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GD General Dynamics




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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 March 29, 2020
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-3671
    
GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1673581
State or other jurisdiction of incorporation or organization I.R.S. employer identification no.
     
     
11011 Sunset Hills RoadReston,Virginia 20190
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 classTrading Symbol(s)Name of each exchange on which registered
Common StockGDNew York Stock Exchange

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.
Large accelerated filer ü Accelerated filer ___ Non-accelerated filer ___
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
286,864,540 shares of the registrant’s common stock, $1 par value per share, were outstanding on March 29, 2020.





INDEX


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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)March 29, 2020 March 31, 2019
Revenue:   
Products$4,890
 $5,251
Services3,859
 4,010
 8,749

9,261
Operating costs and expenses:   
Products(3,983) (4,235)
Services(3,278) (3,398)
General and administrative (G&A)(547) (614)
 (7,808) (8,247)
Operating earnings941
 1,014
Interest, net(107) (117)
Other, net14
 18
Earnings before income tax848

915
Provision for income tax, net(142) (170)
Net earnings$706

$745
    
Earnings per share   
Basic$2.45
 $2.59
Diluted$2.43
 $2.56
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.


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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 Three Months Ended
(Dollars in millions)March 29, 2020 March 31, 2019
Net earnings$706
 $745
(Losses) gains on cash flow hedges(99) 17
Unrealized gains on marketable securities1
 
Foreign currency translation adjustments(239) 31
Change in retirement plans’ funded status77
 63
Other comprehensive (loss) income, pretax(260) 111
Benefit (provision) for income tax, net8
 (16)
Other comprehensive (loss) income, net of tax(252) 95
Comprehensive income$454

$840
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.


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CONSOLIDATED BALANCE SHEET

 (Unaudited)  
(Dollars in millions)March 29, 2020 December 31, 2019
    
ASSETS   
Current assets:   
Cash and equivalents$5,330
 $902
Accounts receivable3,547
 3,544
Unbilled receivables7,938
 7,857
Inventories6,852
 6,306
Other current assets1,074
 1,171
Total current assets24,741

19,780
Noncurrent assets:   
Property, plant and equipment, net4,537
 4,475
Intangible assets, net2,259
 2,315
Goodwill19,653
 19,677
Other assets2,520
 2,594
Total noncurrent assets28,969

29,061
Total assets$53,710

$48,841
    
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Short-term debt and current portion of long-term debt$5,047
 $2,920
Accounts payable2,788
 3,162
Customer advances and deposits6,825
 7,148
Other current liabilities3,780
 3,571
Total current liabilities18,440

16,801
Noncurrent liabilities:   
Long-term debt12,951
 9,010
Other liabilities9,119
 9,453
Commitments and contingencies (see Note M)


 


Total noncurrent liabilities22,070

18,463
Shareholders’ equity:   
Common stock482
 482
Surplus3,015
 3,039
Retained earnings31,983
 31,633
Treasury stock(17,809) (17,358)
Accumulated other comprehensive loss(4,471) (4,219)
Total shareholders’ equity13,200

13,577
Total liabilities and shareholders equity
$53,710

$48,841
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.

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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 Three Months Ended
(Dollars in millions)March 29, 2020 March 31, 2019
Cash flows from operating activities - continuing operations:   
Net earnings$706
 $745
Adjustments to reconcile net earnings to net cash from operating activities:  
Depreciation of property, plant and equipment122
 114
Amortization of intangible and finance lease right-of-use assets90
 91
Equity-based compensation expense30
 40
Deferred income tax benefit(28) (10)
(Increase) decrease in assets, net of effects of business acquisitions:   
Accounts receivable(33) 49
Unbilled receivables(78) (873)
Inventories(546) (210)
Increase (decrease) in liabilities, net of effects of business acquisitions:   
Accounts payable(375) (167)
Customer advances and deposits(373) (623)
Other, net(181) 49
Net cash used by operating activities(666) (795)
Cash flows from investing activities:   
Capital expenditures(185) (181)
Other, net8
 (6)
Net cash used by investing activities(177) (187)
Cash flows from financing activities:   
Proceeds from fixed-rate notes3,960
 
Proceeds from commercial paper, net2,271
 1,010
Purchases of common stock(449) (133)
Dividends paid(295) (268)
Other, net(202) 88
Net cash provided by financing activities5,285
 697
Net cash used by discontinued operations(14) (5)
Net increase (decrease) in cash and equivalents4,428
 (290)
Cash and equivalents at beginning of period902
 963
Cash and equivalents at end of period$5,330
 $673
Supplemental cash flow information:   
Income tax payments, net$(43) $(37)
Interest payments$(66) $(48)
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these financial statements.


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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
December 31, 2019$482
 $3,039
 $31,633
 $(17,358) $(4,219) $13,577
Cumulative-effect adjustment*
 
 (37) 
 
 (37)
Net earnings
 
 706
 
 
 706
Cash dividends declared
 
 (319) 
 
 (319)
Equity-based awards
 (24) 
 50
 
 26
Shares purchased
 
 
 (501) 
 (501)
Other comprehensive loss
 
 
 
 (252) (252)
March 29, 2020$482
 $3,015
 $31,983
 $(17,809) $(4,471) $13,200
            
December 31, 2018$482
 $2,946
 $29,326
 $(17,244) $(3,778) $11,732
Net earnings
 
 745
 
 
 745
Cash dividends declared
 
 (290) 
 
 (290)
Equity-based awards
 (9) 
 47
 
 38
Shares purchased
 
 
 (86) 
 (86)
Other comprehensive income
 
 
 
 95
 95
March 31, 2019$482
 $2,937
 $29,781
 $(17,283) $(3,683) $12,234
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. See Note A for additional details.



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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; combat vehicles, weapons systems and munitions; information technology (IT) services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) solutions; and shipbuilding and ship repair.
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. 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-month period ended March 29, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
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-month periods ended March 29, 2020, and March 31, 2019.
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, 2019.
Use of Estimates and Other Uncertainties. The Coronavirus (COVID-19) outbreak has caused significant disruptions to national and global economies. Our U.S.-based businesses are designated as national critical infrastructure companies by the U.S. Department of Homeland Security and, as such, have been required to stay open. Within our Aerospace segment, quarantine and travel restrictions in connection with the outbreak have delayed aircraft deliveries and impacted some supply chain providers. Our defense business has experienced minimal disruptions to date. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak’s duration and its broader impact.

