General Dynamics Corporation

07/29/2026 | Press release | Distributed by Public on 07/29/2026 09:09

Quarterly Report for Quarter Ending July 5, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share amounts or unless otherwise noted)
BUSINESS OVERVIEW
General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapon systems and munitions; and technology products and services.
Our company is organized into four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We refer to the latter three collectively as our defense segments. Our primary customer is the U.S. government, including the Department of War (DoW), the intelligence community and other U.S. government agencies. We also have significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business jet aircraft and related services. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2025, and with the unaudited Consolidated Financial Statements included in this Form 10-Q.
BUSINESS ENVIRONMENT
As a global aerospace and defense company, we compete in domestic and international markets, serving both government and commercial customers. Our financial performance is significantly influenced by U.S. government spending levels, administration priorities and the overall economy. In the federal market, defense spending has been at increased levels, and the administration has publicly stated support for further increases.
There is significant demand in U.S. Navy shipbuilding, particularly submarines. We have invested significantly in our facilities and workforce to increase production capacity to meet this demand, and expect to continue to do so. The increased demand has placed pressure on the shipbuilding industrial base, which was already impacted by significant demographic issues coming out of the global pandemic. Together with the Navy customer, we have been working to stabilize and grow the supply chain to meet this heightened demand.
We have also been investing in the development of the next generation of combat vehicles and artillery. While the U.S. Army is reviewing its funding priorities and begins transitioning to next-generation combat vehicles, we expect short-term combat vehicle production volumes to be down slightly. Demand for our munitions products has been high and is expected to remain at an elevated level given ongoing conflicts and the administration's support for further increases.
Internationally, as a result of ongoing regional conflicts and the overall threat environment, we have seen increased demand, particularly in Europe, for our Combat Systems military products and services. This provides opportunities for our European businesses established in local markets as well as exports from our North American businesses. To meet this expected demand, there will be increased pressure on the supply chain and our hiring of skilled workers.
In our principal commercial market, our Aerospace group is experiencing strong demand for business jets. We believe our investments in a new family of Gulfstream aircraft will continue to fuel demand. The most recent addition is the G800, which entered into service last year. In addition, we
expect the growing installed base of aircraft will continue to lead to increased demand for global aircraft services. The ongoing sanctions on Russia have restricted access to a segment of the market.
Our ability to produce new aircraft is dependent on our supply chain, and while performance has improved and the overall supply chain has stabilized, we have experienced some delays including at our Israel-based supplier of mid-cabin airframes caused by conflicts in the Middle East.
Our Aerospace business has been impacted by inflationary pressures and ongoing tariffs. In February 2026, the U.S. Supreme Court held that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unauthorized, and a phased process was developed to refund the previously paid tariffs. To date, we have received refunds of some of these tariffs. However, the timing of collection of remaining tariff refunds is uncertain. Overall, tariffs as applied in their current form and tariffs yet to be refunded are not material to our results of operations.
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 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 OVERVIEW
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 14,094 $ 13,041 $ 1,053 8.1 %
Operating costs and expenses (12,634) (11,736) (898) 7.7 %
Operating earnings 1,460 1,305 155 11.9 %
Operating margin 10.4 % 10.0 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 27,575 $ 25,264 $ 2,311 9.1 %
Operating costs and expenses (24,695) (22,691) (2,004) 8.8 %
Operating earnings 2,880 2,573 307 11.9 %
Operating margin 10.4 % 10.2 %
Our consolidated revenue increased in the second quarter and first six months of 2026 driven by growth across all four operating segments, primarily in our Aerospace and Marine Systems segments. Operating margin increased 40 basis points in the second quarter and 20 basis points in the first six months of 2026 due to improved operating performance in our Aerospace and Marine Systems segments.
REVIEW OF OPERATING SEGMENTS
Following is a discussion of operating results for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note L to the unaudited Consolidated Financial Statements in Part I, Item 1.
AEROSPACE
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 3,525 $ 3,062 $ 463 15.1 %
Operating earnings 510 403 107 26.6 %
Operating margin 14.5 % 13.2 %
Gulfstream aircraft deliveries (in units) 41 38 3 7.9 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 6,804 $ 6,088 $ 716 11.8 %
Operating earnings 1,003 835 168 20.1 %
Operating margin 14.7 % 13.7 %
Gulfstream aircraft deliveries (in units) 79 74 5 6.8 %
Operating Results
The increase in the Aerospace segment's revenue in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
Aircraft manufacturing $ 338 $ 481
Aircraft services 125 235
Total increase
$ 463 $ 716
Aircraft manufacturing revenue increased in the second quarter and first six months of 2026 due primarily to the number and mix of aircraft deliveries. Aircraft services revenue was up in the second quarter and first six months of 2026 due primarily to higher fixed-base operator (FBO) activity and increased customer demand for aircraft maintenance.
