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MarketScreener Homepage  >  Equities  >  Nyse  >  General Dynamics Corporation    GD

GENERAL DYNAMICS CORPORATION

(GD)
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GENERAL DYNAMICS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per-share amounts or unless otherwise noted) (form 10-Q)

10/28/2020 | 10:42am EST
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 and government activities. Our
businesses have been designated as critical infrastructure by the U.S.
government and many non-U.S. governments and, as such, are required to stay
open. During this time, 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;

• planning for and working aggressively to mitigate disruptions that may occur;

and

• supporting our communities and the U.S. government in addressing the

challenges of the pandemic, such as the production of medical supplies and

donation of personal protective equipment.



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 those 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 some other governments have taken 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 payments to
covered workers who are prevented from working due to COVID-19 facility closures
or other restrictions; however,

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such reimbursement is subject to the availability of funds. These provisions of
the CARES Act, which were scheduled to expire on September 30, 2020, have been
extended through December 11, 2020. The CARES Act also allows for loans to
companies. To date, we have not sought or accepted CARES Act loans. In late
March 2020, the DoD increased progress payment rates and reduced retention rates
on certain contracts to provide liquidity to federal contractors and their
suppliers. We have in turn advanced payments across our supplier base to help
maintain the health and liquidity of our supply chain. Outside of the United
States, other governments have established various government workforce
programs, which can support business continuity for our foreign operations. We
continue to assess the benefits and limitations of the actions taken by the
United States and other governments. 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 has continued to experience some disruption from
the COVID-19 pandemic, including reduced activities due to select customer site
closures and limited access to sites, travel restrictions, slowdowns in the
provision of materials from suppliers, and lower man-hours at manufacturing
sites. Internationally, while government actions shut down some of our
facilities in the second quarter, our defense business has largely returned to
normal operations. Within our Aerospace segment, pandemic-related travel
limitations resulted in lower demand for aircraft services due to reduced flight
activity, and disrupted the aircraft sales process by limiting our ability to
arrange demonstration flights and coordinate in-person access to customers. To
de-risk elements of the supply chain and better align production with demand, we
have reduced our aircraft production rate until such time that the marketplace
supports future increases in production rates. Accordingly, we have adjusted
staffing levels and taken other cost control measures. The Review of Operating
Segments includes additional information on the third-quarter results for each
of our segments.
We expect COVID-19 to continue to negatively impact our businesses, particularly
Aerospace, until the large economies of the world recover from the effects of
the pandemic. During this period, our priorities remain to provide a healthy and
safe work environment for our employees; closely monitor, work with and support
our supply chain; and continue to meet our customers' demands. We believe the
support by the DoD, and the U.S. government generally, of the defense industrial
base has helped and will continue to help mitigate the effects of disruptions on
our U.S. defense business. Our non-U.S. defense business will be impacted to
varying degrees based on the response of the countries in which they operate.
In our Aerospace segment, as air travel resumes, we expect aircraft services
volume to increase, but we could see some future aircraft deliveries delayed to
the extent customers have difficulty traveling to take possession of their
aircraft. In addition, should the global economy experience a significant
extended downturn from the pandemic, demand for our aerospace products and
services 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 nine months of 2020 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 matured in May 2020
and for general corporate purposes, including the repayment of a portion of our
borrowings under our commercial paper program. In addition to this long-term
borrowing, we renewed our access to $5 billion of credit facilities. 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.


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U.S. GOVERNMENT BUDGET
With approximately 70% of our revenue from the U.S. government, government
spending levels - particularly defense spending - influence our financial
performance. As the start of the government's new fiscal year (FY) approached,
which began on October 1, 2020, the Congress had not passed the FY 2021 defense
appropriations bill. On September 30, 2020, a continuing resolution (CR) was
signed into law, providing funding for federal agencies at FY 2020 spending
levels through December 11, 2020. When the government operates under a CR, all
programs of record are funded at the prior year's appropriated levels, and the
DoD is proscribed from starting new programs. This could result in delayed
revenue growth as programs that were expected to have increased funding levels
continue to operate at the prior-year levels until the current year
appropriations bill is passed. To prevent detrimental changes or delays to
certain critical government programs, the CR included anomalies that provide
funding flexibility and additional appropriations for these programs, including
the Columbia-class submarine program. We do not anticipate that the current CR,
or any subsequent extensions, will have a material impact on our results of
operations, financial condition or cash flows.