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The nature of our business requires that we make estimates and assumptions in accordance with GAAP. These estimates and assumptions 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. The COVID-19 outbreak has impacted these estimates and assumptions and will continue to do so. The accounting for long-term contracts requires the use of estimates (see Note C). Our estimates at the end of the first quarter assumed no material impact from the disruptions caused by COVID-19. This assumption was based in part on the expectation that COVID-related costs will be reimbursed by our customers. The United States and other governments have taken steps, such as the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and U.S. Department of Defense (DoD) guidance, to provide relief. Through these government actions and our contract provisions, we will seek reimbursement of these costs. As the process for reimbursement has not been finalized, it is possible that our actual reimbursement could be less than 100% of our costs, resulting in a potentially unfavorable impact on the profitability of our contracts. Given the uncertainties, we are unable to estimate an amount or range, if any, of reasonably possible loss for costs that may not be reimbursed.
The company is also monitoring for other long-term impacts of the pandemic, such as the impairment of goodwill, intangibles or other long-lived assets. As of the end of the quarter, we have not identified a triggering event requiring an impairment test.
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:
 March 29, 2020 December 31, 2019
PP&E$9,932
 $9,761
Accumulated depreciation(5,395) (5,286)
PP&E, net$4,537
 $4,475

Accounting Standards Updates. Effective January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes how entities account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. The ASU requires a number of changes to the assessment of credit losses, including the utilization of an expected credit loss model, which requires consideration of a broader range of information to estimate expected credit losses over the entire lifetime of the asset, including losses where probability is considered remote. Additionally, the standard requires the estimation of lifetime expected losses for trade receivables and contract assets that are classified as current. We adopted the standard on a modified retrospective basis and recognized the cumulative effect as a $37 decrease to retained earnings on the date of adoption.
There are other accounting standards that have been issued by the Financial Accounting Standards Board but are not yet effective. These standards are not expected to have a material impact on our results of operations, financial condition or cash flows.


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B. GOODWILL AND INTANGIBLE ASSETS
Goodwill. The changes in the carrying amount of goodwill by reporting unit were as follows:
 Aerospace Combat Systems Information Technology Mission Systems Marine Systems 
Total
Goodwill
December 31, 2019 (a)$2,831
 $2,681
 $9,700
 $4,168
 $297
 $19,677
Acquisitions (b)20
 
 
 
 
 20
Other (c)20
 (58) 
 (6) 
 (44)
March 29, 2020 (a)$2,871
 $2,623
 $9,700
 $4,162
 $297

$19,653

(a)Goodwill in the Information Technology and Mission Systems reporting units is net of $536 and $1.3 billion of accumulated impairment losses, respectively.
(b)Includes a business acquired in our Aerospace segment and adjustments during the purchase price allocation period.
(c)Consists primarily of adjustments for foreign currency translation.
Intangible Assets. Intangible assets consisted of the following:
 Gross Carrying Amount (a)Accumulated AmortizationNet Carrying Amount Gross Carrying Amount (a)Accumulated AmortizationNet Carrying Amount
 March 29, 2020 December 31, 2019
Contract and program
    intangible assets (b)
$3,784
$(1,839)$1,945
 $3,776
$(1,779)$1,997
Trade names and trademarks478
(201)277
 474
(195)279
Technology and software164
(128)36
 164
(126)38
Other intangible assets158
(157)1
 159
(158)1
Total intangible assets$4,584
$(2,325)$2,259
 $4,573
$(2,258)$2,315
(a)Changes in gross carrying amounts consist primarily of adjustments for acquired intangible assets and foreign currency translation.
(b)Consists of acquired backlog and probable follow-on work and associated customer relationships.
Amortization expense is included in operating costs and expenses in the Consolidated Statement of Earnings. Amortization expense for intangible assets was $66 and $70 for the three-month periods ended March 29, 2020, and March 31, 2019, respectively.

C. 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 lifecycle (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 75% of our revenue for the three-month periods ended March 29, 2020, and March 31, 2019, 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 25% of our revenue for the three-month periods ended March 29, 2020, and March 31, 2019, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in

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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 March 29, 2020, we had $85.7 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 55% of our remaining performance obligations as revenue by year-end 2021, an additional 30% by year-end 2023 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 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.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:
Three Months EndedMarch 29, 2020 March 31, 2019
Revenue$90
 $96
Operating earnings90
 68
Diluted earnings per share$0.25
 $0.18

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended March 29, 2020, or March 31, 2019.

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Revenue by Category. Our portfolio of products and services consists of approximately 11,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.
Revenue by major products and services was as follows:
Three Months EndedMarch 29, 2020 March 31, 2019
Aircraft manufacturing and completions$1,194
 $1,733
Aircraft services497
 507
Total Aerospace1,691

2,240
Military vehicles1,146
 1,134
Weapons systems, armament and munitions433
 401
Engineering and other services129
 101
Total Combat Systems1,708

1,636
IT services1,988
 2,169
Total Information Technology1,988

2,169
C4ISR solutions1,116
 1,158
Total Mission Systems1,116

1,158
Nuclear-powered submarines1,560
 1,377
Surface ships462
 446
Repair and other services224
 235
Total Marine Systems2,246

2,058
Total revenue$8,749

$9,261


Revenue by contract type was as follows:
Three Months Ended March 29, 2020Aerospace Combat Systems Information Technology Mission Systems Marine Systems 
Total
Revenue
Fixed-price$1,478
 $1,465
 $769
 $620
 $1,569
 $5,901
Cost-reimbursement
 229
 893
 454
 675
 2,251
Time-and-materials213
 14
 326
 42
 2
 597
Total revenue$1,691

$1,708

$1,988

$1,116

$2,246

$8,749
Three Months Ended March 31, 2019           
Fixed-price$2,040
 $1,416
 $921
 $651
 $1,416
 $6,444
Cost-reimbursement
 211
 841
 463
 640
 2,155
Time-and-materials200
 9
 407
 44
 2
 662
Total revenue$2,240

$1,636

$2,169

$1,158

$2,058

$9,261
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.

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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.
Revenue by customer was as follows:
Three Months Ended March 29, 2020Aerospace Combat Systems Information Technology Mission Systems Marine Systems 
Total
Revenue
U.S. government:           
DoD$161
 $888
 $849
 $788
 $2,159
 $4,845
Non-DoD
 3
 1,078
 106
 1
 1,188
Foreign Military Sales (FMS)18
 89
 4
 9
 49
 169
Total U.S. government179

980

1,931

903

2,209

6,202
U.S. commercial845
 55
 48
 33
 33
 1,014
Non-U.S. government16
 663
 9
 143
 3
 834
Non-U.S. commercial651
 10
 
 37
 1
 699
Total revenue$1,691

$1,708

$1,988

$1,116

$2,246

$8,749
Three Months Ended March 31, 2019           
U.S. government:           
DoD$123
 $793
 $950
 $784
 $1,975
 $4,625
Non-DoD
 3
 1,166
 135
 
 1,304
FMS15
 79
 5
 9
 44
 152
Total U.S. government138

875

2,121

928

2,019

6,081
U.S. commercial1,329
 50
 40
 35
 36
 1,490
Non-U.S. government59
 701
 8
 166
 2
 936
Non-U.S. commercial714
 10
 
 29
 1
 754
Total revenue$2,240
 $1,636
 $2,169
 $1,158
 $2,058
 $9,261
Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the three-month period ended March 29, 2020, were not materially impacted by any other factors.

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Revenue recognized for the three-month periods ended March 29, 2020, and March 31, 2019, that was included in the contract liability balance at the beginning of each year was $1.2 billion and $1.7 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.