The increase in the segment's operating earnings in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
Aircraft manufacturing $ 99 $ 148
Aircraft services 32 60
G&A/other expenses (24) (40)
Total increase
$ 107 $ 168
Aircraft manufacturing operating earnings increased in the second quarter and first six months of 2026 due primarily to increased deliveries and aircraft mix. Aircraft services operating earnings
increased in the second quarter and first six months of 2026 due to higher volume and a favorable services mix. In total, the Aerospace segment's operating margin increased 130 basis points in the second quarter and 100 basis points in the first six months of 2026 compared with the prior-year periods due to improved operating performance.
2026 Outlook
We expect the Aerospace segment's 2026 revenue to be approximately $13.8 billion with operating margin of approximately 14.7%.
MARINE SYSTEMS
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 4,660 $ 4,220 $ 440 10.4 %
Operating earnings 342 291 51 17.5 %
Operating margin 7.3 % 6.9 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 9,003 $ 7,809 $ 1,194 15.3 %
Operating earnings 658 541 117 21.6 %
Operating margin 7.3 % 6.9 %
Operating Results
The increase in the Marine Systems segment's revenue in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
U.S. Navy ship construction $ 281 $ 912
U.S. Navy ship engineering, repair and other services 159 282
Total increase
$ 440 $ 1,194
Revenue from U.S. Navy ship construction was up in the second quarter and first six months of 2026 due primarily to increased material and labor volume on Columbia-class submarine construction and higher throughput on the John Lewis-class (T-AO-205) fleet replenishment oiler. The Marine Systems segment's operating margin increased 40 basis points in the second quarter and first six months of 2026 on improved performance at each of our shipyards.
2026 Outlook
We expect the Marine Systems segment's 2026 revenue to be approximately $18 billion with operating margin of approximately 7.4%.
COMBAT SYSTEMS
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 2,290 $ 2,283 $ 7 0.3 %
Operating earnings 318 324 (6) (1.9 %)
Operating margin 13.9 % 14.2 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 4,573 $ 4,459 $ 114 2.6 %
Operating earnings 628 615 13 2.1 %
Operating margin 13.7 % 13.8 %
Operating Results
The increase in the Combat Systems segment's revenue in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
Weapon systems and munitions $ 95 $ 209
International military vehicles 38 122
U.S. military vehicles (126) (217)
Total increase
$ 7 $ 114
Weapon systems and munitions revenue increased in the second quarter and first six months of 2026 due primarily to increased artillery production. International military vehicles increased in the second quarter and first six months of 2026 due primarily to higher volume on several wheeled and tracked vehicle programs in Europe. Revenue from U.S. military vehicles decreased in the second quarter and first six months of 2026 due to lower U.S. Army demand as part of its recapitalization efforts and the termination of the M10 Booker program. Overall, the Combat Systems segment's operating margin decreased in the second quarter and first six months of 2026 due to program mix.
2026 Outlook
We expect the Combat Systems segment's 2026 revenue to be approximately $9.8 billion with operating margin of approximately 13.8%.
TECHNOLOGIES
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 3,619 $ 3,476 $ 143 4.1 %
Operating earnings 339 332 7 2.1 %
Operating margin 9.4 % 9.6 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 7,195 $ 6,908 $ 287 4.2 %
Operating earnings 678 660 18 2.7 %
Operating margin 9.4 % 9.6 %
Operating Results
The increase in the Technologies segment's revenue in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
C5ISR* solutions $ 112 $ 237
Information technology (IT) services 31 50
Total increase
$ 143 $ 287
*Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance
The Technologies segment's revenue increased in the second quarter and first six months of 2026 due primarily to higher volume across several C5ISR programs, particularly systems supporting a variety of land and air platforms and international programs. Overall, the Technologies segment's operating margin decreased 20 basis points in the second quarter and first six months of 2026 due to program mix.
2026 Outlook
We expect the Technologies segment's 2026 revenue to be approximately $14.1 billion with operating margin of approximately 9.4%.
