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; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services. Our company is organized into four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We refer to the latter three collectively as our defense segments. Our primary customer is 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 2020 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q. BUSINESS ENVIRONMENT The Coronavirus (COVID-19) pandemic has caused significant disruptions to national and global economies and government activities over the last year. 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. While we expect this situation to be temporary, any longer-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, and the Business Environment in Part II, Item 7, in our most recent Form 10-K filing.The United States and some other governments have taken steps to respond to the pandemic and to support economic activity and liquidity in the capital markets. Inthe United States , the American Rescue Plan Act (ARPA) is the latest legislation to provide relief. ARPA extends throughSeptember 30, 2021 , the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) that allow agencies to reimburse contractors for payments to covered workers who are prevented from working due to government facility closures or other restrictions. ARPA also includes changes to employer funding requirements for pension plans designed to reduce the amount of required contributions. However, these same provisions reduce the amount of pension costs reimbursable on ourU.S. government contracts. As a result, this provision is not expected to have a material impact on our 2021 results of operations and financial condition. Our Aerospace segment continues to experience the most significant impact from the pandemic. New aircraft deliveries reflect last year's decision to reduce production rates due to the pandemic. While orders were strong in the quarter, additional new aircraft revenue growth is dependent on the continued improvement of the large economies of the world and the return of international travel. As air travel has increased, demand for aircraft services has improved, but remains modestly below pre-pandemic levels. OurU.S. government business continues to experience some disruption from the COVID-19 pandemic, particularly in our Technologies segment due to select customer site closures and limited access to some customer sites. The Review of Operating Segments includes additional information on the first-quarter results for each of our segments. 25 -------------------------------------------------------------------------------- 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 volume of and 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. 26 -------------------------------------------------------------------------------- Operating earnings and margin in the defense segments are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value (or vice versa) that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- versus lower-margin work. Higher or lower margins can result from a number of factors, including contract type (e.g., fixed-price/cost-reimbursable) and type of work (e.g., development/production). Contract mix can also refer to the stage of program maturity for our long-term production contracts. New long-term production contracts typically have lower margins initially, and then margins generally increase as we achieve learning curve improvements or realize other cost reductions. CONSOLIDATED OVERVIEW Three Months Ended April 4, 2021 March 29, 2020 Variance Revenue$ 9,389 $ 8,749 $ 640 7.3 % Operating costs and expenses (8,451) (7,815) (636) 8.1 % Operating earnings 938 934 4 0.4 % Operating margin 10.0 % 10.7 % Our consolidated revenue increased in the first quarter of 2021 driven by growth in all segments, including a significant increase inU.S. Navy ship construction volume in our Marine Systems segment and additional aircraft deliveries in our Aerospace segment. Operating margin decreased 70 basis points in the first quarter of 2021 due primarily to mark-to-market adjustments related to aircraft that were in the G500 flight test program and a less favorable mix in aircraft deliveries in the Aerospace segment. REVIEW OF OPERATING SEGMENTS Following is a discussion of operating results for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note O to the unaudited Consolidated Financial Statements in Part I, Item 1. 27 --------------------------------------------------------------------------------