D. EARNINGS PER SHARE
We compute basic earnings per share (EPS) using net earnings for the period and the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted stock and restricted stock units (RSUs).
Basic and diluted weighted average shares outstanding were as follows (in thousands):
Three Months EndedMarch 29, 2020 March 31, 2019
Basic weighted average shares outstanding288,569
 287,917
Dilutive effect of stock options and restricted stock/RSUs*1,374
 2,974
Diluted weighted average shares outstanding289,943
 290,891

* 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 5,908 and 3,975 for the three-month periods ended March 29, 2020, and March 31, 2019, 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; and
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 March 29, 2020, or December 31, 2019.
Our financial instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable and payable on the unaudited Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on March 29, 2020, and December 31, 2019, and the basis for determining their fair values:

14



 
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)March 29, 2020
Measured at fair value:         
    Marketable securities held in trust:         
        Cash and equivalents$3
 $3
 $
 $3
 $
        Available-for-sale debt securities148
 148
 
 148
 
        Equity securities50
 50
 50
 
 
    Other investments4
 4
 
 
 4
    Cash flow hedges(53) (53) 
 (53) 
Measured at amortized cost:         
    Short- and long-term debt principal(18,132) (18,720) 
 (18,720) 

 December 31, 2019
Measured at fair value:         
    Marketable securities held in trust:         
        Cash and equivalents$24
 $24
 $11
 $13
 $
        Available-for-sale debt securities129
 129
 
 129
 
        Equity securities54
 54
 54
 
 
    Other investments4
 4
 
 
 4
    Cash flow hedges26
 26
 
 26
 
Measured at amortized cost:         
    Short- and long-term debt principal(12,005) (12,339) 
 (12,339) 

Our Level 1 assets include investments in publicly traded equity securities valued using quoted prices from the market exchanges. The fair value of our Level 2 assets and liabilities is determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets. Our Level 3 assets include direct private equity investments that are measured using inputs unobservable to a marketplace participant.

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:
 March 29, 2020 December 31, 2019
Deferred tax asset$35
 $33
Deferred tax liability(435) (481)
Net deferred tax liability$(400) $(448)

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 2017 and is completing its review of our 2018 tax year.
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

15



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 March 29, 2020, was not material to our results of operations, financial condition or cash flows. In addition, there are 0 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
Unbilled receivables represent revenue recognized on long-term contracts (contract costs and estimated profits) less associated advances and progress billings. These amounts will be billed in accordance with the agreed-upon contractual terms. Unbilled receivables consisted of the following:
 March 29, 2020 December 31, 2019
Unbilled revenue$33,385
 $33,481
Advances and progress billings(25,447) (25,624)
Net unbilled receivables$7,938

$7,857

On March 29, 2020, and December 31, 2019, net unbilled receivables included $2.4 billion and $2.9 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 balance. In March 2020, we finalized a new agreement with the customer that included a revised payment schedule. Under the new agreement, we received two $500 progress payments, one in each of the first and second quarters of 2020. Further progress payments will be due annually that will liquidate the net unbilled receivables balance over the next few years.

H. INVENTORIES
The majority of our inventories are for business-jet aircraft. Our inventories are stated at the lower of cost or net realizable value. Work in process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value.

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Inventories consisted of the following:
 March 29, 2020 December 31, 2019
Work in process$4,602
 $4,419
Raw materials1,684
 1,733
Finished goods475
 30
Pre-owned aircraft91
 124
Total inventories$6,852
 $6,306

The increase in total inventories was due primarily to delays in Gulfstream aircraft deliveries in our Aerospace segment caused by quarantine and travel restrictions resulting from the COVID-19 outbreak.


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I. DEBT
Debt consisted of the following:
  March 29, 2020 December 31, 2019
Fixed-rate notes due:Interest rate:   
May 20202.875%$2,000
 $2,000
May 20213.000%2,000
 2,000
July 20213.875%500
 500
November 20222.250%1,000
 1,000
May 20233.375%750
 750
August 20231.875%500
 500
November 20242.375%500
 500
April 20253.250%750
 
May 20253.500%750
 750
August 20262.125%500
 500
April 20273.500%750
 
November 20272.625%500
 500
May 20283.750%1,000
 1,000
April 20303.625%1,000
 
April 20404.250%750
 
November 20423.600%500
 500
April 20504.250%750
 
Floating-rate notes due:    
May 20203-month LIBOR + 0.29%500
 500
May 20213-month LIBOR + 0.38%500
 500
Commercial paper1.370%2,273
 
OtherVarious359
 505
Total debt principal 18,132
 12,005
Less unamortized debt issuance
    costs and discounts
 134
 75
Total debt 17,998
 11,930
Less current portion 5,047
 2,920
Long-term debt $12,951
 $9,010

In March 2020, we issued $4 billion of fixed-rate notes. The proceeds will be used to repay $2.5 billion of fixed- and floating-rate notes maturing in May 2020 and for general corporate purposes, including the repayment of a portion of our borrowings under our commercial paper program as they mature. We also amended two of our credit facilities to, among other things, extend their expiration dates.
On March 29, 2020, we had $2.3 billion of commercial paper outstanding with a dollar-weighted average interest rate of 1.370%. 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 2021, 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 Securities and Exchange Commission that allows us to access the debt markets.

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Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all covenants and restrictions on March 29, 2020.

J. OTHER LIABILITIES
A summary of significant other liabilities by balance sheet caption follows:
 March 29, 2020 December 31, 2019
    
Salaries and wages$814
 $941
Workers’ compensation305
 306
Retirement benefits290
 296
Operating lease liabilities259
 252
Fair value of cash flow hedges129
 32
Other (a)1,983
 1,744
Total other current liabilities$3,780
 $3,571
    
Retirement benefits$5,024
 $5,172
Operating lease liabilities1,155
 1,251
Customer deposits on commercial contracts659
 709
Deferred income taxes435
 481
Other (b)1,846
 1,840
Total other liabilities$9,119
 $9,453
(a)Consists 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)Consists primarily of warranty reserves, workers’ compensation liabilities, finance lease liabilities and liabilities of discontinued operations.

K. SHAREHOLDERS EQUITY
Share Repurchases. Our board of directors from time to time authorizes management’s repurchase of outstanding shares of our common stock on the open market. On March 4, 2020, the board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding
stock. In the three-month period ended March 29, 2020, we repurchased 3.4 million of our outstanding shares for $501. On March 29, 2020, 13 million shares remained authorized by our board of directors for repurchase, representing 4.5% of our total shares outstanding. We repurchased 0.5 million shares for $86 in the three-month period ended March 31, 2019.
Dividends per Share. Our board of directors declared dividends of $1.10 and $1.02 per share for the three-month periods ended March 29, 2020, and March 31, 2019, respectively. We paid cash dividends of $295 and $268 for the three-month periods ended March 29, 2020, and March 31, 2019, 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 /(Losses) on Cash Flow HedgesUnrealized Gains on Marketable SecuritiesForeign Currency Translation AdjustmentsChanges in Retirement Plans’ Funded StatusAOCL
December 31, 2019$2
$
$288
$(4,509)$(4,219)
Other comprehensive loss, pretax(99)1
(239)77
(260)
Benefit for income tax, net23


(15)8
Other comprehensive loss, net of tax(76)1
(239)62
(252)
March 29, 2020$(74)$1
$49
$(4,447)$(4,471)

December 31, 2018$(71)$
$102
$(3,809)$(3,778)
Other comprehensive income, pretax17

31
63
111
Provision for income tax, net(2)

(14)(16)
Other comprehensive income, net of tax15

31
49
95
March 31, 2019$(56)$
$133
$(3,760)$(3,683)

