UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[☑ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 2021
OR
[☐ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-3671
(Exact name of registrant as specified in its charter)
| State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification No. | ||||||||||||||||
| Address of principal executive offices | Zip code | ||||||||||||||||
(703 ) 876-3000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ü No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Smaller reporting company___☐ Emerging growth company___☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes___☐ No ü
INDEX
| PART I - | PAGE | |||||||
| Item 1 - | ||||||||
Item 2 - | ||||||||
| Item 3 - | ||||||||
| Item 4 - | ||||||||
| PART II - | ||||||||
| Item 1 - | ||||||||
| Item 1A - | ||||||||
| Item 2 - | ||||||||
| Item 6 - | ||||||||
2
PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
| Three Months Ended | |||||||||||
| (Dollars in millions, except per-share amounts) | July 4, 2021 | June 28, 2020 | |||||||||
| Revenue: | |||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Operating costs and expenses: | |||||||||||
| Products | ( | ( | |||||||||
| Services | ( | ( | |||||||||
| General and administrative (G&A) | ( | ( | |||||||||
| ( | ( | ||||||||||
| Operating earnings | |||||||||||
| Other, net | |||||||||||
| Interest, net | ( | ( | |||||||||
| Earnings before income tax | |||||||||||
| Provision for income tax, net | ( | ( | |||||||||
| Net earnings | $ | $ | |||||||||
| Earnings per share | |||||||||||
Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
3
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
| Six Months Ended | |||||||||||
| (Dollars in millions, except per-share amounts) | July 4, 2021 | June 28, 2020 | |||||||||
| Revenue: | |||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Operating costs and expenses: | |||||||||||
| Products | ( | ( | |||||||||
| Services | ( | ( | |||||||||
| G&A | ( | ( | |||||||||
| ( | ( | ||||||||||
| Operating earnings | |||||||||||
| Other, net | |||||||||||
| Interest, net | ( | ( | |||||||||
| Earnings before income tax | |||||||||||
| Provision for income tax, net | ( | ( | |||||||||
| Net earnings | $ | $ | |||||||||
| Earnings per share | |||||||||||
Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| (Dollars in millions) | July 4, 2021 | June 28, 2020 | July 4, 2021 | June 28, 2020 | ||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||
| Gains (losses) on cash flow hedges | ( | |||||||||||||||||||
| Foreign currency translation adjustments | ( | |||||||||||||||||||
| Change in retirement plans’ funded status | ||||||||||||||||||||
| Other comprehensive income, pretax | ||||||||||||||||||||
| Provision for income tax, net | ( | ( | ( | ( | ||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
5
CONSOLIDATED BALANCE SHEET
| (Unaudited) | |||||||||||
| (Dollars in millions) | July 4, 2021 | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Unbilled receivables | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Noncurrent assets: | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt and current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Customer advances and deposits | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent liabilities: | |||||||||||
| Long-term debt | |||||||||||
| Other liabilities | |||||||||||
| Commitments and contingencies (see Note M) | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Shareholders’ equity: | |||||||||||
| Common stock | |||||||||||
| Surplus | |||||||||||
| Retained earnings | |||||||||||
| Treasury stock | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
Total liabilities and shareholders’ equity | $ | $ | |||||||||
6
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
| Six Months Ended | |||||||||||
| (Dollars in millions) | July 4, 2021 | June 28, 2020 | |||||||||
| Cash flows from operating activities - continuing operations: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash from operating activities: | |||||||||||
Depreciation of property, plant and equipment | |||||||||||
Amortization of intangible and finance lease right-of-use assets | |||||||||||
Equity-based compensation expense | |||||||||||
Deferred income tax benefit | ( | ( | |||||||||
| (Increase) decrease in assets, net of effects of business acquisitions: | |||||||||||
Accounts receivable | ( | ( | |||||||||
Unbilled receivables | |||||||||||
Inventories | ( | ( | |||||||||
| Increase (decrease) in liabilities, net of effects of business acquisitions: | |||||||||||
Accounts payable | ( | ( | |||||||||
Customer advances and deposits | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash used by investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayment of fixed-rate notes | ( | ( | |||||||||
| Proceeds from commercial paper, gross (maturities greater than 3 months) | |||||||||||
| Proceeds from fixed-rate notes | |||||||||||
| Purchases of common stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Repayment of floating-rate notes | ( | ( | |||||||||
| Proceeds from commercial paper, net | |||||||||||
| Other, net | ( | ||||||||||
| Net cash (used) provided by financing activities | ( | ||||||||||
| Net cash used by discontinued operations | ( | ( | |||||||||
| Net increase in cash and equivalents | |||||||||||
| Cash and equivalents at beginning of period | |||||||||||
| Cash and equivalents at end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Income tax payments, net | $ | ( | $ | ( | |||||||
| Interest payments | $ | ( | $ | ( | |||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
7
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Par | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||||||||||
| April 4, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity-based awards | — | — | — | ||||||||||||||||||||||||||||||||
| Shares purchased | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| July 4, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| March 29, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity-based awards | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| June 28, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Retained | Treasury | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Par | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity-based awards | — | — | — | ||||||||||||||||||||||||||||||||
| Shares purchased | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| July 4, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Cumulative-effect adjustment* | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity-based awards | — | — | — | ||||||||||||||||||||||||||||||||
| Shares purchased | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| June 28, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.
*Reflects the cumulative effect of Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020.
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share amounts or unless otherwise noted)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services.
Basis of Consolidation and Classification. The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the unaudited Consolidated Financial Statements. Some prior-year amounts have been reclassified among financial statement accounts or disclosures to conform to the current-year presentation.
Consistent with industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts may not be realized within one year.
Further discussion of our significant accounting policies is contained in the other notes to these financial statements.
Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These rules and regulations permit some of the information and footnote disclosures included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are typically 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three- and six-month periods ended July 4, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
The unaudited Consolidated Financial Statements contain all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations and financial condition for the three- and six-month periods ended July 4, 2021, and June 28, 2020.
These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Property, Plant and Equipment, Net. Property, plant and equipment (PP&E) is carried at historical cost, net of accumulated depreciation. Net PP&E consisted of the following:
| July 4, 2021 | December 31, 2020 | ||||||||||
| PP&E | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| PP&E, net | $ | $ | |||||||||
9
B. REVENUE
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue. A contract’s transaction price is allocated to each distinct performance obligation within that contract and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product life cycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract.
Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 81 % and 80 % of our revenue for the three- and six-month periods ended July 4, 2021, and 76 % and 78 % of our revenue for the three- and six-month periods ended June 28, 2020, respectively. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.
Revenue from goods and services transferred to customers at a point in time accounted for 19 % and 20 % of our revenue for the three- and six-month periods ended July 4, 2021, and 24 % and 22 % of our revenue for the three- and six-month periods ended June 28, 2020, respectively. Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.
On July 4, 2021, we had $89.2 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 45 % of our remaining performance obligations as revenue by year-end 2022, an additional 30 % by year-end 2024 and the balance thereafter.
Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. Accounting for long-term contracts and programs involves the use of various
10
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 and award 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 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. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| July 4, 2021 | June 28, 2020 | July 4, 2021 | June 28, 2020 | |||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||||||
| Operating earnings | ( | |||||||||||||||||||
| Diluted earnings per share | $ | $ | ( | $ | $ | |||||||||||||||
No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 4, 2021, or June 28, 2020. The 2020 results reflect an approximate $40 loss in our Technologies segment on a contract with a non-U.S. customer from schedule delays caused by COVID-related travel restrictions.
11
Revenue by major products and services was as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| July 4, 2021 | June 28, 2020 | July 4, 2021 | June 28, 2020 | |||||||||||||||||
| Aircraft manufacturing | $ | $ | $ | $ | ||||||||||||||||
| Aircraft services and completions | ||||||||||||||||||||
| Total Aerospace | ||||||||||||||||||||
| Nuclear-powered submarines | ||||||||||||||||||||
| Surface ships | ||||||||||||||||||||
| Repair and other services | ||||||||||||||||||||
| Total Marine Systems | ||||||||||||||||||||
| Military vehicles | ||||||||||||||||||||
| Weapons systems, armament and munitions | ||||||||||||||||||||
| Engineering and other services | ||||||||||||||||||||
| Total Combat Systems | ||||||||||||||||||||
| Information technology (IT) services | ||||||||||||||||||||
| C4ISR* solutions | ||||||||||||||||||||
| Total Technologies | ||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||
*Command, control, communications, computers, intelligence, surveillance and reconnaissance
12
Revenue by contract type was as follows:
| Three Months Ended July 4, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| Fixed-price | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost-reimbursement | |||||||||||||||||||||||||||||
| Time-and-materials | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three Months Ended June 28, 2020 | |||||||||||||||||||||||||||||
| Fixed-price | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost-reimbursement | |||||||||||||||||||||||||||||
| Time-and-materials | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six Months Ended July 4, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| Fixed-price | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost-reimbursement | |||||||||||||||||||||||||||||
| Time-and-materials | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six Months Ended June 28, 2020 | |||||||||||||||||||||||||||||
| Fixed-price | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost-reimbursement | |||||||||||||||||||||||||||||
| Time-and-materials | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.
Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.
13
Revenue by customer was as follows:
| Three Months Ended July 4, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| Department of Defense (DoD) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Non-DoD | |||||||||||||||||||||||||||||
| Foreign Military Sales (FMS) | |||||||||||||||||||||||||||||
| Total U.S. government | |||||||||||||||||||||||||||||
| U.S. commercial | |||||||||||||||||||||||||||||
| Non-U.S. government | |||||||||||||||||||||||||||||
| Non-U.S. commercial | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three Months Ended June 28, 2020 | |||||||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| DoD | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Non-DoD | |||||||||||||||||||||||||||||
| FMS | |||||||||||||||||||||||||||||
| Total U.S. government | |||||||||||||||||||||||||||||
| U.S. commercial | |||||||||||||||||||||||||||||
| Non-U.S. government | |||||||||||||||||||||||||||||
| Non-U.S. commercial | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six Months Ended July 4, 2021 | Aerospace | Marine Systems | Combat Systems | Technologies | Total Revenue | ||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
DoD | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Non-DoD | |||||||||||||||||||||||||||||
| FMS | |||||||||||||||||||||||||||||
| Total U.S. government | |||||||||||||||||||||||||||||
| U.S. commercial | |||||||||||||||||||||||||||||
| Non-U.S. government | |||||||||||||||||||||||||||||
| Non-U.S. commercial | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six Months Ended June 28, 2020 | |||||||||||||||||||||||||||||
| U.S. government: | |||||||||||||||||||||||||||||
| DoD | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Non-DoD | |||||||||||||||||||||||||||||
| FMS | |||||||||||||||||||||||||||||
| Total U.S. government | |||||||||||||||||||||||||||||
| U.S. commercial | |||||||||||||||||||||||||||||
| Non-U.S. government | |||||||||||||||||||||||||||||
| Non-U.S. commercial | |||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
14
Revenue recognized for the three- and six-month periods ended July 4, 2021, and June 28, 2020, that was included in the contract liability balance at the beginning of each year was $860 and $2.4 billion, and $1.2 billion and $2.4 billion, respectively. This revenue represented primarily the sale of business jet aircraft.
C. GOODWILL AND INTANGIBLE ASSETS
Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:
| Aerospace | Marine Systems | Combat Systems | Technologies | Total Goodwill | |||||||||||||||||||||||||
| December 31, 2020 (a) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Acquisitions (b) | |||||||||||||||||||||||||||||
| Other (c) | ( | ( | |||||||||||||||||||||||||||
| July 4, 2021 (a) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(a)Goodwill in the Technologies reporting unit was net of $1.8 billion of accumulated impairment losses.
(b)Included adjustments during the purchase price allocation period.
(c)Consisted primarily of adjustments for foreign currency translation.
Intangible Assets. Intangible assets consisted of the following:
| Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount (a) | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| July 4, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Contract and program intangible assets (b) | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||
| Trade names and trademarks | ( | ( | |||||||||||||||||||||
| Technology and software | ( | ( | |||||||||||||||||||||
| Other intangible assets | ( | ( | |||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||
(a)Changes in gross carrying amounts consisted primarily of adjustments for write-offs of fully amortized intangible assets, acquired intangible assets and foreign currency translation.
