GD 10-K diff: FY 2023-12-31 → FY 2024-12-31
Paragraph-level diff of Risk Factors (Item 1A) and Management's Discussion & Analysis (Item 7).
Item 1A · Risk Factors
+9 paragraphs −13 paragraphs ~9 changed
FY 2023-12-31 (earlier)
ITEM 1A. RISK FACTORS
An investment in our common stock or debt securities is subject to risks and uncertainties. Investors should consider the following factors, in addition to the other information contained in this annual report on Form 10-K, before deciding whether to purchase our securities.
Investment risks can be market-wide as well as unique to a specific industry or company. The market risks faced by an investor in our securities are similar to the uncertainties faced by investors in a broad range of industries. There are some risks that apply more specifically to our business.
Our revenue is concentrated with the U.S. government. This customer relationship involves some specific risks. In addition, our sales to non-U.S. customers expose us to different financial and legal risks. Despite the varying nature of our government and commercial operations and the markets they serve, each segment shares some common risks, such as the ongoing development of high-technology products and the price, availability and quality of commodities and subsystems.
Risks Relating to Our Business and IndustryThe U.S. government provides a significant portion of our revenue. In 2023, approximately 70% of our consolidated revenue was from the U.S. government. Levels of U.S. defense spending may be impacted by numerous factors, such as the domestic political environment, changes in national and international priorities, and threats to national security. Competing demands for federal funds can pressure various areas of spending. Decreases in U.S. government defense and other spending or
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changes in spending allocation or priorities could result in one or more of our programs being reduced, delayed or terminated, which could impact our financial performance.For additional information relating to U.S. government budget and funding matters, see the Business Environment section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.U.S. government contracts are not always fully funded at inception, and any funding is subject to disruption or delay. Our U.S. government revenue is funded by agency budgets that operate on an October-to-September fiscal year. Early each calendar year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is the result of months of policy and program reviews throughout the executive branch. For the remainder of the year, the Appropriations and Authorization Committees of the Congress review the president’s budget proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies.There are two primary risks associated with the U.S. government budget cycle. First, the annual process may be delayed or disrupted. If the annual budget is not approved by the beginning of the government fiscal year, portions of the U.S. government can shut down or operate under a continuing resolution that maintains spending at prior-year levels, which can impact funding for our programs and timing of new awards. Second, the Congress typically appropriates funds on a fiscal-year basis, even though contract performance may extend over many years. Future revenue under existing multi-year contracts is conditioned on the continuing availability of congressional appropriations. Changes in appropriations in subsequent years may impact the funding available for these programs. Delays or changes in funding can impact the timing of available funds or lead to changes in program content.
Government contracts are subject to termination rights by the customer. U.S. government contracts generally permit the government to terminate a contract, in whole or in part, for convenience. If a contract is terminated for convenience, a contractor usually is entitled to receive payments for its allowable costs incurred and the proportionate share of fees or earnings for the work performed. The government may also terminate a contract for default in the event of a breach by the contractor. If a contract is terminated for default, the government in most cases pays only for the work it has accepted. Many foreign contracts have similar termination rights by customers. The termination of multiple or large programs could have a material adverse effect on our future revenue and earnings.Government contractors operate in a highly regulated environment and are subject to audit by the U.S. government. Numerous U.S. government agencies routinely audit and review government contractors. These agencies review a contractor’s performance under its contracts and compliance with applicable laws, regulations and standards. The U.S. government also reviews the adequacy of, and compliance with, internal control systems and policies, including the contractor’s purchasing, property, estimating, material, earned value management and accounting systems. In some cases, audits may result in delayed payments or contractor costs not being reimbursed or subject to repayment. If an audit or investigation were to result in allegations against a contractor of improper or illegal activities, civil or criminal penalties and administrative sanctions could result, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, reputational harm could result if allegations of impropriety were made. In some cases, audits may result in disputes with the respective government agency that can result in negotiated settlements, arbitration or litigation. Moreover, new laws, regulations or standards, or
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changes to existing ones, can increase our performance and compliance costs and reduce our revenue and earnings.Our Aerospace segment is subject to changing customer demand for business aircraft. The business jet market is driven by the demand for business-aviation products and services by corporate, individual and government customers in the United States and around the world. Customer demand can be affected by a number of factors, including changes in general economic conditions, the availability and cost of credit, pricing pressures and trends in capital goods markets. An adverse change in customer demand for our business-aviation products and services could materially affect our future revenue and earnings. In addition, if customers default on existing contracts and the contracts are not replaced, the segment’s anticipated revenue and profitability could be reduced materially.
Earnings and margin depend on our ability to perform on our contracts. When agreeing to contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting for our contracts requires assumptions and estimates about these conditions and events. These projections and estimates assess, among other things:
• the productivity and availability of labor;
• the complexity of the work to be performed;
• the cost and availability of materials and components; and
• schedule requirements.
If there is a significant change in one or more of these circumstances, estimates or assumptions, or if the risks under our contracts are not managed adequately, the profitability of contracts could be adversely affected. This could affect earnings and margin materially.
Revenue, earnings and margin depend in part on supplier performance. We rely on other companies and our government customers to provide materials, components and subsystems for our products. Suppliers, including subcontractors, sometimes perform some of the services that we provide to our customers. We depend on these suppliers and government entities to meet our contractual obligations in full compliance with customer requirements and applicable law. Misconduct by suppliers, such as a failure to comply with procurement regulations or engaging in unauthorized activities, may harm our future revenue, earnings and margin.We sometimes rely on only one or two sources of supply, and any disruption in our supply chain could have an adverse effect on our ability to meet our customer commitments. For example, some of our operating segments rely on the supply of semiconductors for the manufacture of our products, and any inability of or delay by our suppliers to meet our order demands (including due to the suppliers’ competing commercial priorities, any military conflict resulting in a disruption of manufacturing or trade relations, or any other business disruption) could delay or disrupt our ability to procure semiconductors. Our ability to perform our obligations to our customers, and our future revenue, earnings and margin, may be materially adversely affected if (1) any one or more of our suppliers is unable to provide the agreed-upon materials, or perform the agreed-upon services in a timely and cost-effective manner, or engages in misconduct or other improper activities or (2) we are unable to otherwise obtain necessary materials, components, subsystems or services in a timely and cost-effective manner.
Our success depends in part on our ability to develop new products and technologies and maintain a qualified workforce to meet the needs of our customers. Many of the products and services we provide involve sophisticated technologies and engineering, with related complex manufacturing and system-integration processes. Our customers’ requirements change and evolve
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regularly. Accordingly, our performance depends in part on our ability to continue to develop, manufacture and provide innovative products and services and bring those offerings to market quickly at cost-effective prices. Many of our new products must meet extensive and time-consuming regulatory requirements that are often outside our control and may result in unanticipated delays. Additionally, due to the highly specialized nature of our business, we must hire and retain the skilled and qualified personnel necessary to perform the services required by our customers and to develop and manufacture our products. To the extent that the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting or training costs in order to attract and retain such employees. If we were unable to develop new products that meet customers’ changing needs and satisfy regulatory requirements in a timely manner or successfully attract and retain qualified personnel, our future revenue and earnings may be materially adversely affected.Risks Relating to Our International Operations
Operations outside the United States are subject to various risks that may be associated with doing business in foreign countries. In some countries there is increased chance for economic, legal or political instability, and procurement procedures may be less robust or mature, which may complicate the contracting process. Our non-U.S. operations may be sensitive to and impacted by (1) changes in a foreign government’s national policies and priorities, political leadership and budgets, which may be influenced by changes in threat environments, geopolitical uncertainties, volatility in economic conditions and other economic and political factors including inflationary pressures; (2) changes in U.S., foreign, and international laws, regulations, and policies; (3) energy, natural resource and other commodity shortages; and (4) global trade disputes and supply chain disruptions. For example, the ongoing conflict between Russia and Ukraine has resulted in the imposition of numerous economic and trade sanctions, export controls, and other restrictions targeting Russia and Belarus, and the Russian government has implemented counter-sanctions and export controls targeting the U.S. and various foreign countries in which we operate. These actions have caused some economic disruptions around the world and have exacerbated global supply chain challenges. Changes and developments in any of these matters or factors may occur suddenly and could impact funding for programs or delay purchasing decisions or customer payments.
Non-U.S. transactions can involve increased risks arising from foreign exchange rate variability, which could, among other things, negatively impact sales and the translation of our international revenue from local currencies into U.S. dollars, and differing legal systems. Our non-U.S. operations are subject to U.S. and foreign laws and regulations, including laws and regulations relating to import-export controls, technology transfers, the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws, and the International Traffic in Arms Regulations (ITAR). An unfavorable event or trend in any one or more of these factors or a failure to comply with U.S. or foreign laws could result in administrative, civil or criminal liabilities, including suspension or debarment from government contracts or suspension of our export privileges, and could materially adversely affect revenue and earnings.
In addition, some non-U.S. government customers require contractors to enter into letters of credit, performance or surety bonds, bank guarantees and other similar financial arrangements. We may also be required to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, that require us to satisfy investment or other commitments or face penalties. Offset requirements may extend over several years and could require us to team with local companies to fulfill these commitments. If we do not satisfy these financial or offset requirements, our future revenue and earnings may be materially adversely affected.24Risks Relating to Our Acquisitions and Similar Investment Activities
We have made and expect to continue to make investments, including acquisitions and joint ventures, that involve risks and uncertainties. When evaluating potential acquisitions and joint ventures, we make judgments regarding the value of business opportunities, technologies and other assets, and the risks and costs of potential liabilities based on information available to us at the time of the transaction. Whether we realize the anticipated benefits from these transactions depends on multiple factors, including our integration of the businesses involved; the performance of the underlying products, capabilities, or technologies; market conditions following the acquisition; and acquired liabilities, including some that may not have been identified prior to the acquisition. These factors could materially adversely affect our financial results.
Changes in business conditions may cause goodwill and other intangible assets to become impaired. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized and remains on our balance sheet indefinitely unless there is an impairment or a sale of a portion of the business. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. We face some uncertainty in our business environment due to a variety of challenges, including the risk factors discussed in this section. We may experience unforeseen circumstances that adversely affect the value of our goodwill or intangible assets. Future write-offs of goodwill or other intangible assets as a result of an impairment in the business could materially adversely affect our results of operations and financial condition.
Other Business and Operational Risks
Our business could be negatively impacted by cybersecurity events and other disruptions. We face various cybersecurity threats, including threats to our IT infrastructure and attempts to gain unauthorized access to our proprietary or classified information, denial-of-service attacks, as well as threats to the physical security of our facilities and employees, and threats from terrorist acts. We also design and manage IT systems and products for various customers. We generally face the same security threats for these systems and products as for our own internal systems. In addition, we face cybersecurity threats from entities and persons that may seek to target us through our customers, suppliers and other third parties with whom we do business. Many of these cybersecurity threats are increasingly sophisticated and constantly evolving. Accordingly, we maintain information security staff, policies and procedures for managing risk to our information systems, and we review and update our policies, procedures and practices in light of evolving threats. We conduct employee training on cybersecurity to mitigate persistent and continuously evolving cybersecurity threats, and we report cybersecurity events or losses of customer data to affected customers and applicable regulatory authorities. However, there can be no assurance that any such actions, including the timeliness of our efforts to review, update or implement policies, procedures and practices in light of evolving threats, or the safeguards put in place by our customers, suppliers and other parties on which we rely, will be sufficient to detect, prevent and mitigate cybersecurity breaches or disruptions, or the unauthorized release of sensitive information or corruption of data.