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
We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivative financial instruments for trading or speculative purposes.
Foreign Currency Risk. Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale contracts, designed to offset and minimize our risk. The dollar-weighted two-year average maturity of these instruments generally matches the duration of the activities that are at risk.
Interest Rate Risk. Our financial instruments subject to interest rate risk include variable-rate commercial paper and fixed- and floating-rate long-term debt obligations. We entered into derivative

19



financial instruments, specifically interest rate swap contracts, to eliminate our floating-rate interest risk. 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 protect us from these risks. Some of the protective terms included in our contracts are considered derivative financial instruments but are not accounted for separately, because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk. Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On March 29, 2020, and December 31, 2019, we held $5.3 billion and $902 in cash and equivalents, respectively, but held no marketable securities other than those held in trust to meet some of our obligations under workers’ compensation and non-qualified supplemental executive retirement plans. On March 29, 2020, and December 31, 2019, we held marketable securities in trust of $201 and $207, respectively. These marketable securities are reflected at fair value on the Consolidated Balance Sheet in other current and noncurrent assets. See Note E for additional details.
Hedging Activities. We had notional forward exchange and interest rate swap contracts outstanding of $4.6 billion and $5 billion on March 29, 2020, and December 31, 2019, respectively. These derivative financial instruments are cash flow hedges, and are reflected at fair value on the Consolidated Balance Sheet in other current assets and liabilities. See Note E for additional details.
Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in AOCL until the underlying transaction is reflected in earnings. Alternatively, gains and losses on derivative financial instruments that do not qualify for hedge accounting are recorded each period in earnings. All gains and losses from derivative financial instruments recognized in the Consolidated Statement of Earnings are presented in the same line item as the underlying transaction, either operating costs and expenses or interest expense.
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-month periods ended March 29, 2020, and March 31, 2019. 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-month periods ended March 29, 2020, and March 31, 2019, 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 March 29, 2020, or December 31, 2019.
Foreign Currency Financial Statement Translation. We translate foreign currency balance sheets from our international businesses’ functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and statements of earnings at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of AOCL.
We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations’ results into U.S. dollars. The impact of translating our non-U.S. operations’ revenue into U.S. dollars was not material to our results of operations for the three-month periods ended March 29,

20



2020, or March 31, 2019. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material for the three-month periods ended March 29, 2020, and March 31, 2019.

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

21



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 first quarter of 2020, the relator filed an 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.
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.

22



Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit, bank guarantees, surety bonds and other similar arrangements with financial institutions and insurance carriers totaling approximately $1.3 billion on March 29, 2020. In addition, from time to time and in the ordinary course of business, we contractually guarantee the payment or performance of our subsidiaries arising under certain contracts.
Aircraft Trade-ins. In connection with orders for new aircraft in contract backlog, our Aerospace segment has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are generally structured to establish the fair market value of the trade-in aircraft at a date generally 45 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Other trade-in commitments are structured to guarantee a pre-determined trade-in value. These commitments present more risk in the event of an adverse change in market conditions. In either case, any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction. As of March 29, 2020, the estimated change in fair market values from the date of the commitments was not material.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based generally on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion. Our other warranty obligations, primarily for business-jet aircraft, are included in other current and noncurrent liabilities on the Consolidated Balance Sheet.
The changes in the carrying amount of warranty liabilities for the three-month periods ended March 29, 2020, and March 31, 2019, were as follows:
Three Months EndedMarch 29, 2020 March 31, 2019
Beginning balance$619
 $480
Warranty expense26
 27
Payments(12) (24)
Adjustments
 (1)
Ending balance$633
 $482


N. RETIREMENT PLANS
We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits.

23



Net periodic defined-benefit pension and other post-retirement benefit (credit) cost for the three-month periods ended March 29, 2020, and March 31, 2019, consisted of the following:
 Pension BenefitsOther Post-retirement Benefits
Three Months EndedMarch 29, 2020 March 31, 2019March 29, 2020 March 31, 2019
Service cost$29
 $28
$2
 $2
Interest cost123
 150
7
 9
Expected return on plan assets(234) (228)(9) (9)
Recognized net actuarial loss (gain)79
 70
(1) (2)
Amortization of prior service credit(4) (4)
 (1)
Net periodic benefit (credit) cost$(7) $16
$(1) $(1)

Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense segments. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and other post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent we consider recovery of the cost to be probable based on our backlog and probable follow-on contracts, we defer the excess in other contract costs in other current assets on the Consolidated Balance Sheet until the cost is allocable to contracts. For other plans, the amount allocated to contracts and included in revenue has exceeded the plans’ cumulative benefit cost. We have similarly deferred recognition of these excess earnings on the Consolidated Balance Sheet.

O. SEGMENT INFORMATION
We have 5 operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We organize our segments in accordance with the nature of products and services offered. We measure each segment’s profitability based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our segments.
Summary financial information for each of our segments follows:
 RevenueOperating Earnings
Three Months EndedMarch 29, 2020March 31, 2019March 29, 2020March 31, 2019
Aerospace$1,691
$2,240
$240
$328
Combat Systems1,708
1,636
223
206
Information Technology1,988
2,169
150
156
Mission Systems1,116
1,158
148
148
Marine Systems2,246
2,058
184
180
Corporate

(4)(4)
Total$8,749
$9,261
$941
$1,014

Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) in other income (expense) in the Consolidated Statement of Earnings. As described in Note N, in our defense segments, pension and other post-retirement

24



benefit costs are recoverable contract costs. Therefore, the non-service cost components are included in the operating results of these segments, but an offset is reported in Corporate.

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; combat vehicles, weapons systems and munitions; information technology (IT) services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) solutions; and shipbuilding and ship repair.
Our company is organized into five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems. We refer to the latter four segments collectively as our defense segments. Our primary customer is 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 2019 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.
BUSINESS ENVIRONMENT
The ongoing outbreak of Coronavirus (COVID-19) has caused significant disruptions to national and global economies. As an essential business, we have continued to conduct our operations to the fullest extent possible, while responding to the outbreak with actions that include:
implementing measures to protect the health and safety of our employees;
modifying employee work locations and schedules where possible and permitted under our contracts;
coordinating closely with our suppliers and customers;
instituting various aspects of our business continuity programs; and
planning for and working aggressively to mitigate disruptions that may occur.
While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak’s duration and its broader impact. See the Risk Factors in Part II, Item 1A, regarding the COVID-19 outbreak, as well as set forth in our most recent Form 10-K filing addressing additional risks facing our business, which may be affected by the COVID-19 outbreak.
The United States and other governments have taken a number of steps to respond to the outbreak and to support economic activity and liquidity in the capital markets. In the United States, the adoption of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) provides various forms of relief. The CARES Act includes provisions that allow agencies to reimburse contractors for payment to workers who are prevented from working due to COVID-19 facility closures or other restrictions. In addition, our U.S.-based businesses have been designated as critical infrastructure by the U.S. Department of Homeland Security and, as such, have been required to stay open. The DoD has issued guidance on managing the