15
D. EARNINGS PER SHARE
Basic and diluted weighted average shares outstanding were as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| July 4, 2021 | June 28, 2020 | July 4, 2021 | June 28, 2020 | |||||||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||||||
| Dilutive effect of stock options and restricted stock/RSUs* | ||||||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||||||
* Excludes outstanding options to purchase shares of common stock that had exercise prices in excess of the average market price of our common stock during the period and, therefore, the effect of including these options would be antidilutive. These options totaled 5,392 and 8,746 for the three- and six-month periods ended July 4, 2021, and 7,723 and 6,811 for the three- and six-month periods ended June 28, 2020, respectively.
E. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
•Level 1 - quoted prices in active markets for identical assets or liabilities.
•Level 2 - inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly.
•Level 3 - unobservable inputs significant to the fair value measurement.
We did not have any significant non-financial assets or liabilities measured at fair value on July 4, 2021, or December 31, 2020.
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| Carrying Value | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
| Financial Assets (Liabilities) | July 4, 2021 | ||||||||||||||||||||||||||||
| Measured at fair value: | |||||||||||||||||||||||||||||
| Marketable securities held in trust: | |||||||||||||||||||||||||||||
| Cash and equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Available-for-sale debt securities | |||||||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||
| Measured at amortized cost: | |||||||||||||||||||||||||||||
| Short- and long-term debt principal | ( | ( | ( | ||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Measured at fair value: | |||||||||||||||||||||||||||||
| Marketable securities held in trust: | |||||||||||||||||||||||||||||
| Cash and equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Available-for-sale debt securities | |||||||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||
| Measured at amortized cost: | |||||||||||||||||||||||||||||
| Short- and long-term debt principal | ( | ( | ( | ||||||||||||||||||||||||||
F. INCOME TAXES
Net Deferred Tax Liability. Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax liability consisted of the following:
| July 4, 2021 | December 31, 2020 | ||||||||||
| Deferred tax asset | $ | $ | |||||||||
| Deferred tax liability | ( | ( | |||||||||
| Net deferred tax liability | $ | ( | $ | ( | |||||||
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Tax Uncertainties. We participate in the Internal Revenue Service (IRS) Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2019.
For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50 % chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.
Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on July 4, 2021, was not material to our results of operations, financial condition or cash flows. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.
G. UNBILLED RECEIVABLES
| July 4, 2021 | December 31, 2020 | ||||||||||
| Unbilled revenue | $ | $ | |||||||||
| Advances and progress billings | ( | ( | |||||||||
| Net unbilled receivables | $ | $ | |||||||||
On July 4, 2021, and December 31, 2020, net unbilled receivables included $1.8 billion and $2.8 billion, respectively, associated with a large international wheeled armored vehicle contract in our Combat Systems segment. We had experienced delays in payment under the contract in 2018 and 2019, which resulted in the large unbilled receivables balances. In March 2020, we finalized a contract amendment with the customer that included a revised payment schedule. Under the amended contract, we received progress payments of $1 billion in 2020 and $1.5 billion in the first six months of 2021. Further progress payments will liquidate the net unbilled receivables balance over the next few years.
H. INVENTORIES
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Inventories consisted of the following:
| July 4, 2021 | December 31, 2020 | ||||||||||
| Work in process | $ | $ | |||||||||
| Raw materials | |||||||||||
| Finished goods | |||||||||||
| Pre-owned aircraft | |||||||||||
| Total inventories | $ | $ | |||||||||
I. DEBT
Debt consisted of the following:
| July 4, 2021 | December 31, 2020 | |||||||||||||
| Fixed-rate notes due: | Interest rate: | |||||||||||||
| May 2021 | $ | $ | ||||||||||||
| July 2021 | ||||||||||||||
| November 2022 | ||||||||||||||
| May 2023 | ||||||||||||||
| August 2023 | ||||||||||||||
| November 2024 | ||||||||||||||
| April 2025 | ||||||||||||||
| May 2025 | ||||||||||||||
| June 2026 | ||||||||||||||
| August 2026 | ||||||||||||||
| April 2027 | ||||||||||||||
| November 2027 | ||||||||||||||
| May 2028 | ||||||||||||||
| April 2030 | ||||||||||||||
| June 2031 | ||||||||||||||
| April 2040 | ||||||||||||||
| June 2041 | ||||||||||||||
| November 2042 | ||||||||||||||
| April 2050 | ||||||||||||||
| Floating-rate notes due: | ||||||||||||||
| May 2021 | 3-month LIBOR + | |||||||||||||
| Commercial paper | ||||||||||||||
| Other | ||||||||||||||
| Total debt principal | ||||||||||||||
| Less unamortized debt issuance costs and discounts | ||||||||||||||
| Total debt | ||||||||||||||
| Less current portion | ||||||||||||||
| Long-term debt | $ | $ | ||||||||||||
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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. On July 15, 2021, we repaid an additional $500 of fixed-rate notes at the scheduled maturity.
On July 4, 2021, we had $2 billion of commercial paper outstanding with a dollar-weighted average interest rate of 0.252 %. 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. These credit facilities include a $2 billion 364 -day facility expiring in March 2022, a $2 billion multi-year facility expiring in March 2023 and a $1 billion multi-year facility expiring in March 2025. We may renew or replace these credit facilities in whole or in part at or prior to their expiration dates. We also have an effective shelf registration on file with the SEC that allows us to access the debt markets.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on July 4, 2021.
J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
| July 4, 2021 | December 31, 2020 | ||||||||||
| Salaries and wages | $ | $ | |||||||||
| Retirement benefits | |||||||||||
| Workers’ compensation | |||||||||||
| Operating lease liabilities | |||||||||||
| Fair value of cash flow hedges | |||||||||||
| Other (a) | |||||||||||
| Total other current liabilities | $ | $ | |||||||||
| Retirement benefits | $ | $ | |||||||||
| Operating lease liabilities | |||||||||||
| Customer deposits on commercial contracts | |||||||||||
| Deferred income taxes | |||||||||||
| Other (b) | |||||||||||
| Total other liabilities | $ | $ | |||||||||
(a)Consisted primarily of dividends payable, taxes payable, environmental remediation reserves, warranty reserves, deferred revenue and supplier contributions in the Aerospace segment, liabilities of discontinued operations, finance lease liabilities and insurance-related costs.
(b)Consisted primarily of warranty reserves, workers’ compensation liabilities, finance lease liabilities and liabilities of discontinued operations.