We have experienced cybersecurity events and disruptions such as viruses and attacks targeting our IT systems. Such prior events have not had a material impact on our financial condition, results of operations or liquidity. However, future threats could have a materially adverse impact on our company by, among other things, causing harm to our business, financial condition, results of operations or25reputation; disrupting our operations; exposing us to potential liability, regulatory actions and loss of business; and challenging our eligibility for future work on sensitive or classified systems for government customers. Due to the evolving nature of these security threats, the potential impact of any future incident cannot be predicted. Our insurance coverage may not be adequate to cover all the costs related to cybersecurity attacks or disruptions resulting from such events.Our business may continue to be negatively impacted by the coronavirus (COVID-19) pandemic and could be negatively impacted by other pandemics and outbreaks. The COVID-19 pandemic has had, and could continue to have, a negative effect on our business, results of operations and financial condition. This includes disruptions or restrictions on our employees’ ability to work effectively, temporary closures of our facilities and the facilities of our customers, and the imposition of quarantine and travel restrictions that have and may in the future negatively affect demand for our products and services and result in supply-chain disruptions. Any such effects could materially adversely affect our ability to perform on our contracts. Any cost increases that result from these effects may not be fully recoverable on our contracts or adequately covered by insurance.
Other outbreaks of contagious diseases, including new variants of COVID-19, or other adverse public health developments in countries where we operate or our customers are located, could similarly adversely affect our business, results of operations and financial condition in the future.Global climate change could negatively affect our business. Increased public awareness and concern regarding global climate change may result in state, federal or international requirements to reduce or mitigate global warming, such as the imposition of carbon pricing mechanisms, stricter limits on greenhouse gas emissions, or other business restrictions or compliance requirements regarding reducing or mitigating global climate change. If environmental or climate-change laws or regulations are adopted or changed that directly or indirectly impose significant new costs, operational restrictions or compliance requirements on our business, products, customers or suppliers, they could increase our costs, require additional capital expenditures, reduce our margins and adversely affect our business, results of operations and financial condition.
Further, while we continuously evaluate and seek opportunities to improve our climate-related measures, there can be no assurance that changes in customer demand patterns and competition, as well as potential reputational risks, related to climate change will not adversely affect our business, results of operations and financial condition.
FORWARD-LOOKING STATEMENTSThis annual report on Form 10-K contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “forecasts,” “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
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may differ materially from what is forecast in forward-looking statements due to a variety of factors, including the risk factors discussed in this Form 10-K.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 revisions to any 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 future filings with the SEC.
FY 2024-12-31 (later)
ITEM 1A. RISK FACTORS
An investment in our common stock or debt securities is subject to risks and uncertainties. Investors should consider the following factors, in addition to the other information contained in this annual report on Form 10-K, before deciding whether to purchase our securities.
Investment risks can be market-wide as well as unique to a specific industry or company. The market risks faced by an investor in our securities are similar to the uncertainties faced by investors in a broad range of industries. There are some risks that apply more specifically to our business.
Our revenue is concentrated with the U.S. government. This customer relationship involves some specific risks. In addition, our sales to non-U.S. customers expose us to different financial and legal risks. Despite the varying nature of our government and commercial operations and the markets they serve, each segment shares some common risks, such as the ongoing development of high-technology products and the price, availability and quality of commodities and subsystems.
Risks Relating to Our Business and IndustryThe U.S. government provides a significant portion of our revenue. Approximately 70% of our consolidated revenue was from the U.S. government. Levels of U.S. defense spending may be impacted by numerous factors, such as the domestic political environment, changes in national and international priorities, and threats to national security. Competing demands for federal funds can pressure various areas of spending. Decreases in U.S. government defense and other spending or changes in spending allocation or priorities could result in one or more of our programs being reduced, delayed or terminated, which could impact our financial performance.
20For additional information relating to U.S. government budget and funding matters, see the Business Environment section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.U.S. government contracts are not always fully funded at inception, and any funding is subject to disruption or delay. Our U.S. government revenue is funded by agency budgets that operate on an October-to-September fiscal year. Early each calendar year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is typically the result of months of policy and program reviews throughout the executive branch. For the remainder of the year, the Appropriations and Authorization Committees of the Congress typically review the president’s budget proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies.There are two primary risks associated with the U.S. government budget cycle. First, the annual process may be delayed or disrupted. If the annual budget is not approved by the beginning of the government fiscal year, portions of the U.S. government can shut down or operate under a continuing resolution that maintains spending at prior-year levels, which can impact funding for our programs and timing of new awards. Second, the Congress typically appropriates funds on a fiscal-year basis, even though contract performance may extend over many years. Future revenue under existing multi-year contracts is conditioned on the continuing availability of congressional appropriations. Changes in appropriations in subsequent years may impact the funding available for these programs. Delays or changes in funding can impact the timing of available funds or lead to changes in program content.
Government contracts are subject to termination rights by the customer. U.S. government contracts generally permit the government to terminate a contract, in whole or in part, for convenience. If a contract is terminated for convenience, a contractor usually is entitled to receive payments for its allowable costs incurred and the proportionate share of fees or earnings for the work performed. The government may also terminate a contract for default in the event of a breach by the contractor. If a contract is terminated for default, the government in most cases pays only for the work it has accepted. Many foreign contracts have similar termination rights by customers. The termination of multiple or large programs could have a material adverse effect on our future revenue and earnings.Government contractors operate in a highly regulated environment and are subject to audit by the U.S. government. Numerous U.S. government agencies routinely audit and review government contractors. These agencies review a contractor’s performance under its contracts and compliance with applicable laws, regulations and standards. The U.S. government also reviews the adequacy of, and compliance with, internal control systems and policies, including the contractor’s purchasing, property, estimating, material, earned value management and accounting systems. In some cases, audits may result in delayed payments or contractor costs not being reimbursed or subject to repayment. If an audit or investigation were to result in allegations against a contractor of improper or illegal activities, civil or criminal penalties and administrative sanctions could result, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, reputational harm could result if allegations of impropriety were made. In some cases, audits may result in disputes with the respective government agency that can result in negotiated settlements, arbitration or litigation. Moreover, new laws, regulations or standards, or changes to existing ones, can increase our performance and compliance costs and reduce our revenue and earnings.
21Our Aerospace segment is subject to changing customer demand for business aircraft. The business jet market is driven by the demand for business-aviation products and services by corporate, individual and government customers in the United States and around the world. Customer demand can be affected by a number of factors, including changes in general economic conditions, the availability and cost of credit, pricing pressures and trends in capital goods markets. An adverse change in customer demand for our business-aviation products and services could materially affect our future revenue and earnings. In addition, if customers default on existing contracts and the contracts are not replaced, the segment’s anticipated revenue and profitability could be reduced materially.
Earnings and margin depend on our ability to perform on our contracts. When agreeing to contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting for our contracts requires assumptions and estimates about these conditions and events. These projections and estimates assess, among other things:
• the productivity and availability of labor;
• the complexity of the work to be performed;
• the cost and availability of materials and components; and
• schedule requirements.
If there is a significant change in one or more of these circumstances, estimates or assumptions, or if the risks under our contracts are not managed adequately, the profitability of contracts could be adversely affected. This could affect earnings and margin materially.
Revenue, earnings and margin depend in part on supplier performance. We rely on other companies and our government customers to provide materials, components and subsystems for our products. Suppliers, including subcontractors, sometimes perform some of the services that we provide to our customers. We depend on these suppliers and government entities to meet our contractual obligations in full compliance with customer requirements and applicable law. Misconduct by suppliers, such as a failure to comply with procurement regulations or engaging in unauthorized activities, may harm our future revenue, earnings and margin.We sometimes rely on only one or two sources of supply, and any disruption in our supply chain could have an adverse effect on our ability to meet our customer commitments and could adversely affect our business, results of operations and financial condition. For example, some of our operating segments rely on the supply of semiconductors for the manufacture of our products, and any inability of or delay by our suppliers to meet our order demands (including due to the suppliers’ competing commercial priorities, any military conflict resulting in a disruption of manufacturing or trade relations, or any other business disruption) could delay or disrupt our ability to procure semiconductors. Our ability to perform our obligations to our customers, and our future revenue, earnings and margin, may be materially adversely affected if (1) any one or more of our suppliers is unable to or otherwise fails to, provide the agreed-upon materials or perform the agreed-upon services in a timely and cost-effective manner, or engages in misconduct or other improper activities or (2) we are unable to otherwise obtain necessary materials, components, subsystems or services in a timely and cost-effective manner.
Our success depends in part on our ability to develop new products and technologies and maintain a qualified workforce to meet the needs of our customers. Many of the products and services we provide involve sophisticated technologies and engineering, with related complex manufacturing and system-integration processes. Our customers’ requirements change and evolve regularly. Accordingly, our performance depends in part on our ability to continue to develop, manufacture and provide innovative products and services and bring those offerings to market quickly at
22
cost-effective prices. Many of our new products must meet extensive and time-consuming regulatory requirements that are often outside our control and may result in unanticipated delays. Additionally, due to the highly specialized nature of our business, we must hire and retain the skilled and qualified personnel necessary to perform the services required by our customers and to develop and manufacture our products. To the extent that the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting or training costs in order to attract and retain such employees. If we were unable to develop new products that meet customers’ changing needs and satisfy regulatory requirements in a timely manner or successfully attract and retain qualified personnel, our future revenue and earnings may be materially adversely affected.Risks Relating to Our International Operations
Operations outside the United States are subject to various risks that may be associated with doing business in foreign countries. In some countries there is increased chance for economic, legal or political instability, and procurement procedures may be less robust or mature, which may complicate the contracting process. Our non-U.S. operations may be sensitive to and impacted by (1) changes in a foreign government’s national policies and priorities, political leadership and budgets, which may be influenced by changes in threat environments, geopolitical uncertainties, volatility in economic conditions and other economic and political factors including inflationary pressures; (2) changes in U.S., foreign, and international laws, regulations, and policies; (3) energy, natural resource and other commodity shortages; and (4) global trade disputes and supply chain disruptions. For example, the ongoing conflict between Russia and Ukraine has resulted in the imposition of numerous economic and trade sanctions, export controls, and other restrictions targeting Russia and Belarus, and the Russian government has implemented counter-sanctions and export controls targeting the U.S. and various foreign countries in which we operate. These actions have caused some economic disruptions around the world and have exacerbated global supply chain challenges. Changes and developments in any of these matters or factors may occur suddenly and could impact funding for programs or delay purchasing decisions or customer payments.
Non-U.S. transactions can involve increased risks arising from foreign exchange rate variability, which could, among other things, negatively impact sales and the translation of our international revenue from local currencies into U.S. dollars, and differing legal systems. Our non-U.S. operations are subject to U.S. and foreign laws and regulations, including laws and regulations relating to import-export controls, technology transfers, the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws, and the International Traffic in Arms Regulations (ITAR). An unfavorable event or trend in any one or more of these factors or a failure to comply with U.S. or foreign laws could result in administrative, civil or criminal liabilities, including suspension or debarment from government contracts or suspension of our export privileges, and could materially adversely affect revenue and earnings.
In addition, some non-U.S. government customers require contractors to enter into letters of credit, performance or surety bonds, bank guarantees and other similar financial arrangements. We may also be required to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, that require us to satisfy investment or other commitments or face penalties. Offset requirements may extend over several years and could require us to team with local companies to fulfill these commitments. If we do not satisfy these financial or offset requirements, our future revenue and earnings may be materially adversely affected.23Risks Relating to Our Acquisitions and Similar Investment Activities
We have made and expect to continue to make investments, including acquisitions and joint ventures, that involve risks and uncertainties. When evaluating potential acquisitions and joint ventures, we make judgments regarding the value of business opportunities, technologies and other assets, and the risks and costs of potential liabilities based on information available to us at the time of the transaction. Whether we realize the anticipated benefits from these transactions depends on multiple factors, including our integration of the businesses involved; the performance of the underlying products, capabilities, or technologies; market conditions following the acquisition; and acquired liabilities, including some that may not have been identified prior to the acquisition. These factors could materially adversely affect our financial results.