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.

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In the defense segments, revenue on long-term government contracts is recognized
generally over time as the work progresses, either as products are produced or
as services are rendered. Typically, revenue is recognized over time using costs
incurred to date relative to total estimated costs at completion to measure
progress toward satisfying our performance obligations. Incurred cost represents
work performed, which corresponds with, and thereby best depicts, the transfer
of control to the customer. Contract costs include labor, material, overhead
and, when appropriate, G&A expenses. Variances in costs recognized from period
to period reflect primarily increases and decreases in production or activity
levels on individual contracts. Because costs are used as a measure of progress,
year-over-year variances in cost result in corresponding variances in revenue,
which we generally refer to as volume.
Operating earnings and margin in the defense segments are driven by changes in
volume, performance or contract mix. Performance refers to changes in
profitability based on adjustments to estimates at completion on individual
contracts. These adjustments result from increases or decreases to the estimated
value of the contract, the estimated costs to complete the contract or both.
Therefore, changes in costs incurred in the period compared with prior periods
do not necessarily impact profitability. It is only when total estimated costs
at completion on a given contract change without a corresponding change in the
contract value (or vice versa) that the profitability of that contract may be
impacted. Contract mix refers to changes in the volume of higher- versus
lower-margin work. Higher or lower margins can result from a number of factors,
including contract type (e.g., fixed-price/cost-reimbursable) and type of work
(e.g., development/production). Contract mix can also refer to the stage of
program maturity for our long-term production contracts. New long-term
production contracts typically have lower margins initially, and then margins
generally increase as we achieve learning curve improvements or realize other
cost reductions.

CONSOLIDATED OVERVIEW
Three Months Ended               September 27, 2020     September 29, 2019            Variance
Revenue                         $            9,431     $            9,761     $    (330 )       (3.4 )%
Operating costs and expenses                (8,347 )               (8,545 )         198         (2.3 )%
Operating earnings                           1,084                  1,216          (132 )      (10.9 )%
Operating margin                              11.5 %                 12.5 %
Nine Months Ended                September 27, 2020     September 29, 2019            Variance
Revenue                         $           27,444     $           28,577     $  (1,133 )       (4.0 )%
Operating costs and expenses               (24,578 )              (25,257 )         679         (2.7 )%
Operating earnings                           2,866                  3,320          (454 )      (13.7 )%
Operating margin                              10.4 %                 11.6 %


Our consolidated revenue decreased in the third quarter and first nine months of
2020 due to fewer aircraft deliveries and lower aircraft service activity in our
Aerospace segment. The first nine months of 2020 also reflected lower IT
services volume in our Information Technology segment. These decreases were
driven by the impact of the COVID-19 outbreak. Higher volume on the
Virginia-class and Columbia-class submarine programs in our Marine Systems
segment helped offset some of these decreases. The combined revenue of our
defense businesses for the first nine months of 2020 was up approximately $100
compared with 2019.
Operating margin decreased in the third quarter and first nine months of 2020
due primarily to reduced aircraft deliveries and related severance charges in
our Aerospace segment. Operating margin was also negatively impacted by
COVID-related disruptions in our Information Technology segment, including a

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loss on a contract with a non-U.S. customer in the second quarter and non-fee-bearing cost reimbursements by the U.S. government authorized under Section 3610 of the CARES Act. Consolidated revenue was up approximately 2% sequentially while operating earnings improved almost 30% over the second quarter on a 240 basis-point improvement in operating margin.


REVIEW OF OPERATING SEGMENTS
Following is a discussion of operating results for each of our operating
segments. For the Aerospace segment, results are analyzed by specific types of
products and services, consistent with how the segment is managed. For the
defense segments, the discussion is based on markets and the lines of products
and services offered with a supplemental discussion of specific contracts and
programs when significant to the results. Additional information regarding our
segments can be found in Note O to the unaudited Consolidated Financial
Statements in Part I, Item 1.
AEROSPACE
Three Months Ended               September 27, 2020      September 29, 2019             Variance
Revenue                         $           1,975       $           2,495       $    (520 )      (20.8 )%
Operating earnings                            283                     393            (110 )      (28.0 )%
Operating margin                             14.3 %                  15.8 %
Gulfstream aircraft deliveries
(in units)                                     32                      38              (6 )      (15.8 )%
Nine Months Ended                September 27, 2020      September 29, 2019             Variance
Revenue                         $           5,640       $           6,871       $  (1,231 )      (17.9 )%
Operating earnings                            682                   1,052            (370 )      (35.2 )%
Operating margin                             12.1 %                  15.3 %
Gulfstream aircraft deliveries
(in units)                                     87                     103   