K. SHAREHOLDERS ’ EQUITY
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Dividends per Share. Our board of directors declared dividends of $1.19 and $2.38 per share for the three- and six-month periods ended July 4, 2021, and $1.10 and $2.20 per share for the three- and six-month periods ended June 28, 2020, respectively. We paid cash dividends of $336 and $651 for the three- and six-month periods ended July 4, 2021, and $315 and $610 for the three- and six-month periods ended June 28, 2020, respectively.
Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of accumulated other comprehensive loss (AOCL) consisted of the following:
| Gains on Cash Flow Hedges | Foreign Currency Translation Adjustments | Changes in Retirement Plans’ Funded Status | AOCL | |||||||||||
| December 31, 2020 | $ | $ | $ | ( | $ | ( | ||||||||
| Other comprehensive income, pretax | ( | |||||||||||||
| Provision for income tax, net | ( | ( | ||||||||||||
| Other comprehensive income, net of tax | ( | |||||||||||||
| July 4, 2021 | $ | $ | $ | ( | $ | ( | ||||||||
| December 31, 2019 | $ | $ | $ | ( | $ | ( | ||||||||
| Other comprehensive income, pretax | ( | |||||||||||||
| Provision for income tax, net | ( | ( | ( | |||||||||||
| Other comprehensive income, net of tax | ( | |||||||||||||
| June 28, 2020 | $ | $ | $ | ( | $ | ( | ||||||||
Amounts reclassified out of AOCL related primarily to changes in our retirement plans’ funded status and included pretax recognized net actuarial losses and amortization of prior service credit. See Note N for these amounts, which are included in our net periodic pension and other post-retirement benefit cost.
L. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Interest Rate Risk. Our financial instruments subject to interest rate risk include variable-rate commercial paper and fixed-rate long-term debt obligations. The interest rate risk associated with our financial instruments is not material.
Commodity Price Risk. We are subject to rising labor and commodity price risk, primarily on long-term, fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to
21
Net gains and losses recognized in earnings on derivative financial instruments that do not qualify for hedge accounting were not material to our results of operations for the three- and six-month periods ended July 4, 2021, and June 28, 2020. Net gains and losses reclassified to earnings from AOCL related to qualified hedges were also not material to our results of operations for the three- and six-month periods ended July 4, 2021, and June 28, 2020, and we do not expect the amount of these gains and losses that will be reclassified to earnings during the next 12 months to be material.
We had no material derivative financial instruments designated as fair value or net investment hedges on July 4, 2021, and December 31, 2020.
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M. COMMITMENTS AND CONTINGENCIES
Litigation
In 2015, Electric Boat Corporation, a subsidiary of General Dynamics Corporation, received a Civil Investigative Demand from the U.S. Department of Justice regarding an investigation of potential False Claims Act violations relating to alleged failures of Electric Boat’s quality system with respect to allegedly non-conforming parts purchased from a supplier. In 2016, Electric Boat was made aware that it is a defendant in a lawsuit related to this matter which had been filed under seal in U.S. district court. Also in 2016, the Suspending and Debarring Official for the U.S. Department of the Navy issued a Show Cause Letter to Electric Boat requesting that Electric Boat respond to the official’s concerns regarding Electric Boat’s oversight and management with respect to its quality assurance systems for subcontractors and suppliers. Electric Boat responded to the Show Cause Letter and engaged in discussions with the U.S. government.
In the third quarter of 2019, the Department of Justice declined to intervene in the qui tam action, noting that its investigation continues, and the court unsealed the relator’s complaint. In the fourth quarter of 2020, the relator filed a second amended complaint. Given the current status of these matters, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on our results of operations, financial condition and cash flows.
Additionally, various other claims and legal proceedings incidental to the normal course of business are pending or threatened against us. These other matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these other matters. However, based on information currently available, we believe any potential liabilities in these other proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.
Environmental
We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a Potentially Responsible Party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.
As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liabilities. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.
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Other
Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. We believe the outcome of such ongoing government audits and investigations will not have a material impact on our results of operations, financial condition or cash flows.
In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based on the circumstances, we periodically file requests for equitable adjustment (REAs) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.
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The changes in the carrying amount of warranty liabilities for the six-month periods ended July 4, 2021, and June 28, 2020, were as follows:
| Six Months Ended | July 4, 2021 | June 28, 2020 | |||||||||
| Beginning balance | $ | $ | |||||||||
| Warranty expense | |||||||||||
| Payments | ( | ( | |||||||||
| Adjustments | ( | ||||||||||
| Ending balance | $ | $ | |||||||||
N. RETIREMENT PLANS
We provide retirement benefits to eligible employees through a variety of plans:
•Defined contribution
•Defined benefit
◦Pension (qualified and non-qualified)
◦Other post-retirement benefit
For our defined benefit plans, net periodic benefit credit for the three- and six-month periods ended July 4, 2021, and June 28, 2020, consisted of the following:
| Pension Benefits | Other Post-retirement Benefits | |||||||||||||||||||
| Three Months Ended | July 4, 2021 | June 28, 2020 | July 4, 2021 | June 28, 2020 | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||
| Interest cost | ||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||
| Net actuarial loss (gain) | ( | |||||||||||||||||||
| Prior service credit | ( | ( | ||||||||||||||||||
| Net periodic benefit credit | $ | ( | $ | ( | $ | ( | $ | |||||||||||||
| Six Months Ended | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||
| Interest cost | ||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||
| Net actuarial loss (gain) | ( | |||||||||||||||||||
| Prior service credit | ( | ( | ||||||||||||||||||
| Net periodic benefit credit | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||
25
O. SEGMENT INFORMATION
Summary financial information for each of our segments follows:
| Revenue | Operating Earnings | |||||||||||||
| Three Months Ended | July 4, 2021 | June 28, 2020 | July 4, 2021 | June 28, 2020 | ||||||||||
| Aerospace | $ | $ | $ | $ | ||||||||||
| Marine Systems | ||||||||||||||
| Combat Systems | ||||||||||||||
| Technologies | ||||||||||||||
| Corporate* | ( | ( | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
| Six Months Ended | ||||||||||||||
| Aerospace | $ | $ | $ | $ | ||||||||||
| Marine Systems | ||||||||||||||
| Combat Systems | ||||||||||||||
| Technologies | ||||||||||||||
| Corporate* | ( | ( | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share amounts or unless otherwise noted)
BUSINESS OVERVIEW
General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, 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 the U.S. government, including the Department of Defense (DoD), the intelligence community and other U.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 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. 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. In the United States, the American Rescue Plan Act (ARPA) is the latest legislation to provide relief. ARPA extends through September 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 our U.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’s operating results continue to be the most significantly impacted by the pandemic. New aircraft deliveries reflect last year’s decision to reduce production rates to accommodate supply chain challenges. However, aircraft orders have been strong in the first six months of the year due to 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. Although our U.S. government business continues to experience some disruption from the COVID-19 pandemic, particularly in our Technologies segment, the impact has decreased due to the reopening of, and increased access to, customer sites. The Review of Operating Segments includes additional information on the second-quarter results for each of our segments.