Changes in business conditions may cause goodwill and other intangible assets to become impaired. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized and remains on our balance sheet indefinitely unless there is an impairment or a sale of a portion of the business. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. We face some uncertainty in our business environment due to a variety of challenges, including the risk factors discussed in this section. We may experience unforeseen circumstances that adversely affect the value of our goodwill or intangible assets. Future write-offs of goodwill or other intangible assets as a result of an impairment in the business could materially adversely affect our results of operations and financial condition.
Other Business and Operational Risks
Our business could be negatively impacted by cybersecurity events and other disruptions. We face various cybersecurity threats, including threats to our IT infrastructure and attempts to gain unauthorized access to our proprietary or classified information, denial-of-service attacks, as well as threats to the physical security of our facilities and employees, and threats from terrorist acts. We also design and manage IT systems and products for various customers. We generally face the same security threats for these systems and products as for our own internal systems. In addition, we face cybersecurity threats from entities and persons that may seek to target us through our customers, suppliers and other third parties with whom we do business. Many of these cybersecurity threats are increasingly sophisticated and constantly evolving. Accordingly, we maintain information security staff, policies and procedures for managing risk to our information systems, and we review and update our policies, procedures and practices in light of evolving threats. We conduct employee training on cybersecurity to mitigate persistent and continuously evolving cybersecurity threats, and we report cybersecurity events or losses of customer data to affected customers and applicable regulatory authorities. However, there can be no assurance that any such actions, including the timeliness of our efforts to review, update or implement policies, procedures and practices in light of evolving threats, or the safeguards put in place by our customers, suppliers and other parties on which we rely, will be sufficient to detect, prevent and mitigate cybersecurity breaches or disruptions, or the unauthorized release of sensitive information or corruption of data.
We have experienced cybersecurity events and disruptions such as viruses and attacks targeting our IT systems. Such prior events have not had a material impact on our financial condition, results of operations or liquidity. However, future threats could have a materially adverse impact on our company by, among other things, causing harm to our business, financial condition, results of operations or24reputation; disrupting our operations; exposing us to potential liability, regulatory actions and loss of business; and challenging our eligibility for future work on sensitive or classified systems for government customers. Due to the evolving nature of these security threats, the potential impact of any future incident cannot be predicted. Our insurance coverage may not be adequate to cover all the costs related to cybersecurity attacks or disruptions resulting from such events.Our business may continue to be negatively impacted by the coronavirus (COVID-19) pandemic and could be negatively impacted by other pandemics and outbreaks. The COVID-19 pandemic has had, and could continue to have, a negative effect on our business, results of operations and financial condition. Other outbreaks of contagious diseases, including new variants of COVID-19, or other adverse public health developments in countries where we operate or our customers are located, could similarly adversely affect our business. This includes disruptions or restrictions on our employees’ ability to work effectively, temporary closures of our facilities and the facilities of our customers, and the imposition of quarantine and travel restrictions that have and may in the future negatively affect demand for our products and services and result in supply-chain disruptions. Any such effects could materially adversely affect our ability to perform on our contracts. Any cost increases that result from these effects may not be fully recoverable on our contracts or adequately covered by insurance.Global climate change could negatively affect our business. Increased public awareness and concern regarding global climate change may result in state, federal or international requirements to reduce or mitigate global warming, such as the imposition of carbon pricing mechanisms, stricter limits on greenhouse gas emissions, or other business restrictions or compliance requirements regarding reducing or mitigating global climate change. If environmental or climate-change laws or regulations are adopted or changed that directly or indirectly impose significant new costs, operational restrictions or compliance requirements on our business, products, customers or suppliers, they could increase our costs, require additional capital expenditures, reduce our margins and adversely affect our business, results of operations and financial condition.
Further, while we continuously evaluate and seek opportunities to improve our climate-related measures, there can be no assurance that changes in customer demand patterns and competition, as well as potential reputational risks, related to climate change will not adversely affect our business, results of operations and financial condition.
FORWARD-LOOKING STATEMENTSThis annual report on Form 10-K contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “forecasts,” “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 the risk factors discussed in this Form 10-K.
25All 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 revisions to any 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 future filings with the SEC.
Item 7 · Management's Discussion & Analysis
+197 paragraphs −193 paragraphs ~193 changed
FY 2023-12-31 (earlier)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share amounts or unless otherwise noted)For an overview of our operating segments, including a discussion of our major products and services, see the Business discussion contained in Item 1. The following discussion of our financial condition and results of operations for 2023 compared with 2022 should be read in conjunction with our Consolidated Financial Statements included in Item 8, while a discussion of 2022 compared with 2021 can be found in Item 7 of our annual report on Form 10-K for the year ended December 31, 2022.BUSINESS ENVIRONMENT
GLOBAL EVENTSThe coronavirus (COVID-19) pandemic caused significant disruptions to national and global economies and government activities, including supply chain and staffing challenges. Additionally, in response to the Russian invasion of Ukraine, the United States and several other countries imposed economic and trade sanctions, export controls and other restrictions (collectively, global sanctions) targeting Russia and Belarus. The conflict and these sanctions have caused some disruptions to global economies and some global businesses, including heightened cybersecurity risks, increased energy costs and foreign currency exchange rate fluctuations, as well as exacerbated existing supply chain challenges and inflationary pressures. Lastly, the impact of the war between Israel and Hamas continues to evolve.
The disruptions caused by these events continue to impact global economies and businesses. The primary impact to our business is supply chain challenges, including inflationary pressures. In our Aerospace segment, supply chain challenges have paced our ability to ramp up production in response to strong customer demand for our aircraft and have caused out-of-sequence manufacturing, which increases costs and decreases operational efficiency. This includes the Israel-Hamas war’s impact on our Israel-based supplier of mid-cabin aircraft. Within our defense segments, the COVID-19 pandemic resulted in supply chain challenges and impacted the regional availability of skilled labor, which we continue to experience, particularly in our Marine Systems segment. The Russia-Ukraine conflict and increased threat environment has created additional demand for our products and services, particularly in our Combat Systems segment.Any longer-term impact of these global events to our business is currently unknown due to the uncertainty around duration and their broader impact. For additional information, see the Risk Factors in Part I, Item 1A.
OUR MARKETSWith approximately 70% of our revenue from the U.S. government, government spending levels — particularly defense spending — influence our financial performance. The Congress has not yet passed a defense appropriations bill for the government’s current fiscal year. However, the government has been operating under a continuing resolution (CR) that provides funding for some federal agencies through March 1, 2024, and other federal agencies through March 8, 2024. When the government operates under a CR, all programs of record are funded at the prior year’s appropriated levels until the current year appropriations bill is signed into law. Therefore, the U.S. Department of Defense (DoD) is prohibited
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from starting new programs or increasing funding on existing programs unless there is an exception for the program included in the CR. The current CR included an exception allowing the DoD to obligate funds for the construction of the second submarine under the existing Columbia-class submarine program. We do not anticipate the current CR having a material impact on our results of operations, financial condition or cash flows. However, the impact to our business from an extended CR or government shutdown that may result from any continuing delay by Congress to pass a new defense appropriations bill would depend on the duration and government implementation of the CR or shutdown.The long-term outlook for our U.S. defense business is influenced by the U.S. military’s funding priorities, the diversity of our programs and customers, our insight into customer requirements stemming from our incumbency on core programs, our ability to evolve our products to address a fast-changing threat environment and our proven track record of successful contract execution.
International demand for military equipment and technologies presents opportunities for our non-U.S. operations and exports from our North American businesses. While the revenue potential can be significant, there are risks to doing business in foreign countries, including changing budget priorities and overall spending pressures unique to each country.
In our Aerospace segment, we expect our investment in the development of new aircraft products and technologies to support the segment’s long-term growth. Similarly, we believe our aircraft services business will be a source of steady revenue growth as the global business jet fleet continues to grow.
RESULTS OF OPERATIONS
INTRODUCTION
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 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, 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 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.
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Additional factors affecting the segment’s earnings and margin include the volume, mix and profitability of 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 costs represent 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 costs 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 OVERVIEW2023 IN REVIEW• Strong operating performance:◦ Record-high revenue of $42.3 billion, an increase of 7.3% from 2022
◦ Operating earnings of $4.2 billion with sequential growth throughout the year
◦ Record-high cash provided by operating activities of $4.7 billion, or 142% of net earnings
• Record-high year-end backlog of $93.6 billion increased $2.5 billion, or 2.7%, from 2022, driven by significant order activity during the year supporting our long-term growth expectations:◦ Strong Gulfstream aircraft order activity, including orders across all aircraft models◦ Several significant contract awards received in our defense segments, including $3 billion of combined awards from the U.S. Navy for advance procurement and other work for the Virginia-class submarine program
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Year Ended December 31 2023 2022 Variance
Revenue $ 42,272 $ 39,407 $ 2,865 7.3 %
Operating costs and expenses (38,027) (35,196) (2,831) 8.0 %
Operating earnings 4,245 4,211 34 0.8 %
Operating margin 10.0 % 10.7 %
Our consolidated revenue increased in 2023 driven by growth in each of our defense segments, particularly submarine construction and engineering in our Marine Systems segment. Operating margin decreased in 2023 due primarily to supply-chain cost pressure in our Marine Systems segment and lower-margin artillery facilities expansion work in our Combat Systems 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 Consolidated Financial Statements in Item 8.
AEROSPACEYear Ended December 31 2023 2022 Variance
Revenue $ 8,621 $ 8,567 $ 54 0.6 %
Operating earnings 1,182 1,130 52 4.6 %
Operating margin 13.7 % 13.2 %
Gulfstream aircraft deliveries (in units) 111 120 (9) (7.5) %Operating ResultsThe increase in the Aerospace segment’s revenue in 2023 consisted of the following:
Aircraft services $ 220
Aircraft manufacturing (166)
Total increase $ 54
Aircraft services revenue was higher in 2023 due to an increase in demand for maintenance work based on established maintenance cycles, a larger installed base of aircraft, and strong customer flight activity. Aircraft manufacturing revenue decreased in 2023 due primarily to fewer deliveries of our large-cabin aircraft resulting from supply chain constraints.
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The increase in the segment’s operating earnings in 2023 consisted of the following:
Aircraft services $ 36
Aircraft manufacturing 7
G&A/other expenses 9
Total increase $ 52
Aircraft services operating earnings were up in 2023 due to higher volume and a favorable mix of services. While aircraft manufacturing operating earnings in 2023 reflected the impact of higher production costs resulting from supply chain challenges, 2022 earnings were impacted to a greater extent by customer accommodation costs associated with a G500/G600 airworthiness directive. G&A expenses decreased in 2023, offset partially by increased R&D expenses associated with ongoing product development efforts, particularly those related to the G700 certification. In total, the Aerospace segment’s operating margin increased 50 basis points in 2023 to 13.7%.
2024 Outlook
We expect the Aerospace segment’s 2024 revenue to increase to approximately $12 billion due to an increase in new aircraft deliveries to approximately 160, including the entry into service of the new G700 aircraft. We expect the segment’s operating margin to be approximately 15%.MARINE SYSTEMSYear Ended December 31 2023 2022 Variance
Revenue $ 12,461 $ 11,040 $ 1,421 12.9 %
Operating earnings 874 897 (23) (2.6) %
Operating margin 7.0 % 8.1 %Operating ResultsThe increase in the Marine Systems segment’s revenue in 2023 consisted of the following:
U.S. Navy ship engineering, repair and other services $ 784
U.S. Navy ship construction 637
Total increase $ 1,421
Revenue from U.S. Navy ship construction and engineering was up in 2023 due primarily to increased volume on the Columbia-class submarine program. The Marine Systems segment’s operating margin decreased 110 basis points in 2023 due to supply chain impacts to the Virginia-class submarine schedule and cost growth on the Arleigh Burke-class (DDG-51) guided-missile destroyer program.