(16 ) (15.5 )%



Operating Results
The change in the Aerospace segment's revenue in the third quarter and first
nine months of 2020 consisted of the following:
                                   Third Quarter     Nine Months
Aircraft manufacturing            $        (444 )$     (1,032 )
Aircraft services and completions           (76 )           (199 )
Total decrease                    $        (520 )$     (1,231 )


In the first nine months of 2020, quarantine and travel restrictions resulting
from the COVID-19 outbreak had a significant impact on the segment's results. In
an effort to de-risk elements of the supply chain and better align production
with demand, in April we reduced our aircraft production and delivery rates for
the year. As a result, aircraft manufacturing revenue decreased in the third
quarter and first nine months of 2020 due primarily to fewer deliveries of the
ultra-large-cabin G650 aircraft. In addition, decreased flight activity due to
the pandemic resulted in lower demand for maintenance work and reduced volume at
our fixed-base operator (FBO) facilities in the third quarter and first nine
months of 2020.

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The change in the segment's operating earnings in the third quarter and first nine months of 2020 consisted of the following:

                                   Third Quarter     Nine Months
Aircraft manufacturing            $        (157 )$      (438 )
Aircraft services and completions             -             (30 )
Restructuring charge                          -             (42 )
G&A/other expenses                           47             140
Total decrease                    $        (110 )$      (370 )


Aircraft manufacturing operating earnings were down in the third quarter and
first nine months of 2020 due to reduced aircraft production and delivery rates
and a somewhat less favorable mix in aircraft deliveries. In the first nine
months of 2020, operating earnings were also down in aircraft services and
completions due to lower volume. Results during the first nine months were
negatively impacted by restructuring actions taken to adjust the workforce size
to the revised 2020 production levels. These decreases were 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
test programs. In total, the Aerospace segment's operating margin decreased 150
basis points in the third quarter and 320 basis points in the first nine months
of 2020 compared with prior-year periods.
The Aerospace segment's operating earnings improved 78% in the third quarter
compared with the second quarter of 2020 on stable revenue. As a result, the
segment's operating margin increased 620 basis points in the third quarter
compared with the second quarter of 2020, reflecting a favorable aircraft
delivery mix, increased aircraft services activity and lower operating costs
following the restructuring actions and related charge taken in the second
quarter.
COMBAT SYSTEMS
Three Months Ended  September 27, 2020      September 29, 2019        Variance
Revenue            $           1,801       $           1,740       $  61    3.5 %
Operating earnings               270                     264           6    2.3 %
Operating margin                15.0 %                  15.2 %
Nine Months Ended   September 27, 2020      September 29, 2019        Variance
Revenue            $           5,263       $           5,035       $ 228    4.5 %
Operating earnings               732                     712          20    2.8 %
Operating margin                13.9 %                  14.1 %


Operating Results
The increase in the Combat Systems segment's revenue in the third quarter and
first nine months of 2020 consisted of the following:
                                 Third Quarter      Nine Months
Weapons systems and munitions   $            31    $         142
U.S. military vehicles                       11               70
International military vehicles              19               16
Total increase                  $            61    $         228



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Revenue was up in our weapons systems and munitions business in the third
quarter and first nine months of 2020 driven by increased production of
artillery and missile subcomponents. Also in the first nine months of 2020,
revenue from U.S. military vehicles increased due primarily to higher volume on
the U.S. Army's Abrams tank program. Revenue from international military
vehicles increased in the third quarter and first nine months of 2020 due to
higher volume on a contract to produce armored combat support vehicles (ACSVs)
for the Canadian government and the British Army's AJAX armored fighting vehicle
program, offset partially by lower volume on Piranha wheeled armored vehicle
programs.
The Combat Systems segment's operating margin decreased 20 basis points in the
third quarter and first nine months of 2020 driven largely by contract mix. The
segment's operating margin in 2020 was also impacted by the government-mandated
closure during the second quarter of our Spanish manufacturing facilities.
INFORMATION TECHNOLOGY
Three Months Ended  September 27, 2020      September 29, 2019          Variance
Revenue            $           2,029       $           2,071       $  (42 )    (2.0 )%
Operating earnings               146                     146            -         -  %
Operating margin                 7.2 %                   7.0 %
Nine Months Ended   September 27, 2020      September 29, 2019          Variance
Revenue            $           5,901       $           6,398       $ (497 )    (7.8 )%
Operating earnings               379                     456          (77 )   (16.9 )%
Operating margin                 6.4 %                   7.1 %


