee stock option exercises. Our financing activities also include
repurchases of common stock, payment of dividends and debt repayments.
On March 4, 2020 , our board of directors authorized management to repurchase up
to 10 million additional shares of the company's outstanding stock. In the first
three months of 2020, we repurchased 3.4 million of our outstanding shares for
$501 . On March 29, 2020 , 13 million shares remained authorized by our board of
directors for repurchase, representing 4.5% of our total shares outstanding. We
repurchased 0.5 million shares for $86 in the first three months of 2019.
On March 4, 2020 , our board of directors declared an increased quarterly
dividend of $1.10 per share, the 23rd consecutive annual increase. Previously,
the board had increased the quarterly dividend to $1.02 per share in March 2019 .
Cash dividends paid were $295 in the first three months of 2020 compared with
$268 in the same period in 2019.
In March 2020 , we issued $4 billion of fixed-rate notes. The proceeds will be
used to repay $2.5 billion of fixed- and floating-rate notes maturing in May
2020 and for general corporate purposes, including the repayment of a portion of
our borrowings under our commercial paper program as they mature. See Note I to
the unaudited Consolidated Financial Statements in Part I, Item 1, for
additional information regarding our debt obligations, including scheduled debt
maturities and interest rates.
In the first three months of 2020, we received net proceeds of $2.3 billion from
the issuance of commercial paper, which remained outstanding on March 29, 2020 .
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 that allows us to access the debt markets.
NON-GAAP FINANCIAL MEASURE - FREE CASH FLOW
We emphasize the efficient conversion of net earnings into cash and the
deployment of that cash to maximize shareholder returns. As described below, we
use free cash flow from operations to measure our performance in these areas.
While we believe this metric provides useful information, it is not a defined
operating measure under U.S. generally accepted accounting principles (GAAP),
and there are limitations associated with its use. Our calculation of this
metric may not be completely comparable to similarly titled measures of other
companies due to potential differences in the method of calculation. As a
result, the use of this metric should not be considered in isolation from, or as
a substitute for, other GAAP measures.
We define free cash flow 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 maturing 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 unaudited Consolidated Statement of
Cash Flows in Part I, Item 1:
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Three Months Ended March 29, 2020 March 31, 2019
Net cash used by operating activities $ (666 ) $ (795 )
Capital expenditures (185 ) (181 )
Free cash flow from operations $ (851 ) $ (976 )
Cash flows as a percentage of earnings from
continuing operations:
Net cash used by operating activities (94 )% (107 )%
Free cash flow from operations (121 )% (131 )%
ADDITIONAL FINANCIAL INFORMATION ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES For a discussion of environmental matters and other contingencies, see Note M to the unaudited Consolidated Financial Statements in Part I, Item 1. Except as otherwise noted in Note M, we do not expect our aggregate liability with respect to these matters to have a material impact on our results of operations, financial condition or cash flows. APPLICATION OF CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations is based on the unaudited Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We employ judgment in making our estimates, but they are based on historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. Revenue. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that often span several years. We review and update our contract-related estimates regularly. Our estimates at the end of the first quarter assumed no material impact from the disruptions caused by COVID-19. This assumption was based in part on the expectation that COVID-related costs will be reimbursed by our customers.The United States and other governments have taken steps, such as the CARES Act andU.S. DoD guidance, to provide relief. Through these government actions and our contract provisions, we will seek reimbursement of these costs. As the process for reimbursement has not been finalized, it is possible that our actual reimbursement could be less than 100% of our costs, resulting in a potentially unfavorable impact on the profitability of our contracts. Given the uncertainties, we are unable to estimate an amount or range, if any, of reasonably possible loss for costs that may not be reimbursed. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by$90 ($0.25 ) and$68 ($0.18 ) for the three-month 38 -------------------------------------------------------------------------------- periods endedMarch 29, 2020 , andMarch 31, 2019 , respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods endedMarch 29, 2020 , orMarch 31, 2019 . Long-lived Assets andGoodwill . 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. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over its estimated fair value as determined by discounted cash flows. For further discussion of our methods and assumptions, see the discussion in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . The COVID-19 outbreak has caused significant disruptions to national and global economies, which has impacted our businesses. As of the end of the quarter, we have not identified a triggering event requiring an impairment test for our goodwill, intangibles or other long-lived assets. In our Aerospace segment, which has experienced a more significant impact from the outbreak, we do not believe the impact represents a longer-term change that would indicate that the carrying value of the segment's intangibles and long-lived assets may not be recoverable or that the Aerospace reporting unit's estimated fair value has been significantly affected. Our Information Technology reporting unit's estimated fair value exceeded its carrying value by approximately 25% as ofDecember 31, 2019 . While a material change in the reporting unit's fair value or carrying value could put it at risk of goodwill impairment, we currently do not expect the COVID-19 disruptions to have a significant impact on our IT services business or the estimated fair value of the reporting unit. Other. Other significant estimates include those related to income taxes, pension and other post-retirement benefits, workers' compensation, warranty obligations, and litigation and other contingencies. We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented. For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year endedDecember 31, 2019 . For a discussion of new accounting standards that have been issued by the FASB but are not yet effective, see Note A to the unaudited Consolidated Financial Statements in Part I, Item 1. GUARANTOR FINANCIAL INFORMATION The fixed- and floating-rate notes described in Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, issued byGeneral 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 guarantees rank equally in right of payment with each other and all other existing and future senior unsecured indebtedness of such guarantors. A listing of the guarantors is included in an exhibit to this Form 10-Q. Under the relevant indenture, the guarantee of each guarantor is limited to the maximum amount that can be guaranteed without rendering the guarantee voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the company 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 company, then the guarantor or the entity acquiring the assets (in the event of 39
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the sale or other disposition of all or substantially all of the assets of a guarantor) will be released and relieved of any obligations under the guarantee. The following summarized financial information presents the parent and guarantors (collectively, the combined obligor group) on a combined basis. The summarized financial information of the combined obligor group excludes net investment in and earnings of subsidiaries related to interests held by the combined obligor group in subsidiaries that are not guarantors of the notes.
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