2024 Outlook
We expect the Marine Systems segment’s 2024 revenue to increase to approximately $12.8-12.9 billion with operating margin of approximately 7.6%.
37COMBAT SYSTEMSYear Ended December 31 2023 2022 Variance
Revenue $ 8,268 $ 7,308 $ 960 13.1 %
Operating earnings 1,147 1,075 72 6.7 %
Operating margin 13.9 % 14.7 %Operating ResultsThe increase in the Combat Systems segment’s revenue in 2023 consisted of the following:
International military vehicles $ 474
Weapons systems and munitions 430
U.S. military vehicles 56
Total increase $ 960
Revenue from international military vehicles increased in 2023 due to higher volume on several wheeled and tracked vehicle contracts, including the sale of the Abrams main battle tank to U.S. allies and partners. Weapons systems and munitions revenue was up due to increased demand and facility expansion efforts associated with increased artillery production. Revenue from U.S. military vehicles increased due primarily to higher volume on the U.S. Army’s M10 Booker combat vehicle program (formerly known as Mobile Protected Firepower). The Combat Systems segment’s operating margin decreased 80 basis points compared with 2022 driven primarily by lower-margin artillery facilities expansion work.
2024 Outlook
We expect the Combat Systems segment’s 2024 revenue to increase to approximately $8.5 billion with operating margin of approximately 14.4%.TECHNOLOGIESYear Ended December 31 2023 2022 Variance
Revenue $ 12,922 $ 12,492 $ 430 3.4 %
Operating earnings 1,202 1,227 (25) (2.0) %
Operating margin 9.3 % 9.8 %
38Operating ResultsThe increase in the Technologies segment’s revenue in 2023 consisted of the following:
Information technology (IT) services $ 264
C5ISR* solutions 166
Total increase $ 430* Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissanceThe Technologies segment’s revenue was up due primarily to strong demand for IT services and the acquisition of a C5ISR solutions business in 2022. Overall, the segment’s margin decreased 50 basis points compared with 2022 due to program mix.
2024 Outlook
We expect the Technologies segment’s 2024 revenue to increase to $13 billion with operating margin of around 9.5%.CORPORATECorporate operating costs totaled $160 in 2023 and $118 in 2022 and consisted primarily of equity-based compensation expense. Corporate operating costs are expected to be approximately $125 in 2024.OTHER INFORMATION
PRODUCT AND SERVICE REVENUE AND OPERATING COSTSYear Ended December 31 2023 2022 VarianceRevenue:Products $ 24,595 $ 23,022 $ 1,573 6.8 %
Services 17,677 16,385 1,292 7.9 %Operating Costs:Products $ (20,591) $ (18,981) $ (1,610) 8.5 %
Services (15,009) (13,804) (1,205) 8.7 %
The increase in product revenue in 2023 consisted of the following:
Ship construction $ 637
Military vehicle production 503
Weapons systems and munitions 430
Other, net 3
Total increase $ 1,573
Ship construction revenue increased due primarily to higher volume on the Columbia-class submarine program. Military vehicle production revenue was up due primarily to higher volume on several international wheeled and tracked vehicle contracts. Weapons systems and munitions revenue was up due to increased demand and facility expansion efforts associated with increased artillery
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production. In 2023, product operating costs increased at a higher rate than revenue due to supply chain impacts and cost growth within our Marine Systems segment.
The increase in service revenue in 2023 consisted of the following:
Ship services $ 784
IT services 264
Aircraft services 220
Other, net 24
Total increase $ 1,292
Services revenue increased in 2023 due to a higher volume of engineering work on the Columbia-class submarine program, increased demand for IT services and additional aircraft maintenance work. In 2023, the primary driver of the increase in service operating costs was the change in volume described above.G&A EXPENSESAs a percentage of revenue, G&A expenses decreased to 5.7% in 2023 compared with 6.1% in 2022 due to growth in revenue. We expect G&A expenses as a percentage of revenue in 2024 to be generally consistent with 2023.OTHER, NETNet other income was $82 in 2023 and $189 in 2022 and represents primarily the non-service components of pension and other post-retirement benefits. The decrease in pension income was driven primarily by higher interest rates and a change in investment mix in one of our plans due to its improved funded status. In 2024, we expect net other income to be approximately $50.INTEREST, NETNet interest expense was $343 in 2023 and $364 in 2022, reflecting the repayment of our scheduled debt maturities in 2023 and 2022. See Note K to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including interest rates. We expect 2024 net interest expense to be approximately $320.PROVISION FOR INCOME TAX, NETOur effective tax rate increased to 16.8% in 2023 from 16% in 2022. For further discussion, including a reconciliation of our effective tax rate from the statutory federal rate, see Note D to the Consolidated Financial Statements in Item 8. For 2024, we anticipate a slightly higher full-year effective tax rate of approximately 17.5%. The increase in our effective tax rate in 2023 and the expected increase in 2024 are due principally to higher taxes on foreign earnings.BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUEOur total backlog, including funded and unfunded portions, was $93.6 billion on December 31, 2023, compared to $91.1 billion at the end of 2022. Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note B to the Consolidated Financial
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Statements in Item 8. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $132 billion on December 31, 2023.
The following table details the backlog and estimated potential contract value of each segment at the end of 2023 and 2022:Funded Unfunded Total Backlog Estimated Potential Contract Value Total Estimated Contract ValueDecember 31, 2023
Aerospace $ 19,557 $ 897 $ 20,454 $ 451 $ 20,905
Marine Systems 30,141 15,755 45,896 3,647 49,543
Combat Systems 13,816 721 14,537 6,236 20,773
Technologies 8,961 3,779 12,740 28,011 40,751
Total $ 72,475 $ 21,152 $ 93,627 $ 38,345 $ 131,972December 31, 2022
Aerospace $ 19,077 $ 439 $ 19,516 $ 685 $ 20,201
Marine Systems 26,246 19,453 45,699 3,672 49,371
Combat Systems 12,726 525 13,251 5,364 18,615
Technologies 9,100 3,571 12,671 26,889 39,560
Total $ 67,149 $ 23,988 $ 91,137 $ 36,610 $ 127,747For additional information about our major products and services in backlog see the Business discussion contained in Item 1.
AEROSPACEAerospace funded backlog represents primarily new aircraft 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 2023 with backlog of $20.5 billion, up 4.8% from $19.5 billion at year-end 2022.
Orders in 2023 reflected strong demand across our portfolio of products and services, including orders for all models of Gulfstream aircraft. The segment’s book-to-bill ratio (orders divided by revenue) was 1.2-to-1 in 2023.
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 December 31, 2023, estimated potential contract value in the Aerospace segment was $451.
Demand for Gulfstream aircraft remains strong across customer types and geographic regions, generating orders from public and privately held companies, individuals, and governments around the world. Geographically, U.S. customers represented 68% of the segment’s orders in 2023 and 59% of the segment’s backlog on December 31, 2023, demonstrating continued strong domestic demand.
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The following represents Gulfstream aircraft (in units) in backlog by region on December 31, 2023: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 Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments. The unfunded portion of total backlog includes the amounts we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.
Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.Total backlog in our defense segments was $73.2 billion on December 31, 2023, compared with $71.6 billion at year-end 2022. In 2023, the total book-to-bill ratio in our defense segments was slightly above 1-to-1. Estimated potential contract value in our defense segments was $37.9 billion on December 31, 2023, compared with $35.9 billion at year-end 2022.
42MARINE SYSTEMSThe Marine Systems segment’s backlog consists of very long-term submarine and surface ship construction programs, as well as numerous engineering and repair contracts. The segment’s backlog and estimated potential contract value remained steady compared with year-end 2022.
Significant contract awards in the Marine Systems segment during 2023 include:
• $1.7 billion from the U.S. Navy for lead yard services, development studies and design efforts, procurement and delivery of initial spare parts to support maintenance availabilities for Virginia-class submarines.
• $300 for advanced nuclear plant studies (ANPS) in support of the Columbia-class submarine program. The contracts, including options, have a maximum potential value of $1.5 billion.
• $1.3 billion from the Navy for long-lead materials and advance construction for Block V and long-lead materials for Block VI Virginia-class submarines.
• $720 from the Navy to provide maintenance and modernization services for the DDG-51 destroyer, San Antonio-class amphibious transport dock and Wasp-class amphibious assault ship programs. The awards including options have a maximum potential value of $1.2 billion.
• $735 from the Navy for construction of an additional John Lewis-class (T-AO-205) fleet replenishment oiler.
• $95 from the Navy to provide maintenance and support non-nuclear maintenance on submarines based at the New London Naval Submarine Support Facility in Connecticut. The awards have a maximum potential value of $460.
• A contract from the Navy to provide ongoing lead yard services for the DDG-51 program. The contract including options has a maximum potential value of $420.
• $220 from the Navy to provide in-service support of systems and components on the USS Jimmy Carter (SSN 23).
• A contract from the Navy for the construction of three Flight III DDG-51 destroyers.
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The following represents the Marine Systems segment’s total estimated contract value by major program on December 31, 2023:COMBAT SYSTEMSThe Combat Systems segment’s backlog consists of a mix of U.S. and international combat vehicles, weapons systems and munitions programs. The vehicle programs are generally long-term franchise programs, while the weapons systems and munitions programs tend to be shorter-term in nature. The segment’s backlog was up 9.7% from year-end 2022 to $14.5 billion. The segment’s estimated potential contract value was $6.2 billion on December 31, 2023, compared with $5.4 billion at year-end 2022.
Significant contract awards in the Combat Systems segment during 2023 include:
• $1.7 billion for various munitions and ordnance. The awards have a maximum potential value of $3.2 billion.
• $1 billion from the U.S. Army to establish additional capacity for 155mm projectile metal parts and M795 load, assemble and pack (LAP) production and artillery propellant. The contracts, including follow-on production, have a maximum potential value of $2.4 billion.
• $920 from the Army for Stryker vehicle upgrades, spare parts, and inventory management and support services.
• $695 from the Army to advance to the detailed design and prototype build and test phases of the XM30 Mechanized Infantry Combat Vehicle (MICV) competition, formerly known as the Optionally Manned Fighting Vehicle (OMFV). The award including options has a maximum potential value of $770.
• $755 from the Army to upgrade Abrams main battle tanks to the system enhancement package version 3 (SEPv3) configuration and provide system and sustainment technical support services for the Abrams program.
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• $305 to produce light armored vehicles (LAVs) and provide the associated spares and logistics support services for Colombia.
• $260 from the Army for the second phase of low-rate initial production (LRIP) of the M10 Booker Combat Vehicle.
• $230 to provide maintenance and modernization for the Leopard fleet of vehicles for the Spanish Ministry of Defence.
• $205 to produce Abrams main battle tanks in the SEPv3 configuration for Poland, bringing the total firm backlog for the program to $1.1 billion.
The following represents the Combat Systems segment’s total estimated contract value by market on December 31, 2023:TECHNOLOGIESThe Technologies segment’s backlog consists of thousands of contracts and task orders across a mix of U.S. and non-U.S. government and commercial customers. These contracts can be shorter-cycle or span multiple years, but commonly include a small, initially funded order. Therefore, our estimated potential contract value of $28 billion is an important indicator of future orders and revenue. In 2023, approximately 80% of the segment’s orders were from additional work on IDIQ contracts or the exercise of options. The segment’s total estimated contract value was $40.8 billion on December 31, 2023, compared with $39.6 billion at year-end 2022.45Significant contract awards in the Technologies segment during 2023 include:
• An IDIQ contract to provide full spectrum security support services to protect mission critical infrastructure for the U.S. Air Force. The contract has a maximum potential value of $4.5 billion between two awardees.