AEROSPACE Three Months Ended April 4, 2021 March 29, 2020 Variance Revenue$ 1,887 $ 1,691 $ 196 11.6 % Operating earnings 220 240 (20) (8.3) % Operating margin 11.7 % 14.2 % Gulfstream aircraft deliveries (in units) 28 23 5 21.7 % Operating Results The increase in the Aerospace segment's revenue in the first quarter of 2021 consisted of the following: Aircraft manufacturing$ 207 Aircraft services and completions (11) Total increase$ 196 Aircraft manufacturing revenue increased on additional deliveries of large-cabin G500 and G600 aircraft. The first quarter of 2020 was impacted by delayed aircraft deliveries caused by COVID-related quarantine and travel restrictions. In the second quarter of 2020, in response to the pandemic, we lowered our aircraft production rate, which impacts 2021 deliveries. The full impact of the adjusted production rate will be reflected in our second quarter deliveries, after which we expect steady revenue growth as scheduled customer deliveries increase in the third and fourth quarters. Aircraft services and completions revenue was down slightly from the first quarter of 2020 as increased Gulfstream services revenue was more than offset by decreased fixed-base operator (FBO) and other aircraft services, which remain below pre-pandemic levels. The change in the segment's operating earnings in the first quarter of 2021 consisted of the following: Aircraft manufacturing$ (43)
Aircraft services and completions 21
G&A/other expenses 2 Total decrease$ (20) Aircraft manufacturing operating earnings were down in the first quarter of 2021 due primarily to a less favorable mix in aircraft deliveries. Operating earnings were also impacted by mark-to-market adjustments related to aircraft that were in the G500 flight test program. This decrease was offset partially by increased aircraft services and completions operating earnings due to favorable cost performance and mix of aircraft services. In total, the Aerospace segment's operating margin decreased 250 basis points in the first quarter of 2021 compared with the prior-year period. 28 -------------------------------------------------------------------------------- MARINE SYSTEMS Three Months Ended April 4, 2021 March 29, 2020 Variance Revenue$ 2,483 $ 2,246 $ 237 10.6 % Operating earnings 200 184 16 8.7 % Operating margin 8.1 % 8.2 % Operating Results The increase in the Marine Systems segment's revenue in the first quarter of 2021 consisted of the following: U.S. Navy ship construction$ 267
(33)
Total increase $ 237
Revenue from U.S. Navy ship construction was up in the first quarter of 2021 due
to increased volume on Block V of the Virginia-class submarine program, the
Columbia-class submarine program and the Expeditionary Sea Base (ESB) auxiliary
support ship program. The Marine Systems segment's operating margin decreased 10
basis points in the first quarter of 2021, reflecting the shift in mix to early
work on new submarine programs with the typical lower initial profit rates.
COMBAT SYSTEMS
Three Months Ended April 4, 2021 March 29, 2020 Variance
Revenue $ 1,820 $ 1,708 $ 112 6.6 %
Operating earnings 244 223 21 9.4 %
Operating margin 13.4 % 13.1 %
Operating Results
The increase in the Combat Systems segment's revenue in the first quarter of
2021 consisted of the following:
International military vehicles $ 82
Weapons systems and munitions 42
U.S. military vehicles (12)
Total increase $ 112
Revenue from international military vehicles increased in the first quarter of
2021 due primarily to higher volume on contracts to produce 8x8 and 6x6 vehicles
for a variety of international customers. Weapons systems and munitions revenue
was up driven by increased production of propellant and missile subcomponents.
The Combat Systems segment's operating margin increased 30 basis points in the
first quarter of 2021 on a favorable product mix and continued cost reduction
efforts.
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TECHNOLOGIES
Three Months Ended April 4, 2021 March 29, 2020 Variance
Revenue $ 3,199 $ 3,104 $ 95 3.1 %
Operating earnings 306 298 8 2.7 %
Operating margin 9.6 % 9.6 %
Operating Results
The increase in the Technologies segment's revenue in the first quarter of 2021
consisted of the following:
IT services $ 97
C4ISR* solutions (2)
Total increase $ 95
*Command, control, communications, computers, intelligence, surveillance and
reconnaissance
IT services revenue increased in the first quarter of 2021 due to the ramp up of
several new programs. Revenue growth in C4ISR solutions was offset by the sale
of a satellite communications business in the second quarter of 2020.
Year-over-year organic growth for the segment was 5.3%, excluding the impact of
the sale. The Technologies segment's operating margin remained steady in the
first quarter of 2021 as favorable contract mix offset the COVID-related impacts
in our IT services business, particularly customer reimbursement of idle
workforce cost at zero fee.
CORPORATE
Corporate operating results consisted primarily of equity-based compensation
expense and totaled $32 in the first quarter of 2021 compared with $11 in the
first quarter of 2020.
OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
Three Months Ended April 4, 2021 March 29, 2020 Variance
Revenue $ 5,355 $ 4,890 $ 465 9.5 %
Operating costs (4,438) (3,986) (452) 11.3 %
The increase in product revenue in the first quarter of 2021 consisted of the
following:
Ship construction $ 234
Aircraft manufacturing 207
Other, net 24
Total increase $ 465
Revenue from ship construction was up in the first quarter of 2021 due to
increased volume on the Virginia-class and Columbia-class submarine programs and
ESB auxiliary support ship program. Aircraft manufacturing revenue increased due
to additional deliveries of the large-cabin G500 and G600 aircraft. In the first
quarter of 2021, product operating costs increased at a higher rate than revenue
due
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primarily to the mark-to-market adjustments related to G500 flight test aircraft
and the mix of aircraft deliveries.
SERVICE REVENUE AND OPERATING COSTS
Three Months Ended April 4, 2021 March 29, 2020 Variance
Revenue $ 4,034 $ 3,859 $ 175 4.5 %
Operating costs (3,454) (3,304) (150) 4.5 %
The increase in service revenue in the first quarter of 2021 consisted of the
following:
IT services $ 97
Other, net 78
Total increase $ 175
IT services revenue increased in the first quarter of 2021 due to the ramp up of
several new programs. In the first quarter of 2021, the primary driver of the
increase in service operating costs was the change in volume of IT services.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 6% in the first three months of
2021 and 2020.
INTEREST, NET
Net interest expense was $123 in the first three months of 2021 compared with
$107 in the prior-year period. The increase was due to incremental debt issued
last year in conjunction with refinancing maturing notes. See Note I to the
unaudited Consolidated Financial Statements in Part I, Item 1, for additional
information regarding our debt obligations, including interest rates.
OTHER, NET
Net other income was $30 in the first three months of 2021 compared with $21 in
the first three months of 2020. Other represents primarily the non-service
components of pension and other post-retirement benefits, which were income in
both periods.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 16.2% in the first three months of 2021 compared with
16.7% in the prior-year period.
BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $89.6 billion at
the end of the first quarter of 2021 compared with $89.5 billion on December 31,
2020 . Our total backlog is equal to our remaining performance obligations under
contracts with customers as discussed in Note B to the unaudited Consolidated
Financial Statements in Part I, Item 1. Our total estimated contract value,
which combines total backlog with estimated potential contract value, was $131.4
billion on April 4, 2021 .
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The following table details the backlog and estimated potential contract value
of each segment at the end of the first quarter of 2021 and fourth quarter of
2020:
Estimated Total
Potential Estimated
Funded Unfunded Total Backlog Contract Value Contract Value
April 4, 2021
Aerospace $ 11,545 $ 384 $ 11,929 $ 2,312 $ 14,241
Marine Systems 27,676 22,075 49,751 2,815 52,566
Combat Systems 14,085 143 14,228 9,120 23,348
Technologies 10,003 3,670 13,673 27,530 41,203
Total $ 63,309 $ 26,272 $ 89,581 $ 41,777 $ 131,358
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
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 2021 with
backlog of $11.9 billion , up approximately 3% from $11.6 billion on December 31,
2020 .
Orders in the first quarter of 2021 reflected strong demand across our aircraft
portfolio. The segment's book-to-bill ratio (orders divided by revenue) was
1.3-to-1 in the first quarter of 2021.
Beyond total backlog, estimated potential contract value represents primarily
options and other agreements with existing customers to purchase new aircraft
and long-term aircraft services agreements. On April 4, 2021 , estimated
potential contract value in the Aerospace segment was $2.3 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 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) 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
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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 $77.7 billion on April 4, 2021 . The
Technologies segment started 2021 with strong order activity, achieving a
book-to-bill ratio of 1.1-to-1. Estimated potential contract value in our
defense segments was $39.5 billion on April 4, 2021 . We received the following
significant contract awards during the first quarter of 2021:
Marine Systems:
•$1.9 billion from the U.S. Navy for the construction of a tenth submarine in
Block V of the Virginia-class submarine program.
•$75 from the Navy for Advanced Nuclear Plant Studies (ANPS) in support of the
Columbia-class submarine program.
•$30 from the Navy for maintenance and modernization work on the USS Princeton,
a Ticonderoga-class guided-missile cruiser.
Combat Systems:
•$295 from the U.S. Army for various munitions and ordnance.