CORPORATE
Corporate operating costs totaled $49 in the second quarter and $87 in the first six months of 2026 compared with $45 in the second quarter and $78 in the first six months of 2025 and consisted of equity-based compensation expense and other miscellaneous expenses. Corporate operating costs are expected to be approximately $180 in 2026.
OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 8,711 $ 8,012 $ 699 8.7 %
Operating costs (7,337) (6,823) (514) 7.5 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 16,996 $ 15,347 $ 1,649 10.7 %
Operating costs (14,280) (12,964) (1,316) 10.2 %
The increase in product revenue in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
Aircraft manufacturing $ 338 $ 481
Ship construction 281 912
Weapon systems and munitions 95 209
Other, net (15) 47
Total increase $ 699 $ 1,649
Aircraft manufacturing revenue increased in the second quarter and first six months of 2026 due to additional aircraft deliveries. Ship construction revenue increased due primarily to higher volume on the Columbia-class submarine program. Weapon systems and munitions revenue increased in the second quarter and first six months of 2026 due primarily to increased artillery production. The primary drivers of the increase in product operating costs were the changes in volume on the programs described above.
SERVICE REVENUE AND OPERATING COSTS
Three Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 5,383 $ 5,029 $ 354 7.0 %
Operating costs (4,574) (4,269) (305) 7.1 %
Six Months Ended July 5, 2026 June 29, 2025 Variance
Revenue $ 10,579 $ 9,917 $ 662 6.7 %
Operating costs (8,969) (8,458) (511) 6.0 %
The increase in service revenue in the second quarter and first six months of 2026 consisted of the following:
Second Quarter Six Months
Ship services $ 159 $ 282
C5ISR solutions/IT services 139 277
Aircraft services 125 235
Military vehicle services (103) (183)
Other, net 34 51
Total increase $ 354 $ 662
Ship services revenue was up in the second quarter and first six months of 2026 due to higher volume of engineering and repair work. The increase in C5ISR solutions and IT services revenue was driven by higher volume across the Technologies segment. Aircraft services revenue was up in the second quarter and first six months of 2026 due primarily to FBO activity and additional customer demand for aircraft maintenance. Military vehicle services revenue was down in the second quarter and first six months of 2026 due primarily to lower vehicle support volume. The primary drivers of the increase in service operating costs were the changes in volume on the programs described above.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 5.2% in the first six months of 2026 compared with 5.0% in the first six months of 2025. We expect G&A expenses as a percentage of revenue in 2026 to be generally consistent with 2025.
OTHER, NET
Net other income was $14 in the first six months of 2026 compared with $36 in the first six months of 2025, and represents primarily the non-service components of pension and other post-retirement benefits. In 2026, we expect net other income to be approximately $15.
INTEREST, NET
Net interest expense decreased to $118 in the first six months of 2026 from $177 in the prior-year period, reflecting lower interest expense associated with commercial paper issuances. See Note H to the unaudited Consolidated Financial Statements in Part I, Item 1, for additional information regarding our debt obligations, including interest rates. In 2026, we expect net interest expense to be approximately $270.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 17.7% in the first six months of 2026 compared with 17.4% in the prior-year period. For 2026, we anticipate a full-year effective tax rate of approximately 17.5%.
BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $136.5 billion at the end of the second quarter of 2026 compared with $130.8 billion at the end of the first quarter. Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note B to the unaudited Consolidated Financial Statements in Part I, Item 1. Our total estimated contract value, which combines total backlog with estimated potential contract value, was $186.9 billion on July 5, 2026.
The following table details the backlog and estimated potential contract value of each segment at the end of the second and first quarters of 2026:
Funded Unfunded Total Backlog Estimated Potential Contract Value Total
Estimated Contract Value
July 5, 2026
Aerospace $ 22,992 $ 985 $ 23,977 $ 1,170 $ 25,147
Marine Systems 42,356 22,826 65,182 7,442 72,624
Combat Systems 27,507 1,843 29,350 10,847 40,197
Technologies 11,256 6,733 17,989 30,945 48,934
Total $ 104,111 $ 32,387 $ 136,498 $ 50,404 $ 186,902
April 5, 2026
Aerospace $ 21,172 $ 1,095 $ 22,267 $ 1,040 $ 23,307
Marine Systems 40,598 23,373 63,971 12,519 76,490
Combat Systems 25,532 1,383 26,915 11,770 38,685
Technologies 10,818 6,869 17,687 32,272 49,959
Total $ 98,120 $ 32,720 $ 130,840 $ 57,601 $ 188,441
AEROSPACE
Aerospace 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 the second quarter of 2026 with backlog of $24 billion.