• $1.4 billion for several key classified contracts. The contracts have a maximum potential value of $3.1 billion.
• An IDIQ contract from the Indian Health Service (IHS) to modernize its electronic health record (EHR) system. The contract has a maximum potential value of $2.5 billion.
• $130 to provide flight simulation and training services for the Army. The contract has a maximum potential value of $1.7 billion.
• An IDIQ contract to provide mission command training and technical support services for the Army. The contract has a maximum potential value of $975 among multiple awardees.
• $55 to continue infrastructure modernization of the U.S. Department of Homeland Security’s (DHS) St. Elizabeth’s Campus in Washington, D.C. The contract including options has a maximum potential value of $710.
• $95 from U.S. Special Operations Command (USSOCOM) to provide a full range of activities to support USSOCOM operations, including program management, mission infrastructure and training services. The contract including options has a maximum potential value of $490.
• An IDIQ contract to provide sustainment services, spare parts and obsolescence risk management services, and system readiness for the Army’s Prophet Enhanced sensor systems. The contract has a maximum potential value of $480.
• A contract from the Centers for Medicare and Medicaid Services (CMS) to continue operating and modernizing the agency’s Healthcare Integrated General Ledger Accounting System (HIGLAS) application. The contract including options has a maximum potential value of $450.
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The following represents the Technologies segment’s total estimated contract value by customer on December 31, 2023:LIQUIDITY AND CAPITAL RESOURCESWe place a strong emphasis on cash flow generation, which is underpinned by an operating discipline focused on cost control and working capital management. This emphasis gives us the flexibility for prudent capital deployment, while allowing us to step down debt over time, and preserves a strong balance sheet for future opportunities.
We evaluate a variety of capital deployment options based on current market conditions and our long-term outlook, and we believe agility is a key component of our capital deployment strategy as market conditions change over time. Our capital deployment priorities include investments in our products and services to drive long-term growth, a predictable dividend, strategic acquisitions and opportunistic share repurchases.We believe cash generated by operating activities, supplemented by commercial paper issuances, is sufficient to satisfy our short- and long-term liquidity needs. An additional potential source of capital is the issuance of long-term debt in capital market transactions.47
We ended 2023 with a cash and equivalents balance of $1.9 billion compared with $1.2 billion at the end of 2022. The following is a discussion of our major operating, investing and financing activities in 2023 and 2022, as classified on the Consolidated Statement of Cash Flows in Item 8:
Year Ended December 31 2023 2022
Net cash provided by operating activities $ 4,710 $ 4,579
Net cash used by investing activities (941) (1,489)
Net cash used by financing activities (3,094) (3,471)OPERATING ACTIVITIESCash provided by operating activities was $4.7 billion in 2023 compared with $4.6 billion in 2022 . The primary driver of cash inflows in both years was net earnings. Cash flows in both periods were affected positively by an increase in customer deposits driven by Gulfstream aircraft orders, offset partially by an increase in inventory due primarily to new aircraft models awaiting certification from the U.S. Federal Aviation Administration (FAA). Cash flows in 2023 were also affected positively by a decrease in unbilled receivables due to the receipt of progress payments on large international vehicle contracts in our Combat Systems segment.INVESTING ACTIVITIESCash used by investing activities was $941 in 2023 and $1.5 billion in 2022. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales.
Capital Expenditures. The primary use of cash for investing activities in both years was capital expenditures. Capital expenditures were $904 in 2023 and $1.1 billion in 2022. Capital expenditures include equipment and facility enhancements to support new and existing programs across our businesses.FINANCING ACTIVITIESCash used by financing activities was $3.1 billion in 2023 and $3.5 billion in 2022. Financing activities include the use of cash for repurchases of common stock, payment of dividends, and debt and commercial paper repayments. Our financing activities also include proceeds received from debt and commercial paper issuances and employee stock option exercises.
Dividends. On March 8, 2023, our board of directors (Board) declared an increased quarterly dividend of $1.32 per share, the 26th consecutive annual increase. Previously, the Board had increased the quarterly dividend to $1.26 per share in March 2022. Cash dividends paid were $1.4 billion in 2023 and 2022.
Share Repurchases. Our Board from time to time authorizes management to repurchase outstanding shares of our common stock on the open market. We paid $434 and $1.2 billion in 2023 and 2022, respectively, to repurchase our outstanding shares. On December 31, 2023, 4.7 million shares remained authorized by our Board for repurchase, representing 1.7% of our total shares outstanding.
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Debt Issuances and Repayments. In May and August 2023, we repaid fixed-rate notes of $750 and $500, respectively, and in November 2022, we repaid fixed-rate notes of $1 billion, all at their respective scheduled maturities using cash on hand. Fixed-rate notes of $500 mature in November 2024. We currently plan to repay these notes at maturity using cash on hand, potentially supplemented by commercial paper or other borrowings. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note K to the Consolidated Financial Statements in Item 8.
On December 31, 2023, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have a $4 billion committed bank credit facility for general corporate purposes and working capital needs and to support our commercial paper issuances. We also have an effective shelf registration on file with the Securities and Exchange Commission (SEC) that allows us to access the debt markets.NON-GAAP FINANCIAL MEASURES
We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow and return on invested capital (ROIC) to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, GAAP measures.Free Cash Flow. We define free cash flow as net cash provided by operating activities less capital expenditures. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow with net cash provided by operating activities, as classified on the Consolidated Statement of Cash Flows in Item 8:
Year Ended December 31 2023 2022 2021
Net cash provided by operating activities $ 4,710 $ 4,579 $ 4,271
Capital expenditures (904) (1,114) (887)
Free cash flow $ 3,806 $ 3,465 $ 3,384Cash flows as a percentage of net earnings:Net cash provided by operating activities 142 % 135 % 131 %
Free cash flow 115 % 102 % 104 %
Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as net earnings plus after-tax interest and amortization expense, calculated using the statutory federal income tax rate. Average invested capital is defined as the sum of the average debt and average shareholders’ equity excluding accumulated other comprehensive loss. Average debt and average shareholders’ equity excluding accumulated other comprehensive loss are calculated using the
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respective balances at the end of the preceding year and the respective balances at the end of each of the four quarters of the year presented. ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of company performance.ROIC is calculated as follows:Year Ended December 31 2023 2022 2021
Net earnings $ 3,315 $ 3,390 $ 3,257
After-tax interest expense 315 309 340
After-tax amortization expense 201 235 254
Net operating profit after taxes $ 3,831 $ 3,934 $ 3,851
Average invested capital $ 31,258 $ 31,260 $ 32,270
Return on invested capital 12.3 % 12.6 % 11.9 %CASH REQUIREMENTS
The following is a discussion of how we expect to meet the future cash requirements from known contractual and other obligations.
The majority of our revenue is derived from long-term contracts and programs that can span several years. We similarly enter into long-term agreements with suppliers and subcontractors for goods and services in support of these contracts and programs with payment terms that are generally aligned with the payment terms from our customers. In some instances, we require advance payments or deposits from our customers, which help fund our purchase commitments and reduce the risk of customer performance.
Additionally, we have significant liabilities under our defined benefit retirement plans. As these liabilities are settled using plan assets, our future cash requirements associated with these liabilities are generally limited to the annual cash contributions to these plans required in accordance with Internal Revenue Service (IRS) regulations. See Note S to the Consolidated Financial Statements in Item 8 for additional information.
Other obligations, such as scheduled principal and interest payments on our fixed-rate notes, and scheduled payments in accordance with our lease agreements are expected to be satisfied using cash generated from operations. See Notes J and K to the Consolidated Financial Statements in Item 8 for additional information.
ADDITIONAL FINANCIAL INFORMATION
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATESManagement’s Discussion and Analysis of Financial Condition and Results of Operations is based on the 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. Actual results may differ from these estimates. We
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believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.In our opinion, the following policies are critical and require the use of significant judgment in their application:
Revenue. 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. Our performance obligations are satisfied over time as work progresses or at a point in time.
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 costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.
Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.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. 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. For discussion of our contract estimates, the assumptions used, and the impact of changes in estimates, see Footnote B to the Consolidated Financial Statements in Item 8.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. 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. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
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. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over the estimated fair value as determined by discounted cash flows.Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. Our reporting units are consistent with our operating segments in Note O to the Consolidated Financial Statements in Item 8. We use both qualitative and quantitative approaches when testing goodwill for impairment. When determining the approach to be used, we consider the current facts and circumstances of each
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reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments. Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events. If, based on the qualitative assessment, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary. However, if a quantitative assessment is determined to be necessary, we compare the fair value of a reporting unit to its carrying value and, if necessary, recognize an impairment loss for the amount by which the carrying value exceeds the reporting unit’s fair value.Our estimate of a reporting unit’s fair value is based primarily on the discounted cash flows of the underlying operations and requires the use of judgment by management. The process requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal-value growth rates applied to the final year of projected cash flows. Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis. To assess the reasonableness of our discounted cash flows, we compare the sum of our reporting units’ fair value to our market capitalization. Additionally, we evaluate the reasonableness of each reporting unit’s fair value by comparing the fair value to peer companies and recent relevant market transactions.In the fourth quarter of 2023, we completed qualitative assessments for our Aerospace, Marine Systems and Combat Systems reporting units as the estimated fair values of each of the reporting units significantly exceeded the respective carrying values based on our most recent quantitative assessments, which were performed in the fourth quarter of 2018. Our qualitative assessments did not present indicators of impairment for the reporting units.
In the fourth quarter of 2023, we also completed a qualitative assessment for our Technologies reporting unit as its estimated fair value exceeded its carrying value by approximately 25% at the time of our last quantitative assessment in the fourth quarter of 2022. Interest rates rose over the last year, but the increase was within the tolerances established in our previous quantitative analysis. Our qualitative assessment this year did not present any other indicators of impairment. However, if interest rates were to continue to increase without an offsetting increase in future cash flow projections, the estimated fair value of the reporting unit would decrease and could put the reporting unit at risk of goodwill impairment.
Commitments and Contingencies. We are subject to litigation and other legal proceedings arising either from the normal course of business or under provisions relating to the protection of the environment. Estimating liabilities and costs associated with these matters requires the use of judgment. We record a charge against earnings when a liability associated with claims or pending or threatened litigation is probable and when our exposure is reasonably estimable. The ultimate resolution of our exposure related to these matters may change as further facts and circumstances become known.
Retirement Plans. Our pension and other post-retirement benefit costs and obligations depend on several assumptions and estimates, which are based on our best judgment, including consideration of current and future market conditions. For a discussion of our assumptions and any changes to these assumptions, as well as the impact of these changes, which is reported as an actuarial gain or loss in the reconciliation of the change in the benefit obligation, see Note S to the Consolidated Financial Statements in Item 8. The key assumption is the interest rates used to discount estimated future pension benefits. We base the discount rates on a current yield curve developed from a portfolio of high-quality,
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fixed-income investments with maturities consistent with the projected benefit payout period. The effect of a 25-basis-point increase or decrease in the discount rate assumption on the December 31, 2023, pension benefit obligation is ($317) or $332, respectively.As described in Note S to the Consolidated Financial Statements in Item 8, our contractual arrangements with the U.S. government provide for the recovery of benefit costs for our government retirement plans. We have elected to defer recognition of the benefit costs until such costs can be allocated to contracts. Therefore, the impact of annual changes in financial reporting assumptions on the retirement benefit cost for these plans does not immediately affect our operating results.
GUARANTOR FINANCIAL INFORMATION
The outstanding notes described in Note K to the Consolidated Financial Statements in Item 8, 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 guarantee of each guarantor ranks equally in right of payment with all other existing and future senior unsecured indebtedness of such guarantor. A listing of the guarantors is included in an exhibit to this Form 10-K.