25



impacts of COVID-19 on defense contracts, such as requests for equitable adjustments and other contractual mechanisms to address cost, schedule and performance impacts on contracts. In late March 2020, the DoD also increased progress payment rates and reduced retention rates on certain contracts to provide liquidity to federal contractors and their suppliers. Outside of the United States, other governments have established various government workforce programs, which can support business continuity for our foreign operations. We are assessing the benefits and limitations of the actions taken by the United States and other governments and will continue to monitor these developments as they evolve. See also Note A to the unaudited Consolidated Financial Statements in Part I, Item 1 for additional information about our use of estimates and other uncertainties.
Our U.S. government business experienced minimal disruptions in the first quarter, though we did experience, to a degree, reduced activities toward the end of the quarter due to select customer site closures and limited access to sites, slowdowns in the provision of materials from suppliers, and lower man-hours at manufacturing sites. Internationally, our defense business has experienced site closures in some countries. Within our Aerospace segment, quarantine and travel restrictions in connection with the outbreak delayed Gulfstream aircraft deliveries in the first quarter. Order activity for new aircraft was progressing well until the last two weeks of the quarter, when activity largely ceased. Typically, the last few weeks of a quarter experience the most order activity. The Review of Operating Segments includes additional information on the first quarter results for each of our segments.
Looking forward into the remainder of 2020, COVID-19 will continue to impact our businesses. We believe the continued support by the DoD, and the U.S. government generally, of the defense industrial base will help mitigate any effects of program disruptions on our U.S. defense business. However, we will closely monitor our supply chain, continue to implement measures to provide a healthy and safe work environment and ensure we have an adequate employee base to meet our customers’ demands. Our non-U.S. defense business will be impacted to varying degrees based on the response of each country. In our Aerospace segment, wide-spread extension of travel restrictions will continue to impact aircraft service volume and could delay some future deliveries if customers have difficulty traveling to take possession of their aircraft. In addition, while we continue to work closely with suppliers to mitigate COVID-19 impacts, some suppliers could experience additional delays. The supplier disruptions along with efficiency impacts resulting from our efforts to comply with the Centers for Disease Control and Prevention (CDC) protocols in our facilities have impacted our productivity. In addition, should the large economies of the world experience a significant extended downturn from the pandemic, demand for our aerospace products would likely be impacted. We will continue to assess further potential consequences to our employees, business, supply chain and customers, and take actions to mitigate adverse outcomes.
We took actions in the first quarter to strengthen our liquidity and financial condition. In March 2020, we issued $4 billion of fixed-rate notes to repay $2.5 billion of fixed- and floating-rate notes that mature in May 2020 and for general corporate purposes, including the repayment of a portion of our borrowings under our commercial paper program as they mature. In addition to this long-term borrowing, we renewed our access to $5 billion of credit facilities through March 2021. While part of our pre-COVID-19 planning, this liquidity preserves our financial flexibility during the pandemic. We believe that our cash flows from operations and borrowing capacity are sufficient to support our short and long-term liquidity needs.


26



RESULTS OF OPERATIONS
INTRODUCTION
An understanding of our accounting practices is necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results.
In the Aerospace segment, we record revenue on contracts for new aircraft when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. Revenue associated with the segment’s custom completions of narrow-body and wide-body aircraft and the segment’s services businesses is recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, progress on aircraft completions, and the level and type of aircraft services performed during the period.
The majority of the Aerospace segment’s operating costs relates to new aircraft production on firm orders and consists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at aircraft delivery based on the estimated average unit cost in a production lot. While changes in the estimated average unit cost for a production lot impact the level of operating costs, the amount of operating costs reported in a given period is based largely on the number and type of aircraft delivered. Operating costs in the Aerospace segment’s completions and services businesses are recognized generally as incurred.
For new aircraft, operating earnings and margin are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft, and the mix of ultra-large-cabin, large-cabin and mid-cabin aircraft deliveries. Aircraft mix can also refer to the stage of program maturity for our aircraft models. A new aircraft model typically has lower margins in its initial production lots, and then margins generally increase as we realize efficiencies in the production process. Additional factors affecting the segment’s earnings and margin include the volume, mix and profitability of completions and services work performed, the market for pre-owned aircraft, and the level of general and administrative (G&A) and net research and development (R&D) costs incurred by the segment.
In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual contracts. Because costs are used as a measure of progress, year-over-year variances in cost result in corresponding variances in revenue, which we generally refer to as volume.
Operating earnings and margin in the defense segments are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value (or vice versa) that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- versus lower-margin work. Higher or lower margins can result from a

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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 EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$8,749
 $9,261
 $(512) (5.5)%
Operating costs and expenses(7,808) (8,247) 439
 (5.3)%
Operating earnings941
 1,014
 (73) (7.2)%
Operating margin10.8% 10.9%    
Our consolidated revenue and operating earnings decreased in the first quarter of 2020 driven by delays in aircraft deliveries in our Aerospace segment due to the COVID-19 outbreak. Operating margin decreased slightly in the first quarter of 2020 due to the reduced aircraft deliveries and a less favorable aircraft delivery mix in our Aerospace segment.

REVIEW OF OPERATING SEGMENTS
Following is a discussion of operating results and outlook for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note O to the unaudited Consolidated Financial Statements in Part I, Item 1.
AEROSPACE
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$1,691
 $2,240
 $(549) (24.5)%
Operating earnings240
 328
 (88) (26.8)%
Operating margin14.2% 14.6%    
Gulfstream aircraft deliveries (in units)

23
 34
 (11) (32.4)%
Operating Results
The change in the Aerospace segment’s revenue in the first quarter of 2020 consisted of the following:
Aircraft manufacturing$(552)
Aircraft services and completions3
Total decrease$(549)
Revenue was down in our Aerospace segment driven by delays in Gulfstream aircraft deliveries. Customers were unable to take delivery of 11 aircraft scheduled for delivery in the first quarter due to quarantine and travel restrictions resulting from the COVID-19 outbreak. The impact of these restrictions

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on aircraft service activity was less pronounced as the impact was not felt until the latter weeks of the quarter and was offset by strong service activity in the beginning of the quarter.
The change in the segment’s operating earnings in the first quarter of 2020 consisted of the following:
Aircraft manufacturing$(139)
Aircraft services and completions(1)
G&A/other expenses52
Total decrease$(88)
Operating earnings were down due to the delayed aircraft deliveries. This decrease was offset partially by lower net G&A/other expenses, including reduced R&D expenses. Overall, R&D expenses have been trending downward with the completion of the G500 and G600 aircraft test programs, and the first quarter of 2020 included higher supplier launch assistance associated with our aircraft development programs. In total, the Aerospace segment’s operating margin decreased 40 basis points due to the reduced number and mix of Gulfstream aircraft deliveries.
2020 Outlook
For the year, we had anticipated delivery of somewhat in excess of 150 Gulfstream aircraft. Due to supply chain disruptions and efficiency impacts resulting from our efforts to comply with CDC protocols, we have adjusted our production rate to 125-130 deliveries. Based on the reduction in deliveries and the anticipated impact of travel restrictions on the volume of aircraft services, we now expect the Aerospace segment’s 2020 revenue to be around $8.5 billion with operating earnings of approximately $1.15 billion.
COMBAT SYSTEMS
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$1,708
 $1,636
 $72
 4.4%
Operating earnings223
 206
 17
 8.3%
Operating margin13.1% 12.6%    
Operating Results
The increase in the Combat Systems segment’s revenue in the first quarter of 2020 consisted of the following:
U.S. military vehicles$65
Weapons systems and munitions49
International military vehicles(42)
Total increase$72
Revenue from U.S. military vehicles increased due primarily to higher volume on the U.S. Army’s Abrams M1A2 System Enhancement Package Version 3 (SEPv3) tank program. Weapons systems and munitions revenue was up due to increased volume on several products, including artillery and missile subcomponents. Revenue from international military vehicles decreased due to lower volume on various wheeled armored vehicle programs, offset partially by increased volume on the British Army’s AJAX armored fighting vehicle program.