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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.
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,
28
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 | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 9,220 | $ | 9,264 | $ | (44) | (0.5) | % | |||||||||||||||
| Operating costs and expenses | (8,261) | (8,430) | 169 | (2.0) | % | ||||||||||||||||||
| Operating earnings | 959 | 834 | 125 | 15.0 | % | ||||||||||||||||||
| Operating margin | 10.4 | % | 9.0 | % | |||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 18,609 | $ | 18,013 | $ | 596 | 3.3 | % | |||||||||||||||
| Operating costs and expenses | (16,712) | (16,245) | (467) | 2.9 | % | ||||||||||||||||||
| Operating earnings | 1,897 | 1,768 | 129 | 7.3 | % | ||||||||||||||||||
| Operating margin | 10.2 | % | 9.8 | % | |||||||||||||||||||
Our consolidated revenue increased in the first six months of 2021 driven by growth in each of our defense segments, including increases in U.S. Navy ship construction in our Marine Systems segment, international military vehicle programs in our Combat Systems segment and IT services in our Technologies segment. These increases were offset partially by fewer aircraft deliveries in our Aerospace segment reflecting last year’s decision to lower aircraft production rates in response to the COVID-19 pandemic. On a quarter-over-quarter basis, increases in revenue across each of the defense segments were offset by fewer aircraft deliveries in the Aerospace segment. Operating margin increased 140 basis points in the second quarter of 2021 and 40 basis points in the first six months of 2021 due to margin improvement across all segments.
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.
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AEROSPACE
| Three Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 1,622 | $ | 1,974 | $ | (352) | (17.8) | % | |||||||||||||||
| Operating earnings | 195 | 159 | 36 | 22.6 | % | ||||||||||||||||||
| Operating margin | 12.0 | % | 8.1 | % | |||||||||||||||||||
| Gulfstream aircraft deliveries (in units) | 21 | 32 | (11) | (34.4) | % | ||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 3,509 | $ | 3,665 | $ | (156) | (4.3) | % | |||||||||||||||
| Operating earnings | 415 | 399 | 16 | 4.0 | % | ||||||||||||||||||
| Operating margin | 11.8 | % | 10.9 | % | |||||||||||||||||||
| Gulfstream aircraft deliveries (in units) | 49 | 55 | (6) | (10.9) | % | ||||||||||||||||||
Operating Results
The change in the Aerospace segment’s revenue in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| Aircraft manufacturing | $ | (460) | $ | (253) | |||||||
| Aircraft services and completions | 108 | 97 | |||||||||
| Total decrease | $ | (352) | $ | (156) | |||||||
Aircraft manufacturing revenue decreased in the second quarter and first six months of 2021 due to fewer aircraft deliveries reflecting the full impact of last year’s decision to reduce aircraft production rates in response to the COVID-19 pandemic. These decreases were offset partially by higher aircraft services and completions volume due to increased air travel driving additional demand for maintenance work and activity at our fixed-base operator (FBO) facilities.
The increase in the segment’s operating earnings in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| Aircraft manufacturing | $ | (76) | $ | (119) | |||||||
| Aircraft services and completions | 50 | 71 | |||||||||
| Impact of 2020 restructuring charge | 42 | 42 | |||||||||
| G&A/other expenses | 20 | 22 | |||||||||
| Total increase | $ | 36 | $ | 16 | |||||||
Aircraft manufacturing operating earnings were down in the second quarter and first six months of 2021 due to the planned reduced aircraft production and delivery rates and a less favorable mix of aircraft deliveries in the year-to-date period. In the first six months of 2021, aircraft manufacturing operating earnings were also impacted by mark-to-market adjustments related to aircraft that were in the G500 flight test program. These decreases were offset by increased aircraft services and completions operating earnings due to higher volume and mix of aircraft services. The Aerospace segment’s operating earnings and margin were also up due to restructuring actions taken in the second quarter of 2020 to adjust the workforce size to the revised production levels and lower net G&A/other expenses,
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including reduced R&D expenses. In total, the Aerospace segment’s operating margin increased 390 basis points in the second quarter of 2021 and 90 basis points in the first six months of 2021 compared with the prior-year periods.
2021 Outlook
We expect the Aerospace segment’s 2021 revenue to be about $8.2 billion. As scheduled customer deliveries increase in the second half of the year, operating margin is expected to improve to approximately 12.4% for the full year.
MARINE SYSTEMS
| Three Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 2,536 | $ | 2,471 | $ | 65 | 2.6 | % | |||||||||||||||
| Operating earnings | 210 | 200 | 10 | 5.0 | % | ||||||||||||||||||
| Operating margin | 8.3 | % | 8.1 | % | |||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 5,019 | $ | 4,717 | $ | 302 | 6.4 | % | |||||||||||||||
| Operating earnings | 410 | 384 | 26 | 6.8 | % | ||||||||||||||||||
| Operating margin | 8.2 | % | 8.1 | % | |||||||||||||||||||
Operating Results
The increase in the Marine Systems segment’s revenue in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| U.S. Navy ship construction | $ | 117 | $ | 384 | |||||||
| Commercial ship construction | (21) | (54) | |||||||||
| U.S. Navy ship engineering, repair and other services | (31) | (28) | |||||||||
| Total increase | $ | 65 | $ | 302 | |||||||
Revenue from U.S. Navy ship construction was up across our shipyards in the second quarter and first six months of 2021 due to increased volume on the Columbia-class submarine program, the Arleigh Burke-class (DDG-51) destroyer program and the Expeditionary Sea Base (ESB) auxiliary ship program. These increases were offset partially by lower commercial ship construction and submarine engineering volume. Overall, the Marine Systems segment’s operating margin increased 20 basis points in the second quarter of 2021 and 10 basis points in the first six months of 2021 as our shipyards continue to focus on operating efficiency and effectively managing workload growth.