Because the parent is a holding company, its cash flow and ability to service its debt, including the outstanding notes, depends on the performance of its subsidiaries and the ability of those subsidiaries to distribute cash to the parent, whether by dividends, loans or otherwise. Holders of the outstanding notes have a direct claim only against the parent and the guarantors.
Under the relevant indenture, the guarantee of each guarantor is limited to the maximum amount that can be guaranteed without rendering the guarantee voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the parent or any of its subsidiaries) or (2) there occurs a transfer, sale or other disposition of the voting stock of a guarantor so that the guarantor is no longer a subsidiary of the parent, then the guarantor or the entity acquiring the assets (in the event of the sale or other disposition of all or substantially all of the assets of a guarantor) will be released and relieved of any obligations under the guarantee.
The following summarized financial information presents the parent and guarantors (collectively, the combined obligor group) on a combined basis. The summarized financial information of the combined obligor group excludes net investment in and earnings of subsidiaries related to interests held by the combined obligor group in subsidiaries that are not guarantors of the notes.
STATEMENT OF EARNINGS INFORMATIONYear Ended December 31 2023
Revenue $ 16,276
Operating costs and expenses, excluding G&A (14,316)
Net earnings 773
53BALANCE SHEET INFORMATIONDecember 31, 2023 December 31, 2022
Cash and equivalents $ 986 $ 540
Other current assets 5,012 4,279
Noncurrent assets 4,506 4,164
Total assets $ 10,504 $ 8,983
Short-term debt and current portion of long-term debt $ 503 $ 1,250
Other current liabilities 2,890 3,392
Long-term debt 8,700 9,189
Other noncurrent liabilities 3,281 3,814
Total liabilities $ 15,374 $ 17,645The summarized balance sheet information presented above includes the funded status of the company’s primary qualified U.S. government pension plans as the parent has the ultimate obligation for the plans.
FY 2024-12-31 (later)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share amounts or unless otherwise noted)For an overview of our operating segments, including a discussion of our major products and services, see the Business discussion contained in Item 1. The following discussion of our financial condition and results of operations for 2024 compared with 2023 should be read in conjunction with our Consolidated Financial Statements included in Item 8, while a discussion of 2023 compared with 2022 can be found in Item 7 of our annual report on Form 10-K for the year ended December 31, 2023.BUSINESS ENVIRONMENT
GLOBAL EVENTSThe coronavirus (COVID-19) pandemic caused significant disruptions to national and global economies and government activities, including supply chain and staffing challenges. Additionally, in response to the Russian invasion of Ukraine, the United States and several other countries imposed economic and trade sanctions, export controls and other restrictions targeting Russia and Belarus. Lastly, the impact of the conflict in the Middle East continues to evolve. The disruptions caused by these events continue to impact global economies and businesses, including ours. The primary impact to our business is supply chain challenges, including availability of parts, quality escapes and inflationary pressures.
In our Aerospace segment, supply chain challenges paced our ability to ramp up production at the rate we like in response to strong customer demand for our aircraft, causing out-of-sequence manufacturing that increased costs and decreased operational efficiency. In addition, the conflict in the Middle East impacted the delivery schedule for our Israel-based supplier of mid-cabin aircraft. Within our defense segments, the COVID-19 pandemic resulted in supply chain challenges that continue to impact our Marine Systems segment. The Russia-Ukraine conflict and increased threat environment have created additional demand for certain of our products and services, particularly in our Combat Systems segment.Any longer-term impact of these global events to our business is currently unknown due to the uncertainty around duration and their broader impact. For additional information, see the Risk Factors in Part I, Item 1A.
OUR MARKETSWith approximately 70% of our revenue from the U.S. government, government spending levels — particularly defense spending — influence our financial performance. The Congress has not yet passed a defense appropriations bill for the government’s current fiscal year. However, the government has been operating under a continuing resolution (CR) that provides funding for some federal agencies through March 14, 2025. When the government operates under a CR, all programs of record are funded at the prior year’s appropriated levels until the current year appropriations bill is signed into law. Therefore, the U.S. Department of Defense (DoD) is prohibited from starting new programs or increasing funding on existing programs unless there is an exception for the program included in the CR. The current CR included exceptions allowing the DoD to obligate additional funds for two fiscal year 2024 and one fiscal year 2025 Virginia-class submarines, and for non-executive pay improvements and infrastructure
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investments to support the submarine industrial base. In addition, the CR included an exception allowing the DoD to obligate funds for the construction of the second submarine under the existing Columbia-class submarine contract. We do not anticipate the current CR having a material impact on our results of operations, financial condition or cash flows. However, the impact to our business from an extended CR or government shutdown that may result from any continuing delay by Congress to pass a new defense appropriations bill would depend on the duration and government implementation of the CR or shutdown.The long-term outlook for our U.S. defense business is influenced by the U.S. military’s funding priorities, the diversity of our programs and customers, our insight into customer requirements stemming from our incumbency on core programs, our ability to evolve our products to address a fast-changing threat environment and our proven track record of successful contract execution.
International demand for military equipment and technologies presents opportunities for our non-U.S. operations and exports from our North American businesses. While the revenue potential can be significant, there are risks to doing business in foreign countries, including changing budget priorities and overall spending pressures unique to each country.
In our Aerospace segment, we expect our investment in the development of new aircraft products and technologies to support the segment’s long-term growth. Similarly, we believe our aircraft services business will be a source of steady revenue growth as the global business jet fleet continues to grow.
RESULTS OF OPERATIONS
INTRODUCTION
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 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, 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 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
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of 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 costs represent 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 costs 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 OVERVIEW2024 IN REVIEW• Strong operating performance:◦ Revenue of $47.7 billion, an increase of 12.9% from 2023
◦ Operating earnings of $4.8 billion, an increase of 13% from 2023, with sequential growth throughout the year
◦ Diluted earnings per share of $13.63, up 13.4% from 2023
◦ Cash provided by operating activities of $4.1 billion, or 109% of net earnings
• Backlog of $90.6 billion, supporting our long-term growth expectations:◦ Strong Gulfstream aircraft order activity, including orders across all aircraft models◦ Several significant contract awards received in our defense segments, including $3.7 billion of combined awards from the U.S. Navy for advance procurement and other work for the Virginia-class submarine program
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Year Ended December 31 2024 2023 Variance
Revenue $ 47,716 $ 42,272 $ 5,444 12.9 %
Operating costs and expenses (42,920) (38,027) (4,893) 12.9 %
Operating earnings 4,796 4,245 551 13.0 %
Operating margin 10.1 % 10.0 %
Our consolidated revenue increased in 2024 driven by growth across all segments, including double digit percentage growth in our Aerospace and Marine Systems segments. Operating margin increased 10 basis points.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 Consolidated Financial Statements in Item 8.
AEROSPACEYear Ended December 31 2024 2023 Variance
Revenue $ 11,249 $ 8,621 $ 2,628 30.5 %
Operating earnings 1,464 1,182 282 23.9 %
Operating margin 13.0 % 13.7 %
Gulfstream aircraft deliveries (in units) 136 111 25 22.5 %Operating ResultsThe increase in the Aerospace segment’s revenue in 2024 consisted of the following:
Aircraft manufacturing $ 2,101
Aircraft services 527
Total increase $ 2,628
Aircraft manufacturing revenue increased in 2024 due primarily to the number and mix of aircraft deliveries, including our ultra-long-range, ultra-large-cabin G700 aircraft, which began deliveries in the second quarter of 2024 following U.S. Federal Aviation Administration (FAA) and European Union Aviation Safety Agency (EASA) certification. The number of G700 deliveries in 2024 was impacted by supplier quality escapes, late delivery of components and out of station work. Aircraft services revenue was higher in 2024 due to increased customer demand for aircraft maintenance based on established maintenance cycles, a larger installed base and customer flight activity.
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The increase in the segment’s operating earnings in 2024 consisted of the following:
Aircraft manufacturing $ 213
Aircraft services 129
G&A/other expenses (60)
Total increase $ 282
Aircraft manufacturing operating earnings increased in 2024 but not at the same rate as revenue, reflecting additional costs associated with the initial deliveries of G700 aircraft due to out of station work caused by supplier quality escapes and late delivery of components. Aircraft services operating earnings were higher in 2024 due to higher volume. G&A/other expenses increased in 2024 consistent with the growth in the business. In total, the Aerospace segment’s operating margin decreased 70 basis points in 2024.
2025 Outlook
We expect the Aerospace segment’s 2025 revenue to increase to approximately $12.7 billion with operating margin of approximately 13.7%.MARINE SYSTEMSYear Ended December 31 2024 2023 Variance
Revenue $ 14,343 $ 12,461 $ 1,882 15.1 %
Operating earnings 935 874 61 7.0 %
Operating margin 6.5 % 7.0 %Operating ResultsThe increase in the Marine Systems segment’s revenue in 2024 consisted of the following:
U.S. Navy ship construction $ 1,525
U.S. Navy ship engineering, repair and other services 357
Total increase $ 1,882
Revenue from U.S. Navy ship construction and engineering was up in 2024 due primarily to increased volume on the Columbia-class and Virginia-class submarine programs. The Marine Systems segment’s operating margin decreased 50 basis points in 2024 due to a $123 unfavorable profit adjustment in the fourth quarter of 2024 on the Virginia-class Block IV contract as it approaches completion in 2026. The Virginia-class program has been impacted by supplier quality issues and late supply chain deliveries causing cost growth and schedule delays.
2025 Outlook
We expect the Marine Systems segment’s 2025 revenue to increase to approximately $15 billion with operating margin of approximately 6.8%.
36COMBAT SYSTEMSYear Ended December 31 2024 2023 Variance
Revenue $ 8,997 $ 8,268 $ 729 8.8 %
Operating earnings 1,276 1,147 129 11.2 %
Operating margin 14.2 % 13.9 %Operating ResultsThe increase in the Combat Systems segment’s revenue in 2024 consisted of the following:
Weapons systems and munitions $ 509
U.S. military vehicles 218
International military vehicles 2
Total increase $ 729
Weapons systems and munitions revenue increased in 2024 due to heightened demand for artillery products. Revenue from U.S. military vehicles was up in 2024 due primarily to higher volume on the U.S. Army’s M10 Booker combat vehicle program. The Combat Systems segment’s operating margin increased 30 basis points compared with 2023 driven by favorable contract mix.
2025 Outlook
We expect the Combat Systems segment’s 2025 revenue to increase to approximately $9.1 billion with operating margin of approximately 14.5%.TECHNOLOGIESYear Ended December 31 2024 2023 Variance
Revenue $ 13,127 $ 12,922 $ 205 1.6 %
Operating earnings 1,260 1,202 58 4.8 %
Operating margin 9.6 % 9.3 %Operating ResultsThe increase in the Technologies segment’s revenue in 2024 consisted of the following:
Information technology (IT) services $ 302
C5ISR* solutions (97)
Total increase $ 205* Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissanceThe Technologies segment’s revenue increased in 2024 due primarily to strong demand for IT services, including the ramp-up of new programs, offset partially by C5ISR solutions program timing and the ramp-down of legacy programs. Overall, the segment’s margin increased 30 basis points compared with 2023 due to strong operating performance.