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The Combat Systems segment’s operating earnings and margin were up due to the increased revenue as well as an unfavorable settlement in the first quarter of 2019 relating to a lease at a former operating site outside the United States.
INFORMATION TECHNOLOGY
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$1,988
 $2,169
 $(181) (8.3)%
Operating earnings150
 156
 (6) (3.8)%
Operating margin7.5% 7.2%    
Operating Results
The change in the Information Technology segment’s revenue in the first quarter of 2020 consisted of the following:
Intelligence and homeland security$(135)
Defense(32)
Federal civilian(14)
Total decrease$(181)
Revenue was down across the Information Technology segment due to the exit of non-core lines of business in 2019, the closure of some customer sites to all but mission critical personnel in connection with the COVID-19 outbreak, and the completion of several legacy programs in 2019 versus the start-up of new programs. The Information Technology segment’s operating margin was up 30 basis points compared with the prior-year period, reflecting improved performance and mix.
MISSION SYSTEMS
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$1,116
 $1,158
 $(42) (3.6)%
Operating earnings148
 148
 
  %
Operating margin13.3% 12.8%    
Operating Results
The change in the Mission Systems segment’s revenue in the first quarter of 2020 consisted of the following:
Space, intelligence and cyber systems$(33)
Ground systems and products(18)
Naval, air and electronic systems9
Total decrease$(42)
Revenue in the Mission Systems segment was down slightly in the first quarter of 2020 due to delayed customer shipments caused in part by customer site closures due to the COVID-19 outbreak. The Mission Systems segment’s operating margin increased 50 basis points due to favorable program mix, particularly in our ground systems and products business.

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MARINE SYSTEMS
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$2,246
 $2,058
 $188
 9.1%
Operating earnings184
 180
 4
 2.2%
Operating margin8.2% 8.7%    
Operating Results
The increase in the Marine Systems segment’s revenue in the first quarter of 2020 consisted of the following:
U.S. Navy ship construction$152
U.S. Navy ship engineering, repair and other services38
Commercial ship construction(2)
Total increase$188
Revenue from U.S. Navy ship construction was up due to higher volume on Block V of the Virginia-class submarine program and the Columbia-class submarine program, offset somewhat by lower Virginia-class Block IV volume timing and absenteeism at Bath Iron Works. Revenue from U.S. Navy ship engineering, repair and other services increased, driven by a higher volume of surface ship repair work.
The Marine Systems segment’s operating margin decreased 50 basis points due to a shift in mix and delays on a commercial ship contract.
2020 DEFENSE SEGMENTS OUTLOOK
As discussed, the impact of COVID-19 on our defense segments has not been material. While there is some modest pressure on revenue based on our experience to date, at current levels the impact is not sufficient to affect our full-year earnings for these businesses. Therefore, the full-year outlook for our defense businesses remains unchanged.
CORPORATE
Corporate operating results consisted of the following:
 March 29, 2020 March 31, 2019
Operating expense$(4) $(4)
Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. We are required to report the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) in other income (expense) in the Consolidated Statement of Earnings. In our defense segments, pension and other post-retirement benefit costs are recoverable contract costs. Therefore, the non-service cost components are included in the operating results of these segments, but an offset is reported in Corporate. In both periods, our stock option expense exceeded this offset.


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OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$4,890
 $5,251
 $(361) (6.9)%
Operating costs(3,983) (4,235) 252
 (6.0)%
The change in product revenue in the first quarter of 2020 consisted of the following:
Aircraft manufacturing$(552)
Ship construction148
Other, net43
Total decrease$(361)
Aircraft manufacturing revenue decreased due to delays in aircraft deliveries resulting from the COVID-19 outbreak. Revenue from ship construction increased due to higher volume on Block V of the Virginia-class submarine program and the Columbia-class submarine program, offset partially by lower Virginia-class Block IV volume timing. The primary drivers of the decrease in product operating costs were the changes in volume on the programs described above.
SERVICE REVENUE AND OPERATING COSTS
Three Months EndedMarch 29, 2020 March 31, 2019 Variance
Revenue$3,859
 $4,010
 $(151) (3.8)%
Operating costs(3,278) (3,398) 120
 (3.5)%
The change in service revenue in the first quarter of 2020 consisted of the following:
IT services$(181)
Ship engineering, repair and other services41
Other, net(11)
Total decrease$(151)
IT services revenue decreased due to the exit of non-core lines of business and the completion of several legacy programs in 2019 versus the start-up of new programs. Ship engineering, repair and other services revenue increased, driven by a higher volume of surface ship repair work. The primary drivers of the decrease in service operating costs were the changes in volume on the programs described above.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.3% in the first three months of 2020 compared with 6.6% in the first three months of 2019.
INTEREST, NET
Net interest expense was $107 in the first three months of 2020 compared with $117 in the prior-year period, reflecting lower interest expense associated with commercial paper issuances. See Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt

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obligations, including interest rates. We expect 2020 net interest expense to be approximately $490, reflecting the issuance of $4 billion of fixed-rate notes in March 2020.
OTHER, NET
Net other income was $14 in the first three months of 2020 compared with $18 in the first three months of 2019. These amounts represent primarily the non-service cost components of pension and other post-retirement benefits, which were net income items in both periods.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 16.7% in the first three months of 2020 compared with 18.6% in the prior-year period. The decrease is due to a variety of factors, including lower international taxes and slightly increased research tax credits. For 2020, we anticipate a full-year effective tax rate of approximately 17%.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $85.7 billion at the end of the first quarter of 2020 compared with $86.9 billion on December 31, 2019. Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note C to the unaudited Consolidated Financial Statements in Part I, Item 1. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $123.9 billion on March 29, 2020.
The following table details the backlog and estimated potential contract value of each segment at the end of the first quarter of 2020 and fourth quarter of 2019:
 Funded Unfunded Total Backlog Estimated Potential Contract Value 
Total
Estimated Contract Value
 March 29, 2020
Aerospace$12,998
 $274
 $13,272
 $2,837
 $16,109
Combat Systems14,373
 244
 14,617
 4,253
 18,870
Information Technology5,375
 4,127
 9,502
 18,638
 28,140
Mission Systems4,947
 229
 5,176
 7,957
 13,133
Marine Systems26,112
 17,053
 43,165
 4,460
 47,625
Total$63,805
 $21,927
 $85,732
 $38,145
 $123,877
          
 December 31, 2019
Aerospace$13,168
 $181
 $13,349
 $2,989
 $16,338
Combat Systems14,474
 439
 14,913
 4,322
 19,235
Information Technology4,839
 4,294
 9,133
 19,003
 28,136
Mission Systems5,037
 326
 5,363
 7,482
 12,845
Marine Systems20,012
 24,175
 44,187
 5,453
 49,640
Total$57,530
 $29,415
 $86,945
 $39,249
 $126,194

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AEROSPACE
Aerospace funded backlog represents new aircraft and custom completion orders for which we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace segment ended the first quarter of 2020 with backlog of $13.3 billion, consistent with December 31, 2019.
Order activity for new aircraft was progressing well until the last two weeks of the quarter, when activity largely ceased due to the COVID-19 outbreak. Typically, the last few weeks of a quarter experience the most order activity. Despite this, orders in the first quarter of 2020 reflected demand across our product and services portfolio, and the segment’s book-to-bill ratio (orders divided by revenue) was 1.1-to-1.
Beyond total backlog, estimated potential contract value represents primarily options and other agreements with existing customers to purchase new aircraft and long-term aircraft services agreements. On March 29, 2020, estimated potential contract value in the Aerospace segment was $2.8 billion.