•$225 from the Army for inventory management and support services for the
Stryker fleet.
•$120 from the Army to provide systems technical support for Abrams main battle
tanks.
•$110 to produce M3 amphibious bridging vehicles for an international customer.
•$70 from the Army to upgrade Abrams tanks to the M1A2 System Enhancement
Package Version 3 (SEPv3) configuration.
Technologies:
•A contract to provide information technology (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.
•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.
•$45 from the U.S. Coast Guard to provide sustainment support for the Rescue 21
program. The contract has a maximum potential value of $235 .
•$200 from the Federal Emergency Management Agency (FEMA) to provide
COVID-19-related contact-center operations and support services.
•$175 from the Army for computing and communications equipment under the Common
Hardware Systems-5 (CHS-5) program.
•$135 to provide enterprise IT, communications and mission command support
services to U.S. Army Europe .
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•$130 to provide turnkey training and simulation services for the Army's
Aviation Center of Excellence in Fort Rucker, Alabama .
•$120 from the U.S. Air Force for the Battlefield Information Collection and
Exploitation System (BICES) program to provide intelligence information sharing
capabilities for the DoD .
•A contract to provide software development and IT support services to the U.S.
Patent and Trademark Office . The contract has a maximum potential value of $95 .
•$70 from the Army for the production of Prophet enhanced ground-based signals
intelligence and electronic warfare systems.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2021 with a cash and equivalents balance of $1.8
billion compared with $2.8 billion at the end of 2020.
We expect to continue to generate funds in excess of our short- and long-term
liquidity needs. We believe we have adequate funds on hand and sufficient
borrowing capacity to execute our financial and operating strategy. The
following is a discussion of our major operating, investing and financing
activities in the first three months of 2021 and 2020, as classified on the
unaudited Consolidated Statement of Cash Flows in Part I, Item 1.
OPERATING ACTIVITIES
Cash provided by operating activities was $3 in the first three months of 2021
compared with a use of cash of $666 in the same period in 2020. The primary
driver of cash inflows in both periods was net earnings. However, cash flows in
both periods were affected negatively by growth in operating working capital
(OWC). Throughout 2020 we experienced growth in OWC in our Aerospace segment due
to our position in the development and production cycles of our Gulfstream
aircraft models. Although this Aerospace OWC growth began reversing in the
fourth quarter of 2020 and continued in the first three months of 2021, the
timing of billings and payments in our defense segments resulted in net OWC
growth for the quarter.
INVESTING ACTIVITIES
Cash used by investing activities was $131 in the first three months of 2021
compared with $177 in the same period 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. The
primary use of cash for investing activities in both periods was capital
expenditures. Capital expenditures were $134 in the first three months of 2021
compared with $185 in the same period in 2020.
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FINANCING ACTIVITIES
Cash used by financing activities was $873 in the first three months of 2021
compared with cash provided of $5.3 billion in the same period in 2020. 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.
Our board of directors from time to time authorizes management to repurchase
outstanding shares of our common stock on the open market. We paid $759 and $449
in the first three months of 2021 and 2020, respectively, to repurchase our
outstanding shares. On April 4, 2021 , 7.7 million shares remained authorized by
our board of directors for repurchase, representing 2.7% of our total shares
outstanding.
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 $315 in the first three months of 2021 compared with
$295 in the same period in 2020.
In March 2020 , we issued $4 billion of fixed-rate notes. The proceeds were used
to repay $2.5 billion of fixed- and floating-rate notes that matured in May 2020
and for general corporate purposes, including the repayment of a portion of the
borrowings under our commercial paper program. Fixed- and floating-rate notes
totaling $2.5 billion mature in May 2021 , and an additional $500 of fixed-rate
notes mature in July 2021 . We plan to refinance a portion of these notes and
repay the remainder using a combination of cash on hand and the issuance of
commercial paper. For additional information regarding our debt obligations,
including scheduled debt maturities and interest rates, see Note I to the
unaudited Consolidated Financial Statements in Part 1, Item 1.
In the first three months of 2020, we received net proceeds of $2.3 billion from
the issuance of commercial paper. On April 4, 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 net debt 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.
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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 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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