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2025 Outlook
We expect the Technologies segment’s 2025 revenue to increase to approximately $13.5 billion with operating margin of approximately 9.2%.CORPORATECorporate operating costs totaled $139 in 2024 and $160 in 2023 and consisted primarily of equity-based compensation expense. Corporate operating costs are expected to be approximately $150 in 2025.OTHER INFORMATION
PRODUCT AND SERVICE REVENUE AND OPERATING COSTSYear Ended December 31 2024 2023 VarianceRevenue:Products $ 28,635 $ 24,595 $ 4,040 16.4 %
Services 19,081 17,677 1,404 7.9 %Operating Costs:Products $ (24,332) $ (20,591) $ (3,741) 18.2 %
Services (16,020) (15,009) (1,011) 6.7 %
The increase in product revenue in 2024 consisted of the following:
Aircraft manufacturing $ 2,101
Ship construction 1,525
Weapons systems and munitions 509
Other, net (95)
Total increase $ 4,040
Aircraft manufacturing revenue increased due to additional aircraft deliveries. Ship construction revenue was up due primarily to higher volume on the Columbia-class and Virginia-class submarine programs. Weapons systems and munitions revenue increased due to heightened demand for artillery products. In 2024, product operating costs increased at a higher rate than revenue due to supplier quality issues and late supply chain deliveries on the Virginia-class Block IV contract within our Marine Systems segment and additional costs associated with initial deliveries of G700 aircraft due to out of station work caused by supplier quality escapes and late delivery of components in our Aerospace segment.
The increase in service revenue in 2024 consisted of the following:
Aircraft services $ 527
C5ISR solutions/IT services 493
Ship services 357
Other, net 27
Total increase $ 1,404
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Aircraft services revenue increased due to additional maintenance work. C5ISR solutions and IT services revenue was up due to higher volume, including the ramp-up of new programs. Ship services revenue increased due to higher volume on the Columbia-class submarine program. The primary drivers of the increase in service operating costs were the changes in volume on the programs described above.G&A EXPENSESAs a percentage of revenue, G&A expenses decreased to 5.4% in 2024 compared with 5.7% in 2023 due to growth in revenue. We expect G&A expenses as a percentage of revenue in 2025 to be generally consistent with 2024.OTHER, NETNet other income was $68 in 2024 and $82 in 2023 and represents primarily the non-service components of pension and other post-retirement benefits. In 2025, we expect net other income to be approximately $50.INTEREST, NETNet interest expense was $324 in 2024 and $343 in 2023. See Note K to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including interest rates. We expect 2025 net interest expense to be consistent with 2024.PROVISION FOR INCOME TAX, NETOur effective tax rate was 16.7% in 2024 and 16.8% in 2023. For further discussion, including a reconciliation of our effective tax rate from the statutory federal rate, see Note D to the Consolidated Financial Statements in Item 8. For 2025, we expect a full-year effective tax rate of approximately 17.5%, generally consistent with our original expectations for 2024 before declining due to certain U.S. and foreign tax credits and benefits and other timing items.BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUEOur total backlog, including funded and unfunded portions, was $90.6 billion on December 31, 2024, compared to $93.6 billion at the end of 2023. Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note B to the Consolidated Financial Statements in Item 8. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $144 billion on December 31, 2024.
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The following table details the backlog and estimated potential contract value of each segment at the end of 2024 and 2023:Funded Unfunded Total Backlog Estimated Potential Contract Value Total Estimated Contract ValueDecember 31, 2024
Aerospace $ 18,895 $ 798 $ 19,693 $ 1,132 $ 20,825
Marine Systems 30,530 9,288 39,818 9,560 49,378
Combat Systems 16,142 838 16,980 8,647 25,627
Technologies 9,577 4,529 14,106 34,029 48,135
Total $ 75,144 $ 15,453 $ 90,597 $ 53,368 $ 143,965December 31, 2023
Aerospace $ 19,557 $ 897 $ 20,454 $ 451 $ 20,905
Marine Systems 30,141 15,755 45,896 3,647 49,543
Combat Systems 13,816 721 14,537 6,236 20,773
Technologies 8,961 3,779 12,740 28,011 40,751
Total $ 72,475 $ 21,152 $ 93,627 $ 38,345 $ 131,972For additional information about our major products and services in backlog see the Business discussion contained in Item 1.
AEROSPACEAerospace funded backlog represents primarily new aircraft 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 2024 with backlog of $19.7 billion.
Orders in 2024 reflected strong demand across our portfolio of products and services, including orders for all models of Gulfstream aircraft. The segment’s book-to-bill ratio (orders divided by revenue) was 1-to-1 in 2024, even as revenue grew by more than 30% year over year.
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 December 31, 2024, estimated potential contract value in the Aerospace segment was $1.1 billion.
Demand for Gulfstream aircraft remains strong across customer types and geographic regions, generating orders from public and privately held companies, individuals, and governments around the world. Geographically, U.S. customers represented 54% of the segment’s orders in 2024 and 56% of the segment’s backlog on December 31, 2024, demonstrating continued strong domestic demand.
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The following represents Gulfstream aircraft (in units) in backlog by region on December 31, 2024: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 Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments. The unfunded portion of total backlog includes the amounts we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.
Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.Total backlog in our defense segments was $70.9 billion on December 31, 2024, compared with $73.2 billion at year-end 2023. In 2024, the total book-to-bill ratio in our defense segments was 1-to-1. Estimated potential contract value in our defense segments was $52.2 billion on December 31, 2024, up 37.8% compared with $37.9 billion at year-end 2023.
41MARINE SYSTEMSThe Marine Systems segment’s backlog consists of very long-term submarine and surface ship construction programs, as well as numerous engineering and repair contracts. The segment’s total estimated contract value remained steady compared with year-end 2023.
Significant contract awards in the Marine Systems segment during 2024 include:
• $780 from the U.S. Navy for the construction of an additional John Lewis-class (T-AO-205) fleet replenishment oiler. The contract including options for an additional seven T-AO-205 oilers has a maximum potential value of more than $6.7 billion.
• $2.9 billion from the Navy for long-lead materials for Block V and Block VI Virginia-class submarines.
• $205 from the Navy for planning yard services for the Arleigh Burke-class (DDG-51) guided-missile destroyer program. The contract including options has a maximum potential value of $1.1 billion.
• $770 from the Navy for lead yard services, development studies, design and engineering efforts, procurement and delivery of initial spare parts to support maintenance availabilities for Virginia-class submarines.
• $530 from the Navy to provide maintenance, modernization and repair services for the DDG-51 destroyer, USS Hartford Los Angeles-class submarine and Wasp-class amphibious assault ship programs.
• $455 from the Navy to provide engineering, technical, design and planning yard support services for operational strategic and attack submarines.
• $255 for future technology development on the next-generation attack submarine, SSN(X), program for the Navy.
• $115 for advanced nuclear plant studies (ANPS) in support of the Columbia-class submarine program.
• $55 from the Navy to support non-nuclear maintenance on submarines based at the New England Naval Submarine Support Facility.
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The following represents the Marine Systems segment’s total estimated contract value by major program on December 31, 2024:COMBAT SYSTEMSThe Combat Systems segment’s backlog consists of a mix of U.S. and international combat vehicles, weapons systems and munitions programs. The vehicle programs are generally long-term franchise programs, while the weapons systems and munitions programs tend to be shorter-term in nature. The segment’s backlog was up 16.8% from year-end 2023 to $17 billion. The segment’s estimated potential contract value was $8.6 billion on December 31, 2024, compared with $6.2 billion at year-end 2023.
Significant contract awards in the Combat Systems segment during 2024 include:
• $2 billion for various munitions and ordnance. These contracts have a maximum potential value of $3.2 billion.
• An IDIQ contract to provide medium-caliber ammunition cartridges for the U.S. Army. The contract has a maximum potential value of $3 billion among two awardees.
• $1.6 billion from the Army to produce 155mm artillery projectile metal parts and propelling bag charges and establish additional capacity for artillery propellant. The contracts have a maximum potential value of $2.5 billion.
• $1.3 billion for the production of Pandur 6x6 wheeled combat vehicles from the Austrian Federal Ministry of Defense. The contract including options has a maximum potential value of $2 billion.
• Two contracts from the Canadian government for the Logistics Vehicle Modernization (LVM) program to provide a new fleet of light and heavy armored vehicles and logistics support services for the Canadian Army. These contracts including options have a maximum potential value of $1.9 billion. The scope of the work is shared with an industry partner.
• $605 from the Army for Stryker vehicle upgrades, systems technical support and inventory management. The contracts have a maximum potential value of $1.1 billion.
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• $350 from the Army for Abrams main battle tank upgrades, engineering and logistics support services, and system and sustainment technical support services.
• $325 from the Army for the third phase of the low-rate initial production (LRIP) of the M10 Booker Combat Vehicle.
• $325 from the Canadian government to produce armored combat support vehicles (ACSVs).
• $285 to produce Abrams main battle tanks in the system enhancement package version 3 (SEPv3) configuration for Romania.
• $280 from the Army to produce Stryker Sgt. Stout vehicles and provide long-lead materials to support the future retrofit of the vehicles to a dual Stinger Vehicle Universal Launcher (SVUL) configuration.
The following represents the Combat Systems segment’s total estimated contract value by market on December 31, 2024:TECHNOLOGIESThe Technologies segment’s backlog consists of thousands of contracts and task orders across a mix of U.S. and non-U.S. government and commercial customers. These contracts can be shorter-cycle or span multiple years, but commonly include a smaller, initially funded order. Therefore, our estimated potential contract value of $34 billion is an important indicator of future orders and revenue. In 2024, approximately 75% of the segment’s orders were from additional work on IDIQ contracts or the exercise of options. The segment’s total estimated contract value was $48.1 billion on December 31, 2024, up 18.1% compared with $40.8 billion at year-end 2023.
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Significant contract awards in the Technologies segment during 2024 include:
• $50 from the U.S. Air Force to modernize, integrate and operate the DoD’s Mission Partner Environments (MPEs), enabling the military and its partners to securely communicate and share real-time information at multiple levels of classification. The contract has a maximum potential value of $5.6 billion.
• $2.2 billion for several key classified contracts. These contracts have a maximum potential value of $4.4 billion.
• A contract from the U.S. Space Force to provide sustainment services for the Mobile User Objective System (MUOS) satellite communications system. The contract has a maximum potential value of $2.2 billion.
• Four IDIQ contracts from the Canadian government to support the Land Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) system for the Canadian Army. The contracts have a maximum potential value of $1.3 billion.
• $125 to modernize the U.S. Central Command’s (CENTCOM) enterprise IT infrastructure. The contract including options has a maximum potential value of $920.
• $140 from the Navy to manufacture and test various components for MK54 torpedoes and for general engineering services. The contract including options has a maximum potential value of $810.
• $340 from the Navy to provide full life cycle and operational support for the Trident II Fire Control System (FCS) onboard Ohio-class submarines and continue the development, production and installation of FCS for all new Columbia-class submarines. The contract including options has a maximum potential value of $620.
• $605 for multiple awards from the U.S. Space Development Agency (SDA) to develop and integrate ground systems for the low-Earth orbit (LEO) satellite network.
• $205 from the North Carolina Department of Health and Human Services to operate its Medicaid Management Information System. The contract including options has a maximum potential value of $525.
• $515 from the National Geospatial-Intelligence Agency (NGA) to provide hybrid cloud services and IT design, engineering, and operations and sustainment services.
• $280 for two awards from the New York State Department of Health to operate and modernize the state’s health insurance exchange and to support and enhance the state’s Medicaid Management Information System. These contracts including options have a maximum potential value of $480.
• $235 from the Centers for Medicare and Medicaid Services (CMS) to provide cloud services and software tools and to support the Benefits Coordination & Recovery Center. The contracts including options have a maximum potential value of $470.
• $115 from the Department of Veteran Affairs (VA) under the Veterans Intake, Conversion and Communications Services (VICCS) program to digitally convert historical veteran records and automate data extraction of existing records. The contract including options has a maximum potential value of $345.45The following represents the Technologies segment’s total estimated contract value by customer on December 31, 2024:LIQUIDITY AND CAPITAL RESOURCESWe place a strong emphasis on cash flow generation, which is underpinned by an operating discipline focused on cost control and working capital management. This emphasis gives us the flexibility for prudent capital deployment, while allowing us to maintain an appropriate debt level, and preserves a strong balance sheet for future opportunities.