DEFENSE SEGMENTS
The total backlog in our defense segments represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of total backlog includes items that have been authorized and appropriated by 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 that we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.

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Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.
Total backlog in our defense segments was $72.5 billion on March 29, 2020, compared with $73.6 billion on December 31, 2019. After experiencing a book-to-bill ratio of 1.1-to-1 in 2019, the Information Technology segment started 2020 with another quarter of strong orders, achieving a book-to-bill ratio of 1.2-to-1. Estimated potential contract value in our defense segments was $35.3 billion on March 29, 2020. We received the following significant contract awards during the first quarter of 2020:
Combat Systems:
$300 from the U.S. Army to upgrade Abrams tanks to the M1A2 SEPv3 configuration.
$225 from the Army to provide spare parts and inventory management services for the Stryker wheeled combat-vehicle program.
$145 from the Army to provide systems technical support for Abrams main battle tanks.
$135 to produce Eagle wheeled combat vehicles for Germany.
$90 from the Army for various munitions and ordnance.
Information Technology:
$240 to provide supercomputing resources through the National Oceanic Atmospheric Administration’s (NOAA) Weather and Climate Operational Supercomputing System (WCOSS) contract. The contract has a maximum potential value of $505.
$80 to provide sustainment support, maintenance and logistics for the Army. The contract has a maximum potential value of $455.
An IDIQ contract to provide development, program management and support services for enterprise-wide application development functions for a federal agency. The contract has a maximum potential value of $250.
$150 for several key contracts to provide intelligence services to classified customers.
A contract to provide IT infrastructure and engineering support for the U.S. Navy. The contract has a maximum potential value of $125.
Mission Systems:
An IDIQ contract to modernize the Army’s training programs. The contract has a maximum potential value of $885.
$65 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.

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$45 to support the engineering and manufacturing efforts on the Navy’s Air and Missile Defense Radar (AMDR) program.
$40 from the Navy to provide nuclear weapons security maintenance and sustainment services.
$40 from the Army to provide continued software support and engineering for the Warfighter Information Network-Tactical (WIN-T) Increment 2 program.
Marine Systems:
$875 for the construction of two additional Navy John Lewis-class (T-AO-205) fleet replenishment oilers.
$70 from the Navy to provide maintenance and repair services for the Ticonderoga-class guided-missile cruiser and Arleigh Burke-class (DDG-51) guided-missile destroyer programs.
$60 from the Navy to produce a large vertical array fixture for Navy submarine acoustic detection efforts.
$40 from the Navy to provide maintenance for submarines at the Naval Submarine Base New London in Connecticut.
$40 from the Navy for on-board repair parts for two Virginia-class submarines under Block IV of the program.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2020 with a cash balance of $5.3 billion compared with $902 at the end of 2019. Our net debt position, defined as debt less cash and equivalents and marketable securities, was $12.7 billion at the end of the first quarter of 2020 compared with $11 billion at the end of 2019. The following is a discussion of our major operating, investing and financing activities in the first three months of 2020 and 2019, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1.
OPERATING ACTIVITIES
Cash used for operating activities was $666 in the first three months of 2020 compared with $795 in the same period in 2019. Cash flows in both periods were affected negatively by net growth in operating working capital (OWC), particularly our position in the development, production and cash collection cycles of our Gulfstream aircraft models in our Aerospace segment. In the first quarter of 2020, cash flows were also impacted negatively by fewer aircraft deliveries and reduced aircraft orders due to the COVID-19 outbreak. Cash flows in the first three months of 2019 were also affected negatively by growth in OWC in our Combat Systems segment due to the timing of payments on a large international wheeled armored vehicle contract. For additional information about the unbilled receivables balance and activity associated with this contract, see Note G to the unaudited Consolidated Financial Statements in Part I, Item 1.
INVESTING ACTIVITIES
Cash used for investing activities was $177 in the first three months of 2020 compared with $187 in the same period in 2019. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales. The primary use of cash for investing activities in both periods was capital expenditures. Capital expenditures were $185 in the first three months of 2020 compared with $181 in the same period in 2019.

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FINANCING ACTIVITIES
Cash provided by financing activities was $5.3 billion in the first three months of 2020 compared with $697 in the same period in 2019. Net cash from financing activities includes proceeds received from debt and commercial paper issuances and employee stock option exercises. Our financing activities also include repurchases of common stock, payment of dividends and debt repayments.
On March 4, 2020, our board of directors authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. In the first three months of 2020, we repurchased 3.4 million of our outstanding shares for $501. On March 29, 2020, 13 million shares remained authorized by our board of directors for repurchase, representing 4.5% of our total shares outstanding. We repurchased 0.5 million shares for $86 in the first three months of 2019.
On March 4, 2020, our board of directors declared an increased quarterly dividend of $1.10 per share, the 23rd consecutive annual increase. Previously, the board had increased the quarterly dividend to $1.02 per share in March 2019. Cash dividends paid were $295 in the first three months of 2020 compared with $268 in the same period in 2019.
In March 2020, we issued $4 billion of fixed-rate notes. The proceeds will be used to repay $2.5 billion of fixed- and floating-rate notes maturing in May 2020 and for general corporate purposes, including the repayment of a portion of our borrowings under our commercial paper program as they mature. See Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including scheduled debt maturities and interest rates.
In the first three months of 2020, we received net proceeds of $2.3 billion from the issuance of commercial paper, which remained outstanding on March 29, 2020. Separately, we have $5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support our commercial paper issuances. We also have an effective shelf registration on file with the Securities and Exchange Commission that allows us to access the debt markets.
NON-GAAP FINANCIAL MEASURE – FREE CASH FLOW
We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations to measure our performance in these areas. While we believe this metric provides useful information, it is not a defined operating measure under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with its use. Our calculation of this metric may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of this metric should not be considered in isolation from, or as a substitute for, other GAAP measures.
We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1:

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Three Months EndedMarch 29, 2020 March 31, 2019
Net cash used by operating activities$(666) $(795)
Capital expenditures(185) (181)
Free cash flow from operations$(851) $(976)
Cash flows as a percentage of earnings from continuing operations:   
Net cash used by operating activities(94)% (107)%
Free cash flow from operations(121)% (131)%