Operating Results
The change in the Information Technology segment's revenue in the third quarter
and first nine months of 2020 consisted of the following:
                                    Third Quarter      Nine Months
Intelligence and homeland security $         (2 )     $      (234 )
Defense                                       6              (134 )
Federal civilian                            (46 )            (129 )
Total decrease                     $        (42 )$      (497 )


In the first nine months of 2020, revenue was down across the Information
Technology segment due to the partial closure of some customer sites to all but
mission critical personnel and a lower level of customer and program activity as
a result of the COVID-19 outbreak. Revenue was also lower due to the exit of
non-core lines of business in 2019.
The Information Technology segment's operating margin increased 20 basis points
in the third quarter of 2020 due to a charge recorded in the third quarter of
2019 as we exited a non-core line of business. Operating margin decreased 70
basis points in the first nine months of 2020 due to COVID-related impacts,
including customer reimbursement of idle workforce cost at zero fee and an
approximate $40 loss recognized in the second quarter on a contract with a
non-U.S. customer from schedule delays caused by COVID travel restrictions.

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Revenue in the Information Technology segment grew 7.7% from the second quarter
to the third quarter of 2020, and margins increased 280 basis points, reflecting
the ramp up of new programs, higher volume on several existing programs, the
international contract loss in the second quarter and a reduced pandemic impact
as our customers begin to reopen and continue to reconstitute their workforces.
MISSION SYSTEMS
Three Months Ended  September 27, 2020      September 29, 2019          Variance
Revenue            $           1,221       $           1,220       $    1      0.1  %
Operating earnings               168                     185          (17 )   (9.2 )%
Operating margin                13.8 %                  15.2 %
Nine Months Ended   September 27, 2020      September 29, 2019          Variance
Revenue            $           3,518       $           3,655       $ (137 )   (3.7 )%
Operating earnings               480                     495          (15 )   (3.0 )%
Operating margin                13.6 %                  13.5 %


Operating Results
The change in the Mission Systems segment's revenue in the third quarter and
first nine months of 2020 consisted of the following:
                                       Third Quarter      Nine Months
Ground systems and products           $        (52 )$      (159 )
Space, intelligence and cyber systems            7               (18 )
Naval, air and electronic systems               46                40
Total increase (decrease)             $          1       $      (137 )


Revenue in our ground systems and products business was down in the third
quarter and first nine months of 2020 due to the sale of a satellite
communications business in the second quarter and volume timing, particularly on
a mobile communications network program. These decreases were offset partially
by increased volume on programs supporting the U.S. Navy's submarine platforms
in our naval, air and electronic systems business.
The Mission Systems segment's operating margin decreased 140 basis points in the
third quarter of 2020 and increased 10 basis points in the first nine months of
2020 due to program mix.
MARINE SYSTEMS
Three Months Ended  September 27, 2020      September 29, 2019        Variance
Revenue            $           2,405       $           2,235       $ 170    7.6 %
Operating earnings               223                     209          14    6.7 %
Operating margin                 9.3 %                   9.4 %
Nine Months Ended   September 27, 2020      September 29, 2019        Variance
Revenue            $           7,122       $           6,618       $ 504    7.6 %
Operating earnings               607                     586          21    3.6 %
Operating margin                 8.5 %                   8.9 %



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Operating Results
The increase in the Marine Systems segment's revenue in the third quarter and
first nine months of 2020 consisted of the following:
                                                       Third Quarter      Nine Months
U.S. Navy ship construction                           $        195       $  

478

U.S. Navy ship engineering, repair and other services (12 )

      50
Commercial ship construction                                   (13 )             (24 )
Total increase                                        $        170$       504


Revenue from U.S. Navy ship construction was up in the third quarter and first
nine months of 2020 due to increased volume on the Virginia-class and
Columbia-class submarine programs. The Marine Systems segment's operating margin
decreased 10 basis points in the third quarter of 2020 and 40 basis points in
the first nine months of 2020 due to a shift in mix.
CORPORATE
Corporate operating results consisted of the following:
                                          Three Months Ended                              Nine Months Ended
                              September 27, 2020        September 29, 2019   September 27, 2020       September 29, 2019
Operating (expense) income  $              (6 )         $              19   $            (14 )       $                19


Corporate operating results have two primary components: pension and other
post-retirement benefit income, and equity-based compensation 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. This amount decreased in the
first nine months of 2020 compared with the first nine months of 2019, resulting
in a lower offset to Corporate costs.

OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
Three Months Ended  September 27, 2020     September 29, 2019         Variance
Revenue            $            5,454     $            5,789     $ (335 )   (5.8 )%
Operating costs                (4,452 )               (4,640 )      188     (4.1 )%
Nine Months Ended   September 27, 2020     September 29, 2019         Variance
Revenue            $           15,849     $           16,441     $ (592 )   (3.6 )%
Operating costs               (13,038 )              (13,217 )      179     (1.4 )%



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The change in product revenue in the third quarter and first nine months of 2020 consisted of the following:

                        Third Quarter     Nine Months
Aircraft manufacturing $        (444 )$     (1,032 )
Ship construction                182              454
Other, net                       (73 )            (14 )
Total decrease         $        (335 )$       (592 )


In the third quarter and first nine months of 2020, aircraft manufacturing
revenue decreased due to the reduced production and delivery rates caused by the
COVID-19 outbreak. These decreases were offset partially by increased volume on
the Virginia-class and Columbia-class submarine programs. In the third quarter
and first nine months of 2020, product operating costs decreased at a lower rate
than revenue due primarily to the shift in mix of Gulfstream aircraft
deliveries.
SERVICE REVENUE AND OPERATING COSTS
Three Months Ended  September 27, 2020     September 29, 2019         Variance
Revenue            $            3,977     $            3,972     $    5      0.1  %
Operating costs                (3,384 )               (3,333 )      (51 )    1.5  %
Nine Months Ended   September 27, 2020     September 29, 2019         Variance
Revenue            $           11,595     $           12,136     $ (541 )   (4.5 )%
Operating costs                (9,931 )              (10,258 )      327     (3.2 )%

The change in service revenue in the third quarter and first nine months of 2020 consisted of the following:

                           Third Quarter      Nine Months
IT services               $        (42 )$      (497 )
Other, net                          47               (44 )
Total increase (decrease) $          5       $      (541 )


In the third quarter and first nine months of 2020, IT services revenue
decreased due to the partial closure of some customer sites to all but mission
critical personnel and a lower level of customer and program activity as a
result of the COVID-19 outbreak. In the first nine months of 2020, the primary
driver of the decrease in service operating costs was the change in volume of IT
services described above.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 5.9% in the first nine months of
2020 compared with 6.2% in the first nine months of 2019.
INTEREST, NET
Net interest expense was $357 in the first nine months of 2020 compared with
$350 in the prior-year period. See Note I to the unaudited Consolidated
Financial Statements in Part I, Item 1, for additional information regarding our
debt obligations, including interest rates.

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OTHER, NET
Net other income was $44 in the first nine months of 2020 compared with $18 in
the first nine 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 15.2% in the first nine months of 2020 compared with
17.5% in the prior-year period. The decrease is due to a variety of factors,
including lower taxes on international income and higher research tax credits.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $81.5 billion at
the end of the third quarter of 2020 compared with $82.7 billion on June 28,
2020. 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 $131.9
billion on September 27, 2020.
The following table details the backlog and estimated potential contract value
of each segment at the end of the third and second quarters of 2020:
                                                                                Estimated            Total
                                                                                Potential          Estimated
                          Funded          Unfunded        Total Backlog      Contract Value     Contract Value
                                                          September 27, 2020
Aerospace              $    11,640$        324$        11,964     $         2,888     $      14,852
Combat Systems              14,511              200              14,711               6,593            21,304
Information Technology       5,558            3,411               8,969              18,925            27,894
Mission Systems              4,554              240               4,794               7,317            12,111
Marine Systems              23,958           17,124              41,082              14,666            55,748
Total                  $    60,221$     21,299$        81,520$        50,389$     131,909

