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 2025 compared with 2024 should be read in conjunction with our Consolidated Financial Statements included in Item 8, while a discussion of 2024 compared with 2023 can be found in Item 7 of our annual report on Form 10-K for the year ended December 31, 2024.
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 elevated levels, and the administration has publicly stated support for further increases in fiscal year (FY) 2027. This is reflected in the significant demand in U.S. Navy shipbuilding, particularly submarines. We have invested 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 great pressure on the shipbuilding supply chain, 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 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 regional threats.
The administration began taking steps in 2025 to address federal spending and reduce the size of the government. These actions resulted in federal government staff reductions, contract modifications and terminations, and award delays. We experienced some impact from these actions which were largely limited to our IT services business. Our IT services business was also somewhat impacted by the government shutdown at the start of the current fiscal year. We expect some limited ongoing impact from these actions.
We entered 2026 with the government operating under a continuing resolution that expires on January 30. Our outlook for the year assumes that the FY26 budget is approved without significant delay or another prolonged shutdown.
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 present 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, Aerospace is experiencing strong demand for business jets. 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 challenges in terms of delay including at our Israel-based supplier of mid-cabin airframes caused by the conflict with Hamas.
Our Aerospace business has been impacted by inflationary pressures and the administration’s implementation of tariffs. To date, the tariffs have not had a material impact on our results but did reduce the Aerospace operating margins by 30 basis points in 2025. The duration and extent of the tariffs continue to evolve. The ongoing sanctions on Russia have also restricted access to a segment of the market.
Overall, 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 service in 2025. In addition, we expect the growing installed base of aircraft will continue to lead to increased demand for global aircraft services.
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
2025 IN REVIEW
• Strong operating performance:
◦ Revenue of $52.6 billion, an increase of 10.1% from 2024
◦ Operating earnings of $5.4 billion, an increase of 11.7% from 2024, with sequential growth throughout the year
◦ Diluted earnings per share of $15.45, up 13.4% from 2024
◦ Cash provided by operating activities of $5.1 billion, or 122% of net earnings
• Backlog of $118 billion, an increase of 30% from 2024, supports 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 $20.1 billion of combined awards from the U.S. Navy for the Virginia-class and Columbia-class submarine programs and $9.2 billion of combined awards for wheeled and tracked vehicles for international customers
Year Ended December 31
Variance
Revenue
Operating costs and expenses
Operating earnings
Operating margin
Our consolidated revenue increased in 2025 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.
AEROSPACE
Year Ended December 31
Variance
Revenue
Operating earnings
Operating margin
Gulfstream aircraft deliveries (in units)
Operating Results
The increase in the Aerospace segment’s revenue in 2025 consisted of the following:
Aircraft manufacturing
Aircraft services
Total increase
Aircraft manufacturing revenue increased in 2025 due to additional G700 deliveries. Initial deliveries of the new G800 largely offset the decrease in G650 revenue with its final deliveries in 2025. Aircraft services revenue was higher in 2025 due to increased customer demand for aircraft maintenance based on established maintenance cycles, a larger installed base and customer flight activity.
The increase in the segment’s operating earnings in 2025 consisted of the following:
Aircraft manufacturing
Aircraft services
G&A/other expenses
Total increase
Aircraft manufacturing operating earnings increased in 2025 due primarily to the increase in ultra-large-cabin aircraft deliveries. G&A/other expenses decreased in 2025 due primarily to reduced R&D expenditures after completion of the G800 certification process. In total, the Aerospace segment’s operating margin increased 30 basis points in 2025.
2026 Outlook
We expect the Aerospace segment’s 2026 revenue to increase to approximately $13.6 billion with operating margin of approximately 14%.
MARINE SYSTEMS
Year Ended December 31
Variance
Revenue
Operating earnings
Operating margin
Operating Results
The increase in the Marine Systems segment’s revenue in 2025 consisted of the following:
U.S. Navy ship construction
U.S. Navy ship engineering, repair and other services
Total increase
Revenue from U.S. Navy ship construction was up in 2025 due primarily to increased volume on Virginia-class and Columbia-class submarine construction. The Marine Systems segment’s operating margin increased 50 basis points in 2025 as 2024 included the unfavorable impact of supplier cost growth.
2026 Outlook
We expect the Marine Systems segment’s 2026 revenue to increase to $17.3-$17.7 billion with operating margin of around 7.3%.
COMBAT SYSTEMS
Year Ended December 31
Variance
Revenue
Operating earnings
Operating margin
Operating Results
The increase in the Combat Systems segment’s revenue in 2025 consisted of the following:
Weapon systems and munitions
International military vehicles
U.S. military vehicles
Total increase
Weapon systems and munitions revenue increased in 2025 due to increased propellant production and higher volume on missile subsystems programs. Revenue from international military vehicles was up in 2025 due to higher volume on several wheeled and tracked vehicle programs in Europe. Revenue from U.S. military vehicles decreased in 2025 due primarily to the termination of the M10 Booker program and lower volume on Stryker programs, partially offset by higher volume on the XM30 program. The Combat Systems segment’s operating margin increased 20 basis points compared with 2024 driven by favorable program mix.