We evaluate a variety of capital deployment options based on current market conditions and our long-term outlook, and we believe agility is a key component of our capital deployment strategy as market conditions change over time. Our capital deployment priorities include investments in our business infrastructure, products and services to drive long-term growth, a predictable dividend, strategic acquisitions and opportunistic share repurchases.We believe cash generated by operating activities, supplemented by commercial paper issuances, is sufficient to satisfy our short- and long-term liquidity needs. An additional potential source of capital is the issuance of long-term debt in capital market transactions.46
We ended 2024 with a cash and equivalents balance of $1.7 billion compared with $1.9 billion at the end of 2023. The following is a discussion of our major operating, investing and financing activities in 2024 and 2023, as classified on the Consolidated Statement of Cash Flows in Item 8:
Year Ended December 31 2024 2023
Net cash provided by operating activities $ 4,112 $ 4,710
Net cash used by investing activities (953) (941)
Net cash used by financing activities (3,369) (3,094)OPERATING ACTIVITIESCash provided by operating activities was $4.1 billion in 2024 compared with $4.7 billion in 2023 . The primary driver of cash flows in both years was net earnings. Cash flows in 2024 were affected negatively by growth in operating working capital, particularly driven by the ramp-up in production of new Gulfstream aircraft models, offset partially by an increase in customer deposits driven by Gulfstream aircraft orders in our Aerospace segment. Cash flows in 2023 were affected positively by a decrease in unbilled receivables due to the receipt of progress payments on large international vehicle contracts in our Combat Systems segment and an increase in customer deposits driven by Gulfstream aircraft orders, offset partially by an increase in inventory due primarily to the ramp-up in production of new Gulfstream aircraft models.INVESTING ACTIVITIESCash used by investing activities was $953 in 2024 and $941 in 2023. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales.
Capital Expenditures. The primary use of cash for investing activities in both years was capital expenditures. Capital expenditures were $916 in 2024 and $904 in 2023. Capital expenditures include equipment and facility enhancements to support new and existing programs across our businesses.FINANCING ACTIVITIESCash used by financing activities was $3.4 billion in 2024 and $3.1 billion in 2023. Financing activities include the use of cash for repurchases of common stock, payment of dividends, and debt and commercial paper repayments. Our financing activities also include proceeds received from debt and commercial paper issuances and employee stock option exercises.
Dividends. On March 6, 2024, our board of directors (Board) declared an increased quarterly dividend of $1.42 per share, the 27th consecutive annual increase. Previously, the Board had increased the quarterly dividend to $1.32 per share in March 2023. Cash dividends paid were $1.5 billion in 2024 and $1.4 billion in 2023.
Share Repurchases. Our Board from time to time authorizes management’s repurchase of outstanding shares of our common stock on the open market. On December 4, 2024, the Board authorized management to repurchase up to 10 million additional shares of the company’s outstanding stock. We paid $1.5 billion and $434 in 2024 and 2023, respectively, to repurchase our outstanding
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shares. On December 31, 2024, 9.2 million shares remained authorized by our Board for repurchase, representing 3.4% of our total shares outstanding.
Debt Issuances and Repayments. In November 2024, we repaid fixed-rate notes of $500, and in May and August 2023, we repaid fixed-rate notes of $750 and $500, respectively, all at their respective scheduled maturities using cash on hand. Fixed-rate notes of $750 mature in both April and May 2025. We currently plan to repay these notes at maturity using cash on hand, potentially supplemented by commercial paper or other borrowings. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note K to the Consolidated Financial Statements in Item 8.
On December 31, 2024, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have a $4 billion committed bank credit facility for general corporate purposes and working capital needs and to support our commercial paper issuances. We also have an effective shelf registration on file with the Securities and Exchange Commission (SEC) that allows us to access the debt markets.NON-GAAP FINANCIAL MEASURES
We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow and return on invested capital (ROIC) to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, GAAP measures.Free Cash Flow. We define free cash flow as net cash provided by operating activities less capital expenditures. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles free cash flow with net cash from operating activities, as classified on the Consolidated Statement of Cash Flows in Item 8:
Year Ended December 31 2024 2023 2022
Net cash provided by operating activities $ 4,112 $ 4,710 $ 4,579
Capital expenditures (916) (904) (1,114)
Free cash flow $ 3,196 $ 3,806 $ 3,465Cash flows as a percentage of net earnings:Net cash provided by operating activities 109 % 142 % 135 %
Free cash flow 85 % 115 % 102 %
Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as net earnings plus after-tax interest and amortization expense, calculated using the
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statutory federal income tax rate. Average invested capital is defined as the sum of the average debt and average shareholders’ equity excluding accumulated other comprehensive loss. Average debt and average shareholders’ equity excluding accumulated other comprehensive loss are calculated using the respective balances at the end of the preceding year and the respective balances at the end of each of the four quarters of the year presented. ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of company performance.ROIC is calculated as follows:Year Ended December 31 2024 2023 2022
Net earnings $ 3,782 $ 3,315 $ 3,390
After-tax interest expense 310 315 309
After-tax amortization expense 191 201 235
Net operating profit after taxes $ 4,283 $ 3,831 $ 3,934
Average invested capital $ 32,451 $ 31,258 $ 31,260
Return on invested capital 13.2 % 12.3 % 12.6 %CASH REQUIREMENTS
The following is a discussion of how we expect to meet the future cash requirements from known contractual and other obligations.
The majority of our revenue is derived from long-term contracts and programs that can span several years. We similarly enter into long-term agreements with suppliers and subcontractors for goods and services in support of these contracts and programs with payment terms that are generally aligned with the payment terms from our customers. In some instances, we require advance payments or deposits from our customers, which help fund our purchase commitments and reduce the risk of customer performance.
Additionally, we have significant liabilities under our defined benefit retirement plans. As these liabilities are settled using plan assets, our future cash requirements associated with these liabilities are generally limited to the annual cash contributions to these plans required in accordance with Internal Revenue Service (IRS) regulations. See Note S to the Consolidated Financial Statements in Item 8 for additional information.
Other obligations, such as scheduled principal and interest payments on our fixed-rate notes, and scheduled payments in accordance with our lease agreements are expected to be satisfied using cash generated from operations. See Notes J and K to the Consolidated Financial Statements in Item 8 for additional information.
ADDITIONAL FINANCIAL INFORMATION
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATESManagement’s Discussion and Analysis of Financial Condition and Results of Operations is based on the 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
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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. Actual results may differ from these estimates. We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.In our opinion, the following policies are critical and require the use of significant judgment in their application:
Revenue. 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. Our performance obligations are satisfied over time as work progresses or at a point in time.
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 costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.
Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.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. 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. For discussion of our contract estimates, the assumptions used, and the impact of changes in estimates, see Note B to the Consolidated Financial Statements in Item 8.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. 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. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
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. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived assets over the estimated fair value as determined by discounted cash flows.Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually at each of our reporting units or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. Our reporting
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units are consistent with our operating segments in Note O to the Consolidated Financial Statements in Item 8. We use both qualitative and quantitative approaches when testing goodwill for impairment. When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments. Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events. If, based on the qualitative assessment, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary. However, if a quantitative assessment is determined to be necessary, we compare the fair value of a reporting unit to its carrying value and, if necessary, recognize an impairment loss for the amount by which the carrying value exceeds the reporting unit’s fair value.Our estimate of a reporting unit’s fair value is based primarily on the discounted cash flows of the underlying operations and requires the use of judgment by management. The process requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal-value growth rates applied to the final year of projected cash flows. Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis. To assess the reasonableness of our discounted cash flows, we compare the sum of our reporting units’ fair value to our market capitalization. Additionally, we evaluate the reasonableness of each reporting unit’s fair value by comparing the fair value to peer companies and recent relevant market transactions.In the fourth quarter of 2024, we completed qualitative assessments for each of our reporting units. Our Aerospace, Marine Systems and Combat Systems reporting units’ estimated fair values significantly exceeded their respective carrying values based on our most recent quantitative assessments, which were performed in the fourth quarter of 2018. Our Technologies reporting unit’s estimated fair value exceeded its carrying value by approximately 25% at the time of our last quantitative assessment in the fourth quarter of 2022. Our qualitative assessments this year did not present indicators of impairment.
Commitments and Contingencies. We are subject to litigation and other legal proceedings arising either from the normal course of business or under provisions relating to the protection of the environment. Estimating liabilities and costs associated with these matters requires the use of judgment. We record a liability associated with claims or pending or threatened litigation when it is probable a loss has been incurred and the amount is reasonably estimable. The ultimate resolution of our exposure related to these matters may change as further facts and circumstances become known.
Retirement Plans. Our pension and other post-retirement benefit costs and obligations depend on several assumptions and estimates, which are based on our best judgment, including consideration of current and future market conditions. For a discussion of our assumptions and any changes to these assumptions, as well as the impact of these changes, which is reported as an actuarial gain or loss in the reconciliation of the change in the benefit obligation, see Note S to the Consolidated Financial Statements in Item 8. The key assumption is the interest rates used to discount estimated future pension benefits. We base the discount rates on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period. The effect of a 25-basis-point increase or decrease in the discount rate assumption on the December 31, 2024, pension benefit obligation is ($261) or $272, respectively.
51As described in Note S to the Consolidated Financial Statements in Item 8, our contractual arrangements with the U.S. government provide for the recovery of benefit costs for our government retirement plans. We have elected to defer recognition of the benefit costs until such costs can be allocated to contracts. Therefore, the impact of annual changes in financial reporting assumptions on the retirement benefit cost for these plans does not immediately affect our operating results.
GUARANTOR FINANCIAL INFORMATION
The outstanding notes described in Note K to the Consolidated Financial Statements in Item 8, 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 guarantee of each guarantor ranks equally in right of payment with all other existing and future senior unsecured indebtedness of such guarantor. A listing of the guarantors is included in an exhibit to this Form 10-K.
Because the parent is a holding company, its cash flow and ability to service its debt, including the outstanding notes, depends on the performance of its subsidiaries and the ability of those subsidiaries to distribute cash to the parent, whether by dividends, loans or otherwise. Holders of the outstanding notes have a direct claim only against the parent and the guarantors.
Under the relevant indenture, the guarantee of each guarantor is limited to the maximum amount that can be guaranteed without rendering the guarantee voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the parent or any of its subsidiaries) or (2) there occurs a transfer, sale or other disposition of the voting stock of a guarantor so that the guarantor is no longer a subsidiary of the parent, then the guarantor or the entity acquiring the assets (in the event of the sale or other disposition of all or substantially all of the assets of a guarantor) will be released and relieved of any obligations under the guarantee.
The following summarized financial information presents the parent and guarantors (collectively, the combined obligor group) on a combined basis. The summarized financial information of the combined obligor group excludes net investment in and earnings of subsidiaries related to interests held by the combined obligor group in subsidiaries that are not guarantors of the notes.
STATEMENT OF EARNINGS INFORMATIONYear Ended December 31 2024
Revenue $ 18,701
Operating costs and expenses, excluding G&A (16,638)
Net earnings 785
52BALANCE SHEET INFORMATIONDecember 31, 2024 December 31, 2023
Cash and equivalents $ 474 $ 986
Other current assets 5,187 5,012
Noncurrent assets 4,841 4,506
Total assets $ 10,502 $ 10,504
Short-term debt and current portion of long-term debt $ 1,500 $ 503
Other current liabilities 3,016 2,890
Long-term debt 7,210 8,700
Other noncurrent liabilities 3,170 3,281
Total liabilities $ 14,896 $ 15,374The summarized balance sheet information presented above includes the funded status of the company’s primary qualified U.S. government pension plans as the parent has the ultimate obligation for the plans.