                                                            June 28, 2020
Aerospace              $    11,874$        239$        12,113     $         2,834     $      14,947
Combat Systems              13,863              242              14,105               6,399            20,504
Information Technology       5,464            3,463               8,927              18,392            27,319
Mission Systems              4,856              185               5,041               7,510            12,551
Marine Systems              25,118           17,365              42,483              14,441            56,924
Total                  $    61,175$     21,494$        82,669$        49,576$     132,245



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 third quarter of 2020 with
backlog of $12 billion. Following reduced order activity in the first half of
2020 due to the

                                       38
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COVID-19 outbreak, the third quarter of 2020 reflected improving demand for
Gulfstream aircraft. The segment's book-to-bill ratio (orders divided by
revenue) was 0.9-to-1 in the third quarter of 2020 and 1.1-to-1 over the
trailing 12 months.
Beyond total backlog, estimated potential contract value represents primarily
options and other agreements with existing customers to purchase new aircraft
and long-term aircraft services agreements. On September 27, 2020, estimated
potential contract value in the Aerospace segment was $2.9 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.
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 $69.6 billion on September 27, 2020.
The Information Technology and Marine Systems segments each achieved a
book-to-bill ratio of 1-to-1 or greater over the trailing 12 months. Estimated
potential contract value in our defense segments was $47.5 billion on
September 27, 2020. We received the following significant contract awards during
the third quarter of 2020:
Combat Systems:
•      $870 to deliver 8x8 wheeled combat vehicles, maintenance and life cycle

support to the Spanish Ministry of Defense.

• An IDIQ contract to produce Small Multipurpose Equipment Transport (SMET)

vehicles for the U.S. Army. The contract has a maximum potential value of

$250.

$125 from the Army for various munitions and ordnance.

$55 from the U.S. Navy to produce gun systems for the F-35 Joint Strike

Fighter.

$35 from the Army for the production of Improved Fire Control Electronics

Units (IFCEUs) and Improved Commanders Display Units (ICDUs) for the

Abrams tank program.



Information Technology:
•      $65 to provide enterprise information technology and cybersecurity

services and solutions for the DoD. The contract has a maximum potential

       value of $760.



                                       39
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$70 to provide command, control and communications capabilities for the

       DoD. The contract has a maximum potential value of $365.


•      $50 from the U.S. Department of Health and Human Services Centers for
       Medicare and Medicaid Services (CMS) to provide cloud services and
       software tools. The contract has a maximum potential value of $240.


•      $145 for several key contracts to provide intelligence services to
       classified customers.

$110 to provide design, development, testing, installation, maintenance,

       logistics support and modernization services for Navy airborne and
       shipboard platforms.

$95 to provide logistics, sustainment and maintenance support services for

the Army.

$50 from the U.S. Department of Veterans Affairs under the Veterans

Intake, Conversion and Communications Services (VICCS) program to

modernize benefits claims processing.



Mission Systems:
• $140 for several key contracts for classified customers.


•      $95 from the Army for computing and communications equipment under the
       Common Hardware Systems-5 (CHS-5) program.

$35 from the Army to provide continued software support and engineering

for the Warfighter Information Network-Tactical (WIN-T) Increment 2

program.

Marine Systems: • $240 from the Navy to provide maintenance and repair services for the

Arleigh Burke-class guided-missile destroyer, Independence-class Littoral

Combat Ship (LCS), Ticonderoga-class guided-missile cruiser and Wasp-class

amphibious assault ship programs.

$155 from the Navy for Advanced Nuclear Plant Studies (ANPS) in support of

       various submarine programs.


•      $115 from the Navy for maintenance and modernization work on the USS
       Hartford, a Los Angeles-class attack submarine.

$35 from the Navy for the Expeditionary Sea Base (ESB) auxiliary support

       ship program.



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We ended the third quarter of 2020 with a cash balance of $1.5 billion compared
with $902 at the end of 2019. Our net debt position, defined as debt less cash
and equivalents and marketable securities, was $11.9 billion at the end of the
third quarter of 2020.
We expect to continue to generate funds in excess of our short- and long-term
liquidity needs. We believe we have adequate funds on hand and sufficient
borrowing capacity to execute our financial and operating strategy. The
following is a discussion of our major operating, investing and financing
activities in the first nine months of 2020 and 2019, as classified on the
unaudited Consolidated Statement of Cash Flows in Part I, Item 1.