2021 Outlook
We expect the Marine Systems segment’s 2021 revenue to be approximately $10.6 billion. Operating margin is expected to be approximately 8.4%.
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COMBAT SYSTEMS
| Three Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 1,899 | $ | 1,754 | $ | 145 | 8.3 | % | |||||||||||||||
| Operating earnings | 266 | 239 | 27 | 11.3 | % | ||||||||||||||||||
| Operating margin | 14.0 | % | 13.6 | % | |||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 3,719 | $ | 3,462 | $ | 257 | 7.4 | % | |||||||||||||||
| Operating earnings | 510 | 462 | 48 | 10.4 | % | ||||||||||||||||||
| Operating margin | 13.7 | % | 13.3 | % | |||||||||||||||||||
Operating Results
The increase in the Combat Systems segment’s revenue in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| International military vehicles | $ | 159 | $ | 241 | |||||||
| Weapons systems and munitions | (6) | 36 | |||||||||
| U.S. military vehicles | (8) | (20) | |||||||||
| Total increase | $ | 145 | $ | 257 | |||||||
Revenue from international military vehicles increased in the second quarter and first six months of 2021 due primarily to higher volume on wheeled armored vehicle programs, including contracts to produce armored combat support vehicles (ACSVs) and light armored vehicles (LAVs) for the Canadian government. Domestic Abrams and Stryker revenue was also somewhat higher in the second quarter and first six months of 2021. The Combat Systems segment’s operating margin increased 40 basis points in the second quarter and first six months of 2021 on a favorable product mix and continued cost reduction efforts.
2021 Outlook
We expect the Combat Systems segment’s 2021 revenue to be about $7.4 billion with operating margin of approximately 14.6%.
TECHNOLOGIES
| Three Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 3,163 | $ | 3,065 | $ | 98 | 3.2 | % | |||||||||||||||
| Operating earnings | 308 | 247 | 61 | 24.7 | % | ||||||||||||||||||
| Operating margin | 9.7 | % | 8.1 | % | |||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 6,362 | $ | 6,169 | $ | 193 | 3.1 | % | |||||||||||||||
| Operating earnings | 614 | 545 | 69 | 12.7 | % | ||||||||||||||||||
| Operating margin | 9.7 | % | 8.8 | % | |||||||||||||||||||
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Operating Results
The increase in the Technologies segment’s revenue in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| IT services | $ | 188 | $ | 285 | |||||||
| C4ISR* solutions | (90) | (92) | |||||||||
| Total increase | $ | 98 | $ | 193 | |||||||
*Command, control, communications, computers, intelligence, surveillance and reconnaissance
IT services revenue increased in the second quarter and first six months of 2021 due to the ramp up of several new programs. The decrease in C4ISR solutions revenue in the first six months of 2021 was due to approximately $115 of revenue in the prior-year period from a satellite communications business that was sold in the second quarter of 2020. Year-over-year growth for the segment was 5.1% for the first half excluding the impact of the sale. In the second quarter of 2021, C4ISR solutions revenue was also impacted by timing on several programs.
The Technologies segment’s operating margin increased 160 basis points in the second quarter of 2021 and 90 basis points in the first six months of 2021 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. Additionally, operating results in the second quarter of 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.
2021 Outlook
We expect the Technologies segment’s 2021 revenue to be approximately $13 billion with operating margin of around 9.8%.
CORPORATE
Corporate operating results consisted primarily of equity-based compensation expense and totaled $20 in the second quarter and $52 in the first six months of 2021 compared with $11 and $22 in the prior-year periods, respectively. Corporate operating costs are expected to be approximately $85 in 2021.
OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
| Three Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 5,160 | $ | 5,505 | $ | (345) | (6.3) | % | |||||||||||||||
| Operating costs | (4,259) | (4,607) | 348 | (7.6) | % | ||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 10,515 | $ | 10,395 | $ | 120 | 1.2 | % | |||||||||||||||
| Operating costs | (8,697) | (8,593) | (104) | 1.2 | % | ||||||||||||||||||
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The change in product revenue in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| Aircraft manufacturing | $ | (460) | $ | (253) | |||||||
| Ship construction | 96 | 330 | |||||||||
| Other, net | 19 | 43 | |||||||||
| Total (decrease) increase | $ | (345) | $ | 120 | |||||||
In the second quarter and first six months of 2021, aircraft manufacturing revenue decreased due to fewer aircraft deliveries. In the first six months of 2021, this decrease was more than offset by an increase in ship construction revenue, driven by higher U.S. Navy ship construction volume across our shipyards. In the second quarter and first six months of 2021, the primary drivers of the changes in product operating costs were the changes in volume on the programs described above.
SERVICE REVENUE AND OPERATING COSTS
| Three Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 4,060 | $ | 3,759 | $ | 301 | 8.0 | % | |||||||||||||||
| Operating costs | (3,446) | (3,249) | (197) | 6.1 | % | ||||||||||||||||||
| Six Months Ended | July 4, 2021 | June 28, 2020 | Variance | ||||||||||||||||||||
| Revenue | $ | 8,094 | $ | 7,618 | $ | 476 | 6.2 | % | |||||||||||||||
| Operating costs | (6,900) | (6,553) | (347) | 5.3 | % | ||||||||||||||||||
The increase in service revenue in the second quarter and first six months of 2021 consisted of the following:
| Second Quarter | Six Months | ||||||||||
| IT services | $ | 188 | $ | 285 | |||||||
| Aircraft services and completions | 108 | 97 | |||||||||
| Other, net | 5 | 94 | |||||||||
| Total increase | $ | 301 | $ | 476 | |||||||
Services revenue increased in the second quarter and first six months of 2021 due to the ramp up of several new IT services programs and higher aircraft services and completions revenue driven by additional maintenance work and FBO activity. The primary drivers of the increase 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% in the first six months of 2021 compared with 6.1% in the first six months of 2020. We expect G&A expenses as a percentage of revenue in 2021 to be generally consistent with 2020.
INTEREST, NET
Net interest expense was $232 in the first six months of 2021 compared with $239 in the prior-year period. See Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional
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information regarding our debt obligations, including interest rates. We expect 2021 net interest expense to be approximately $425, reflecting repayment of our scheduled debt maturities of $3 billion in 2021.