ADDITIONAL FINANCIAL INFORMATION
ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
For a discussion of environmental matters and other contingencies, see Note M to the unaudited Consolidated Financial Statements in Part I, Item 1. Except as otherwise noted in Note M, we do not expect our aggregate liability with respect to these matters to have a material impact on our results of operations, financial condition or cash flows.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the unaudited Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We employ judgment in making our estimates, but they are based on historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
Revenue. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that often span several years. We review and update our contract-related estimates regularly. Our estimates at the end of the first quarter assumed no material impact from the disruptions caused by COVID-19. This assumption was based in part on the expectation that COVID-related costs will be reimbursed by our customers. The United States and other governments have taken steps, such as the CARES Act and U.S. DoD guidance, to provide relief. Through these government actions and our contract provisions, we will seek reimbursement of these costs. As the process for reimbursement has not been finalized, it is possible that our actual reimbursement could be less than 100% of our costs, resulting in a potentially unfavorable impact on the profitability of our contracts. Given the uncertainties, we are unable to estimate an amount or range, if any, of reasonably possible loss for costs that may not be reimbursed.
We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by $90 ($0.25) and $68 ($0.18) for the three-month

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periods ended March 29, 2020, and March 31, 2019, respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended March 29, 2020, or March 31, 2019.
Long-lived Assets and Goodwill. We review long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over its estimated fair value as determined by discounted cash flows. For further discussion of our methods and assumptions, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 outbreak has caused significant disruptions to national and global economies, which has impacted our businesses. As of the end of the quarter, we have not identified a triggering event requiring an impairment test for our goodwill, intangibles or other long-lived assets. In our Aerospace segment, which has experienced a more significant impact from the outbreak, we do not believe the impact represents a longer-term change that would indicate that the carrying value of the segment’s intangibles and long-lived assets may not be recoverable or that the Aerospace reporting unit’s estimated fair value has been significantly affected.
Our Information Technology reporting unit’s estimated fair value exceeded its carrying value by approximately 25% as of December 31, 2019. While a material change in the reporting unit’s fair value or carrying value could put it at risk of goodwill impairment, we currently do not expect the COVID-19 disruptions to have a significant impact on our IT services business or the estimated fair value of the reporting unit.
Other. Other significant estimates include those related to income taxes, pension and other post-retirement benefits, workers’ compensation, warranty obligations, and litigation and other contingencies. We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented. For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2019. For a discussion of new accounting standards that have been issued by the FASB but are not yet effective, see Note A to the unaudited Consolidated Financial Statements in Part I, Item 1.
GUARANTOR FINANCIAL INFORMATION
The fixed- and floating-rate notes described in Note I to the unaudited Consolidated Financial Statements in Part I, Item 1, issued by General Dynamics Corporation (the parent), are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of the parent’s 100%-owned subsidiaries (the guarantors). The guarantees rank equally in right of payment with each other and all other existing and future senior unsecured indebtedness of such guarantors. A listing of the guarantors is included in an exhibit to this Form 10-Q.
Under the relevant indenture, the guarantee of each guarantor is limited to the maximum amount that can be guaranteed without rendering the guarantee voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the company or any of its subsidiaries) or (2) there occurs a transfer, sale or other disposition of the voting stock of a guarantor so that the guarantor is no longer a subsidiary of the company, then the guarantor or the entity acquiring the assets (in the event of

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the sale or other disposition of all or substantially all of the assets of a guarantor) will be released and relieved of any obligations under the guarantee.
The following summarized financial information presents the parent and guarantors (collectively, the combined obligor group) on a combined basis. The summarized financial information of the combined obligor group excludes net investment in and earnings of subsidiaries related to interests held by the combined obligor group in subsidiaries that are not guarantors of the notes.
STATEMENT OF EARNINGS INFORMATION
Three Months EndedMarch 29, 2020
Revenue$2,990
Operating costs and expenses, excluding G&A(2,580)
Net Earnings142
BALANCE SHEET INFORMATION
 March 29, 2020 December 31, 2019
Cash and equivalents$4,919
 $606
Other current assets2,635
 2,367
Noncurrent assets2,644
 2,549
Total assets$10,198
 $5,522
    
Short-term debt and current portion of long-term debt$4,772
 $2,497
Other current liabilities2,751
 2,642
Long-term debt12,904
 8,965
Other noncurrent liabilities5,463
 5,665
Total liabilities$25,890
 $19,769
The summarized balance sheet information presented above includes the funded status of the company’s primary domestic qualified defined-benefit 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, 2019.

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 March 29, 2020. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on March 29, 2020, our disclosure controls and procedures were effective.

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There were no changes in our internal control over financial reporting that occurred during the quarter ended March 29, 2020, 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 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 II, Item 1A of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019. These factors include:
general U.S. and international political and economic conditions;
the negative impact of the COVID-19 outbreak, or other similar outbreaks;
decreases in U.S. government defense spending or changing priorities within the defense budget;
termination or restructuring of government contracts due to unilateral government action;
differences in anticipated and actual program performance, including the ability to perform under long-term, fixed-price contracts within estimated costs, and performance issues with key suppliers and subcontractors;
expected recovery on contract claims and requests for equitable adjustment;
changing customer demand or preferences 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.

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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
Other than the risk factor identified below, 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, 2019.
Our business could be negatively impacted by the recent Coronavirus (COVID-19) outbreak or other similar outbreaks. The recent outbreak of COVID-19, and any other outbreaks of contagious diseases or other adverse public health developments in countries where we operate or our customers are located, could have a negative effect on our business, results of operations and financial condition. These effects could include disruptions or restrictions on our employees’ ability to work effectively, as well as temporary closures of our facilities or the facilities of our customers or suppliers. This could affect our performance on our contracts. Resulting cost increases may not be fully recoverable on our contracts or adequately covered by insurance, which could impact our profitability. In addition, the outbreak of COVID-19 has resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries, which could result in an economic downturn that may negatively affect demand for our products. The imposition of quarantine and travel restrictions may negatively affect our businesses, particularly our Aerospace segment. The extent to which COVID-19 could impact our business, results of operations and financial condition is highly uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about our first-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 (a) Maximum Number of Shares That May Yet Be Purchased Under the Program (a)
Shares Purchased Pursuant to Share Buyback Program    
1/1/20-1/26/20 
 $
 
 
1/27/20-2/23/20 330,000
 183.69
 330,000
 6,050,168
2/24/20-3/29/20 3,027,200
 145.46
 3,027,200
 13,022,968
         
Shares Delivered or Withheld Pursuant to Restricted Stock Vesting (b)    
1/1/20-1/26/20 84,235
 177.98
    
1/27/20-2/23/20 85
 175.44
    
2/24/20-3/29/20 145,681
 164.18
    
  3,587,201
 $150.50
    
(a)On March 4, 2020, the board of directors authorized management to repurchase up to 10 million additional shares of common stock.
(b)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.
We did not make any unregistered sales of equity securities in the first quarter of 2020.

ITEM 6. EXHIBITS
4.1

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10.1*
10.2*
10.3*
22
31.1
31.2
32.1
32.2
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document**
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document**
101.LABInline XBRL Taxonomy Extension Label Linkbase Document**
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document**
104Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)


* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 6 of Form 10-Q.
** 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
mosssignature20191231a01.gif
  William A. Moss
  Vice President and Controller
  (Authorized Officer and Chief Accounting Officer)
Dated: April 29, 2020  


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