Orders for new Gulfstream aircraft reflected very strong demand across our portfolio of products and services. The segment achieved a book-to-bill ratio (orders divided by revenue) of 1.5-to-1 in the second quarter of 2026 and 1.3-to-1 in the first six months, even as revenue grew more than 10% in each period.
Beyond total backlog, estimated potential contract value represents primarily options and other agreements with existing customers to purchase new aircraft and long-term aircraft services agreements. On July 5, 2026, estimated potential contract value in the Aerospace segment was $1.2 billion.
DEFENSE SEGMENTS
The total backlog in our defense segments represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of total backlog includes items that have been authorized and appropriated by the U.S. Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments. The unfunded portion of total backlog includes the amounts we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.
Estimated potential contract value in our defense segments includes unexercised options associated with existing firm contracts and unfunded work on indefinite delivery, indefinite quantity (IDIQ) contracts. Contract options represent agreements to perform additional work under existing contracts at the election of the customer. We recognize options in backlog when the customer exercises the option
and establishes a firm order. For IDIQ contracts, we evaluate the amount of funding we expect to receive and include this amount in our estimated potential contract value. This amount is often less than the total IDIQ contract value, particularly when the contract has multiple awardees. The actual amount of funding received in the future may be higher or lower than our estimate of potential contract value.
Total backlog in our defense segments was $112.5 billion on July 5, 2026. The defense segments achieved a book-to-bill ratio of 1.4-to-1 in the second quarter of 2026 and 1.8-to-1 in the first six months. The increase in backlog was primarily driven by awards in the Marine Systems segment for continued construction of Virginia-class submarines and to produce armored combat support vehicles in the Combat Systems segment. Estimated potential contract value in our defense segments was $49.2 billion on July 5, 2026.
LIQUIDITY AND CAPITAL RESOURCES
We 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 primarily to address dilution.
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.
We ended the second quarter of 2026 with a cash and equivalents balance of $4.3 billion compared with $2.3 billion at the end of 2025. Following is a discussion of our major operating, investing and financing activities in the first six months of 2026 and 2025, as classified on the Consolidated Statement of Cash Flows in Part I, Item 1:
Six Months Ended July 5, 2026 June 29, 2025
Net cash provided by operating activities $ 4,035 $ 1,450
Net cash used by investing activities (424) (216)
Net cash used by financing activities (1,605) (1,403)
OPERATING ACTIVITIES
Cash provided by operating activities was $4 billion in the first six months of 2026 compared with $1.5 billion in the same period in 2025. The primary driver of cash flows in both periods was net earnings. Cash flows in the first six months of 2026 were affected positively by reductions in operating working capital led by our Combat Systems and Aerospace segments.
INVESTING ACTIVITIES
Cash used by investing activities was $424 in the first six months of 2026 compared with $216 in the same period in 2025. Our investing activities include cash paid for capital expenditures; business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales. The primary use of cash for investing activities in both periods was capital expenditures. Capital expenditures were $437 in the first six months of 2026, up 29% compared with $340 in the same period of 2025, and are expected to continue to increase in the second half of 2026.
FINANCING ACTIVITIES
Cash used by financing activities was $1.6 billion in the first six months of 2026 compared with $1.4 billion in the same period in 2025. Financing activities include the use of cash for payment of dividends, debt and commercial paper repayments and repurchases of common stock to cover dilution. Our financing activities also include proceeds received from debt and commercial paper issuances and employee stock option exercises.
On March 9, 2026, our board of directors (Board) declared a quarterly dividend of $1.59 per share, the 29th consecutive annual increase. Previously, the Board had increased the quarterly dividend to $1.50 per share in March 2025. Cash dividends paid were $834 in the first six months of 2026 compared with $785 in the same period in 2025.
We paid $319 and $600 in the first six months of 2026 and 2025, respectively, to repurchase our outstanding shares to cover dilution. On July 5, 2026, 5.8 million shares remained authorized by our Board for repurchase, representing 2.2% of our total shares outstanding.
In June 2026, we repaid fixed-rate notes of $500 at the scheduled maturity using cash on hand. Fixed-rate notes of $500 mature in August 2026. We currently plan to repay these notes using cash on hand but will continue to monitor market conditions as well as the need for future borrowings. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note H to the unaudited Consolidated Financial Statements in Part I, Item 1.