2026 Outlook
We expect the Combat Systems segment’s 2026 revenue to increase to approximately $9.6-$9.7 billion with operating margin of approximately 14.1%.
TECHNOLOGIES
Year Ended December 31
Variance
Revenue
Operating earnings
Operating margin
Operating Results
The increase in the Technologies segment’s revenue in 2025 consisted of the following:
Information technology (IT) services
C5ISR* solutions
Total increase
* Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance
The Technologies segment’s revenue increased in 2025 due primarily to demand for IT services. Overall, the segment’s margin decreased 10 basis points compared with 2024.
2026 Outlook
We expect the Technologies segment’s 2026 revenue to increase to approximately $13.8 billion with operating margin of approximately 9.2%.
CORPORATE
Corporate operating costs totaled $175 in 2025 and $139 in 2024 and consisted of equity-based compensation expense and other miscellaneous expenses. Corporate operating costs are expected to be approximately $160 in 2026.
OTHER INFORMATION
PRODUCT AND SERVICE REVENUE AND OPERATING COSTS
Year Ended December 31
Variance
Revenue:
Products
Services
Operating Costs:
Products
Services
The increase in product revenue in 2025 consisted of the following:
Ship construction
Aircraft manufacturing
Weapon systems and munitions
International military vehicles
Other, net
Total increase
Ship construction revenue was up due primarily to higher volume on submarine programs. Aircraft manufacturing revenue increased due to additional aircraft deliveries. Weapon systems and munitions revenue increased due to increased propellant production and higher volume on missile subsystems programs. International military vehicles was up due primarily to demand for wheeled and tracked combat vehicle programs. The primary drivers of the increase in product operating costs were the changes in volume on the programs described above.
The increase in service revenue in 2025 consisted of the following:
C5ISR solutions/IT services
Aircraft services
Other, net
Total increase
The increase in service revenue is due to demand for IT services and aircraft maintenance work. 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 decreased to 4.9% in 2025 compared with 5.4% in 2024 due to growth in revenue. We expect G&A expenses as a percentage of revenue in 2026 to be generally consistent with 2025.
OTHER, NET
Net other income was $61 in 2025 and $68 in 2024 and represents primarily the non-service components of pension and other post-retirement benefits. In 2026, we expect net other income to be approximately $50.
INTEREST, NET
Net interest expense was $314 in 2025 and $324 in 2024. See Note K to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including interest rates. We expect 2026 net interest expense to be approximately $340, which assumes that we refinance the notes maturing in 2026 at higher interest rates.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 17.5% in 2025 and 16.7% in 2024. 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 2026, we expect 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 $118 billion on December 31, 2025, compared to $90.6 billion at the end of 2024. 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 $178.9 billion on December 31, 2025.
The following table details the backlog and estimated potential contract value of each segment at the end of 2025 and 2024:
Funded
Unfunded
Total Backlog
Estimated Potential Contract Value
Total
Estimated Contract Value
December 31, 2025
Aerospace
Marine Systems
Combat Systems
Technologies
Total
December 31, 2024
Aerospace
Marine Systems
Combat Systems
Technologies
Total
For additional information about our major products and services in backlog see the Business discussion contained in Item 1.
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 2025 with backlog of $21.8 billion.
Orders in 2025 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 2025, even as revenue grew by more than 15% 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, 2025, 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 68% of Gulfstream’s orders in 2025 and 61% of Gulfstream’s backlog on December 31, 2025, demonstrating continued strong domestic demand.
The following represents Gulfstream aircraft (in units) in backlog by region on December 31, 2025:
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 $96.2 billion on December 31, 2025, compared with $70.9 billion at year-end 2024. In 2025, the total book-to-bill ratio in our defense segments was 1.6-to-1. Estimated potential contract value in our defense segments was $59.8 billion on December 31, 2025, up 14.4% compared with $52.2 billion at year-end 2024.
MARINE SYSTEMS
The 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 was $64.2 billion on December 31, 2025, up 30% compared with $49.4 billion at year-end 2024. The increase was due primarily to $20.1 billion of combined submarine awards, a contract award for the construction of John Lewis-class (T-AO-205) fleet replenishment oilers and a contract award for the construction of an Arleigh Burke-class (DDG-51) guided-missile destroyer.