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OPERATING ACTIVITIES
Cash provided by operating activities was $1.3 billion in the first nine months
of 2020 compared with $587 in the same period in 2019. The primary driver of
cash inflows in both periods was net earnings. However, cash flows in both
periods were affected negatively by growth in operating working capital (OWC) in
our Aerospace segment due to our position in the development and production
cycles of our Gulfstream aircraft models. We had anticipated this OWC growth to
begin reversing in 2020, but the impact of COVID-19 on our production and
delivery rates has delayed this recovery. Cash flows in the first nine 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 $589 in the first nine months of 2020
compared with $604 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 $622 in the first nine months of 2020
compared with $606 in the same period in 2019.

FINANCING ACTIVITIES
Cash used by financing activities was $100 in the first nine months of 2020
compared with cash provided of $65 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
nine months of 2020, we repurchased 3.4 million of our outstanding shares for
$501. We did not repurchase any shares in the second and third quarters of 2020.
On September 27, 2020, 13 million shares remained authorized by our board of
directors for repurchase, representing 4.5% of our total shares outstanding. We
repurchased 1.1 million shares for $184 in the first nine 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 $925 in the first nine months of 2020 compared with
$858 in the same period in 2019.
In March 2020, we issued $4 billion of fixed-rate notes. The proceeds were used
to repay $2.5 billion of fixed- and floating-rate notes that matured in May 2020
and for general corporate purposes, including the repayment of a portion of our
borrowings under our commercial paper program.
Fixed- and floating-rate notes totaling $2.5 billion mature in May 2021, and an
additional $500 of fixed-rate notes mature in July 2021. As we approach the
maturity dates of this debt, we plan to repay these notes using a combination of
cash on hand and the issuance of commercial paper. For additional information
regarding our debt obligations, including scheduled debt maturities and interest
rates, and our credit facilities, see Note I to the unaudited Consolidated
Financial Statements in Part 1, Item 1.

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On September 27, 2020, we had no commercial paper outstanding, but we maintain
the ability to access the commercial paper market in the future. Separately, we
have $5 billion in committed bank credit facilities for general corporate
purposes and working capital needs and to support our commercial paper
issuances. We also have an effective shelf registration on file with the
Securities and Exchange Commission 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:
Nine Months Ended                                    September 27, 2020       September 29, 2019
Net cash provided by operating activities           $           1,296       $            587
Capital expenditures                                             (622 )                 (606 )
Free cash flow from operations                      $             674       $            (19 )
Cash flows as a percentage of net earnings:
Net cash provided by operating activities                          60 %                   24  %
Free cash flow from operations                                     31 %                   (1 )%



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

                                       42
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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 third quarter included
impacts from the disruptions caused by COVID-19. Given the uncertainties around
the pandemic, including its duration and potential future disruptions to our
supply chain or workforce, it is reasonably possible that the actual impact of
the pandemic on contract costs could be materially different than our current
estimates. The United States and other governments have taken steps to provide
relief. Where our customer has agreed to reimburse certain costs, such as
provided for by the CARES Act, we have included those recoveries in our
estimates of revenue. To the extent the U.S. government provides for
reimbursement of additional costs through legislation and the DoD has available
funds, we will seek reimbursement as appropriate.
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 $84 ($0.23) and $169
($0.46) for the three- and nine-month periods ended September 27, 2020, and $81
($0.22) and $220 ($0.60) for the three- and nine-month periods ended
September 29, 2019, respectively. No adjustment on any one contract was material
to the unaudited Consolidated Financial Statements for the three- and nine-month
periods ended September 27, 2020, or September 29, 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 and government activities, 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
our IT services business to have a significant impact on the estimated fair
value of the reporting unit.

                                       43

--------------------------------------------------------------------------------



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 parent or any of its subsidiaries) or (2) there occurs a
transfer, sale or other disposition of the voting stock of a guarantor so that
the guarantor is no longer a subsidiary of the parent, then the guarantor or the
entity acquiring the assets (in the event of the sale or other disposition of
all or substantially all of the assets of a guarantor) will be released and
relieved of any obligations under the guarantee.
The following summarized financial information presents the parent and
guarantors (collectively, the combined obligor group) on a combined basis. The
summarized financial information of the combined obligor group excludes net
investment in and earnings of subsidiaries related to interests held by the
combined obligor group in subsidiaries that are not guarantors of the notes.

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