On July 5, 2026, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. Separately, we have $4 billion in a 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 MEASURE - FREE CASH FLOW
We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow to measure our performance in these areas. While we believe this metric provides useful information, it is not a defined operating measure under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with its use. Our calculation of this metric may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of this metric should not be considered in isolation from, or as a substitute for, GAAP measures.
We define free cash flow as net cash from 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, paying dividends and repurchasing our common stock to cover dilution. 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 Part I, Item 1:
Six Months Ended July 5, 2026 June 29, 2025
Net cash provided by operating activities $ 4,035 $ 1,450
Capital expenditures (437) (340)
Free cash flow $ 3,598 $ 1,110
Cash flows as a percentage of net earnings:
Net cash provided by operating activities 177 % 72 %
Free cash flow 157 % 55 %
ADDITIONAL FINANCIAL INFORMATION
ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
For a discussion of environmental matters and other contingencies, see Note J to the unaudited Consolidated Financial Statements in Part I, Item 1. Except as otherwise noted in Note J, we do not expect our aggregate liability with respect to these matters to have a material impact on our results of operations, financial condition or cash flows.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on the unaudited Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We employ judgment in making our estimates, but they are based on historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that often span several years. We review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. The aggregate impact of adjustments in contract estimates changed our operating earnings (and diluted earnings per share) by $29 ($0.08) and $83 ($0.24) for the three- and six-month periods ended July 5, 2026, and $31 ($0.09) and $62 ($0.18)
for the three- and six-month periods ended June 29, 2025, respectively. No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 5, 2026, or June 29, 2025.
Other critical accounting policies and estimates include long-lived assets and goodwill, commitments and contingencies, and retirement plans. For a full discussion of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2025.
GUARANTOR FINANCIAL INFORMATION
The outstanding notes described in Note H to the unaudited Consolidated Financial Statements in Part I, Item 1, issued by General Dynamics Corporation (the parent), are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of the parent's 100%-owned subsidiaries (the guarantors). The guarantee of each guarantor ranks equally in right of payment with all other existing and future senior unsecured indebtedness of such guarantor. A listing of the guarantors is included in an exhibit to this Form 10-Q.
Because the parent is a holding company, its cash flow and ability to service its debt, including the outstanding notes, depends on the performance of its subsidiaries and the ability of those subsidiaries to distribute cash to the parent, whether by dividends, loans or otherwise. Holders of the outstanding notes have a direct claim only against the parent and the guarantors.
Under the relevant indenture, the guarantee of each guarantor is limited to the maximum amount that can be guaranteed without rendering the guarantee voidable under applicable laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each indenture also provides that, in the event (1) of a merger, consolidation or sale or disposition of all or substantially all of the assets of a guarantor (other than a transaction with the parent or any of its subsidiaries) or (2) there occurs a transfer, sale or other disposition of the voting stock of a guarantor so that the guarantor is no longer a subsidiary of the parent, then the guarantor or the entity acquiring the assets (in the event of a sale or other disposition of all or substantially all of the assets of a guarantor) will be released and relieved of any obligations under the guarantee.
The following summarized financial information presents the parent and guarantors (collectively, the combined obligor group) on a combined basis. The summarized financial information of the combined obligor group excludes net investment in and earnings of subsidiaries related to interests held by the combined obligor group in subsidiaries that are not guarantors of the notes.
STATEMENT OF EARNINGS INFORMATION - COMBINED OBLIGOR GROUP
Six Months Ended July 5, 2026 Year Ended
December 31, 2025
Revenue $ 11,022 $ 20,716
Operating costs and expenses, excluding G&A (9,746) (18,476)
Net earnings 588 839
BALANCE SHEET INFORMATION - COMBINED OBLIGOR GROUP
July 5, 2026 December 31, 2025
Cash and equivalents $ 2,088 $ 482
Other current assets 6,302 5,405
Noncurrent assets 5,564 5,403
Total assets $ 13,954 $ 11,290
Short-term debt and current portion of long-term debt $ 1,253 $ 1,003
Other current liabilities 3,405 3,029
Long-term debt 6,210 6,955
Other noncurrent liabilities 3,238 2,835
Total liabilities $ 14,106 $ 13,822
The summarized balance sheet information presented above includes the funded status of the company's primary qualified U.S. government pension plans as the parent has the ultimate obligation for the plans.
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