OTHER, NET
Net other income was $61 in the first six months of 2021 compared with $46 in the first six months of 2020. Other represents primarily the non-service components of pension and other post-retirement benefits, which were income in both periods. In 2021, we expect net other income to be approximately $115.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 16.3% in the first six months of 2021 compared with 15.5% in the prior-year period. For 2021, 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 $89.2 billion at the end of the second quarter of 2021 compared with $89.6 billion on April 4, 2021. 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 $130.3 billion on July 4, 2021.
The following table details the backlog and estimated potential contract value of each segment at the end of the second and first quarters of 2021:
| Funded | Unfunded | Total Backlog | Estimated Potential Contract Value | Total Estimated Contract Value | |||||||||||||||||||||||||
| July 4, 2021 | |||||||||||||||||||||||||||||
| Aerospace | $ | 13,155 | $ | 366 | $ | 13,521 | $ | 2,099 | $ | 15,620 | |||||||||||||||||||
| Marine Systems | 26,435 | 21,095 | 47,530 | 4,689 | 52,219 | ||||||||||||||||||||||||
| Combat Systems | 14,157 | 271 | 14,428 | 7,711 | 22,139 | ||||||||||||||||||||||||
| Technologies | 9,769 | 3,999 | 13,768 | 26,594 | 40,362 | ||||||||||||||||||||||||
| Total | $ | 63,516 | $ | 25,731 | $ | 89,247 | $ | 41,093 | $ | 130,340 | |||||||||||||||||||
| 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 | |||||||||||||||||||
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 second quarter of 2021 with backlog of $13.5 billion, up 13.3% from $11.9 billion on April 4, 2021.
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Orders in the second quarter of 2021 reflected strong demand across our aircraft portfolio – the second highest quarterly orders in more than five years. The segment’s book-to-bill ratio (orders divided by revenue) exceeded 2-to-1 in the second quarter of 2021, resulting in a book-to-bill of 1.3-to-1 over the trailing 12 months.
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 July 4, 2021, estimated potential contract value in the Aerospace segment was $2.1 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 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 $75.7 billion on July 4, 2021. In the second quarter of 2021, the Combat Systems and Technologies segments each achieved a book-to-bill ratio of 1-to-1. Overall, the defense segments achieved a book-to-bill ratio of 1.1-to-1 over the trailing twelve months. Estimated potential contract value in our defense segments was $39 billion on July 4, 2021. We received the following significant contract awards during the second quarter of 2021:
Marine Systems:
•$135 from the U.S. Navy to provide ongoing lead yard services for the Virginia-class submarine program and options totaling $1.6 billion of additional potential value.
•$100 from the Navy for maintenance and modernization work on the USS Pinckney, an Arleigh Burke-class (DDG-51) guided-missile destroyer.
•$65 from the Navy for maintenance and modernization work on the USS Hartford, a Los Angeles-class submarine.
•$55 from the Navy to provide ongoing lead yard services for the DDG-51 program.
Combat Systems:
•$620 from the U.S. Army to upgrade Stryker vehicles to the double-V-hull A1 configuration.
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•$435 from the Army to produce Stryker Initial Maneuver Short-Range Air Defense (IM-SHORAD) vehicles.
•$145 from the Army for the production of Hydra-70 rockets.
•$100 for various munitions and ordnance.
•$45 to produce mission control units for Abrams main battle tanks.
Technologies:
•$865 for several key contracts for classified customers.
•$160 to provide ship modernization services for the Navy. The contract has a maximum potential value of $730.
•$240 from the Centers for Medicare and Medicaid Services (CMS) for several contracts, including work to provide cloud services and software tools.
•$115 to provide enterprise information technology (IT) and cybersecurity services and solutions for the Department of Defense (DoD).
•$40 to provide IT support services and system engineering for the U.S. Department of Energy (DOE). The contract has a maximum potential value of $90.
•$80 to provide military information support operations for the DoD.
•$80 from the Environmental Protection Agency (EPA) to provide infrastructure support and applications hosting services.
•$80 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.
•$65 to provide training support for the Navy.
•$40 from the Navy to retrofit five Knifefish surface mine countermeasure systems with improved operational capabilities.
•$40 from the Army to provide continued software support and engineering for the Warfighter Information Network-Tactical (WIN-T) Increment 2 program.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We ended the second quarter of 2021 with a cash and equivalents balance of $3 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 six months of 2021 and 2020, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1.
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OPERATING ACTIVITIES
Cash provided by operating activities was $1.1 billion in the first six months of 2021 compared with $177 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), which is defined as current assets, excluding cash and equivalents, less current liabilities, excluding short-term debt and current portion of long-term debt. 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. While Aerospace OWC has decreased in the first six months of 2021, the timing of billings and payments in our defense segments resulted in net OWC growth.
INVESTING ACTIVITIES
Cash used by investing activities was $308 in the first six months of 2021 compared with $222 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 $306 in the first six months of 2021 compared with $406 in the same period in 2020. We expect capital expenditures to be approximately 2.5% of revenue in 2021.
FINANCING ACTIVITIES
Cash used by financing activities was $671 in the first six months of 2021 compared with cash provided of $1.5 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 the use of cash for 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 $1.4 billion and $501 in the first six months of 2021 and 2020, respectively, to repurchase our outstanding shares. On July 4, 2021, 14.5 million shares remained authorized by our board of directors for repurchase, representing 5.2% 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 $651 in the first six months of 2021 compared with $610 in the same period in 2020.
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. On July 15, 2021, we repaid an additional $500 of fixed-rate notes at the scheduled maturity. 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 six months of 2021, we received net proceeds of $2 billion from the issuance of commercial paper, which remained outstanding on July 4, 2021. Separately, we have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support
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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.
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:
| Six Months Ended | July 4, 2021 | June 28, 2020 | |||||||||
| Net cash provided by operating activities | $ | 1,118 | $ | 177 | |||||||
| Capital expenditures | (306) | (406) | |||||||||
| Free cash flow from operations | $ | 812 | $ | (229) | |||||||
| Cash flows as a percentage of net earnings: | |||||||||||
| Net cash provided by operating activities | 77 | % | 13 | % | |||||||
Free cash flow from operations | 56 | % | (17) | % | |||||||
Net Debt. We define net debt as short- and long-term debt (total debt) less cash and equivalents. We believe net debt is a useful measure for investors because it reflects the borrowings that support our operations and capital deployment strategy. We use net debt as an important indicator of liquidity and financial position. The following table reconciles net debt with total debt:
| July 4, 2021 | December 31, 2020 | ||||||||||
| Total debt | $ | 14,306 | $ | 12,998 | |||||||
| Less cash and equivalents | 2,950 | 2,824 | |||||||||
| Net debt | $ | 11,356 | $ | 10,174 | |||||||
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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. We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.