The following represents the Marine Systems segment’s total estimated contract value by major program on December 31, 2025:
COMBAT SYSTEMS
The Combat Systems segment’s backlog consists of a mix of U.S. and international combat vehicles, weapon systems and munitions programs. The vehicle programs are generally long-term franchise programs, while the weapon systems and munitions programs tend to be shorter-term in nature. The segment’s backlog was $27.2 billion on December 31, 2025, up 60.3% from $17 billion at year-end 2024. The segment’s estimated potential contract value was $14.7 billion on December 31, 2025, up 69.7% compared with $8.6 billion at year-end 2024. The increase in the Combat Systems segment’s backlog and estimated potential contract value was driven primarily by $9.2 billion of combined awards for wheeled and tracked vehicles for international customers, $3.3 billion for various munitions and ordnance, and $1 billion for next-generation Abrams main battle tanks.
The following represents the Combat Systems segment’s total estimated contract value by market on December 31, 2025:
TECHNOLOGIES
The 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 $33.3 billion is an important indicator of future orders and revenue. In 2025, approximately 85% 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 $49.9 billion on December 31, 2025, compared with $48.1 billion at year-end 2024. Several significant contract awards in the Technologies segment leverage the Digital Accelerator portfolio of solutions in cyber, AI, cloud services and digital modernization.
The following represents the Technologies segment’s total estimated contract value by customer on December 31, 2025:
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 2025 with a cash and equivalents balance of $2.3 billion compared with $1.7 billion at the end of 2024. The following is a discussion of our major operating, investing and financing activities in 2025 and 2024, as classified on the Consolidated Statement of Cash Flows in Item 8:
Year Ended December 31
Net cash provided by operating activities
Net cash used by investing activities
Net cash used by financing activities
OPERATING ACTIVITIES
Cash provided by operating activities was $5.1 billion in 2025 compared with $4.1 billion in 2024 . 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 timing in our Aerospace and Combat Systems segments. Cash flows in 2025 were affected positively as operating working capital balances in our Aerospace and Combat Systems segments began to unwind.
INVESTING ACTIVITIES
Cash used by investing activities was $1.3 billion in 2025 and $953 in 2024. Our investing activities include cash paid for capital expenditures; 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 up almost 30% to $1.2 billion in 2025 versus $916 in 2024. Capital expenditures include equipment and facility enhancements to support new and existing programs across our businesses.
FINANCING ACTIVITIES
Cash used by financing activities was $3.2 billion in 2025 and $3.4 billion in 2024. Financing activities include the use of cash for payment of dividends, settlement of finance lease liabilities, debt and commercial paper repayments, and some repurchase of common stock. Our financing activities also include proceeds received from debt and commercial paper issuances and employee stock option exercises.
Dividends. On March 5, 2025, our board of directors (Board) declared an increased quarterly dividend of $1.50 per share, the 28th consecutive annual increase. Previously, the Board had increased the quarterly dividend to $1.42 per share in March 2024. Cash dividends paid were $1.6 billion in 2025 and $1.5 billion in 2024.
Share Repurchases. With respect to share repurchases, we paid $637 in 2025 to cover dilution from stock vesting and exercises, and $1.5 billion in 2024. On December 31, 2025, 6.8 million shares remained of the amount authorized by our Board in 2024 for repurchase, representing 2.5% of our total shares outstanding.
Debt Issuances and Repayments. In March 2025, we repaid fixed-rate notes of $750 with cash on hand and commercial paper issuances. In May 2025, we issued $750 of fixed-rate notes. The proceeds were used to repay fixed-rate notes of $750 that matured in May 2025. Fixed-rate notes of $500 mature in June and August 2026. Our plan is to refinance these notes but we will continue to evaluate our approach as the maturity dates draw near. 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, 2025, we had no commercial paper outstanding, but we maintain the ability to access the commercial paper market in the future. In addition, we have a $5 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, 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 Item 8:
Year Ended December 31
Net cash provided by operating activities
Capital expenditures
Free cash flow
Cash flows as a percentage of net earnings:
Net cash provided by operating activities
Free cash flow
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 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
Net earnings
After-tax interest expense
After-tax amortization expense
Net operating profit after taxes
Average invested capital
Return on invested capital
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 receive advance payments or deposits from our customers, which help fund our purchase commitments and reduce collection risk.
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 or refinancing of principal payments. 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 ESTIMATES
Management’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 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 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 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 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 2025, we completed qualitative assessments of goodwill 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, 2025, pension benefit obligation is ($260) or $271, 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 INFORMATION
Year Ended December 31
Revenue
Operating costs and expenses, excluding G&A
Net earnings
BALANCE SHEET INFORMATION
December 31, 2025
December 31, 2024
Cash and equivalents
Other current assets
Noncurrent assets
Total assets
Short-term debt and current portion of long-term debt
Other current liabilities
Long-term debt
Other noncurrent liabilities
Total liabilities
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.