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. 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 $76 ($0.21) and $139 ($0.39) for the three- and six-month periods ended July 4, 2021, respectively. The aggregate impact of adjustments in contract estimates decreased our operating earnings (and diluted earnings per share) by $5 ($0.01) for the three-month period ended June 28, 2020, and increased our operating earnings (and diluted earnings per share) by $85 ($0.23) for the six-month period ended June 28, 2020. The 2020 results reflect an approximate $40 loss in our Technologies segment on a contract with a non-U.S. customer from schedule delays caused by COVID-related travel restrictions. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 4, 2021, or June 28, 2020.
Other critical accounting policies include long-lived assets and goodwill, commitments and contingencies, and retirement plans. For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2020.
GUARANTOR FINANCIAL INFORMATION
The outstanding notes described in Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, issued by General Dynamics Corporation (the parent), are fully and unconditionally guaranteed
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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-Q.
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 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
| Six Months Ended July 4, 2021 | Year Ended December 31, 2020 | ||||||||||
| Revenue | $ | 6,406 | $ | 13,065 | |||||||
| Operating costs and expenses, excluding G&A | (5,544) | (11,190) | |||||||||
| Net earnings | 295 | 738 | |||||||||
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BALANCE SHEET INFORMATION
| July 4, 2021 | December 31, 2020 | ||||||||||
| Cash and equivalents | $ | 2,081 | $ | 1,952 | |||||||
| Other current assets | 2,737 | 2,894 | |||||||||
| Noncurrent assets | 3,207 | 3,082 | |||||||||
| Total assets | $ | 8,025 | $ | 7,928 | |||||||
| Short-term debt and current portion of long-term debt | $ | 2,499 | $ | 2,998 | |||||||
| Other current liabilities | 2,615 | 2,944 | |||||||||
| Long-term debt | 11,416 | 9,922 | |||||||||
| Other noncurrent liabilities | 5,287 | 5,645 | |||||||||
| Total liabilities | $ | 21,817 | $ | 21,509 | |||||||
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of July 4, 2021. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on July 4, 2021, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the quarter ended July 4, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The certifications of the company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “outlook,” “estimates,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples include projections of revenue, earnings, operating margin, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog. In making these statements we rely on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected
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future developments as well as other factors we consider appropriate under the circumstances. We believe our estimates and judgments are reasonable based on information available to us at the time. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation, the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. These factors include:
•general U.S. and international political and economic conditions;
•the negative impact of the COVID-19 pandemic, or other similar outbreaks;
•decreases in U.S. government defense spending or changing priorities within the defense budget;
•termination of government contracts due to unilateral government action;
•differences in anticipated and actual program performance, including the ability to perform within estimated costs, and performance issues with key suppliers and subcontractors;
•expected recovery on contract claims and requests for equitable adjustment;
•changing customer demand for business aircraft, including the effects of economic conditions on the business-aircraft market;
•potential for changing prices for energy and raw materials;
•the status or outcome of legal and/or regulatory proceedings;
•potential effects of audits and reviews by government agencies of our government contract performance, compliance and internal control systems and policies;
•risks and uncertainties relating to our acquisitions and joint ventures; and
•potential for cybersecurity events and other disruptions.
All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to General Dynamics or any person acting on our behalf are qualified by the cautionary statements in this section. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report. These factors may be revised or supplemented in subsequent reports on SEC Forms 10-Q and 8-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information relating to legal proceedings, see Note M to the unaudited Consolidated Financial Statements in Part I, Item 1.
ITEM 1A. RISK FACTORS
There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2020.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about our second-quarter purchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
| Period | Total Number of Shares | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Number of Shares That May Yet Be Purchased Under the Program | ||||||||||||||||||||||
| Shares Purchased Pursuant to Share Buyback Program | ||||||||||||||||||||||||||
| 4/5/21-5/2/21 | 768,720 | $ | 184.02 | 768,720 | 6,941,409 | |||||||||||||||||||||
| 5/3/21-5/30/21 | 1,095,491 | 190.77 | 1,095,491 | 5,845,918 | ||||||||||||||||||||||
| 5/31/21-7/4/21 | 1,389,159 | 189.96 | 1,389,159 | 14,456,759 | ||||||||||||||||||||||
| Shares Delivered or Withheld Pursuant to Restricted Stock Vesting* | ||||||||||||||||||||||||||
| 4/5/21-5/2/21 | 177 | 181.51 | ||||||||||||||||||||||||
| 5/3/21-5/30/21 | 493 | 190.44 | ||||||||||||||||||||||||
| 5/31/21-7/4/21 | 800 | 192.46 | ||||||||||||||||||||||||
| 3,254,840 | $ | 188.83 | ||||||||||||||||||||||||
*Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the statutory tax withholding due upon vesting of the restricted shares.
On June 2, 2021, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding common stock on the open market. We repurchased 3.3 million shares in the second quarter of 2021. On July 4, 2021, 14.5 million shares remained authorized by our board of directors for repurchase.
We did not make any unregistered sales of equity securities in the second quarter of 2021.
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ITEM 6. EXHIBITS
3.2 Amended and Restated Bylaws of General Dynamics Corporation (as amended effective June 2, 2021) (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Securities and Exchange Commission on June 4, 2021)
4.1 Third Supplemental Indenture, dated as of May 10, 2021, among General Dynamics Corporation, the Guarantors named therein and The Bank of New York Mellon, as Trustee (includes forms of 1.150% Notes due 2026, 2.250% Notes due 2031 and 2.850% Notes due 2041) (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Securities and Exchange Commission on May 10, 2021)
101.INS Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
* Filed or furnished electronically herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GENERAL DYNAMICS CORPORATION | ||||||||
| by | /s/ William A. Moss | |||||||
| William A. Moss | ||||||||
| Vice President and Controller | ||||||||
| (Authorized Officer and Chief Accounting Officer) | ||||||||
| Dated: July 28, 2021 | ||||||||
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