General Dynamics Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 2, 2023, compared with the periods ended July 3, 2022. General Dynamics operates in Aerospace, Marine Systems, Combat Systems and Technologies, serving commercial, U.S. government and international customers.
Financial performance
Amounts are in millions, except per-share data, percentages and where noted.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $10,152 | $9,189 | $20,033 | $18,581 |
| Operating earnings | $962 | $978 | $1,900 | $1,886 |
| Operating margin | 9.5% | 10.6% | 9.5% | 10.2% |
| Net earnings | $744 | $766 | $1,474 | $1,496 |
| Diluted EPS | $2.70 | $2.75 | $5.34 | $5.35 |
- Revenue increased 10.5% in Q2 and 7.8% for the first half, primarily on higher defense-segment volume, including Navy ship construction and international military vehicles.
- Operating margin declined 110 basis points in Q2 and 70 basis points year to date, reflecting program mix and supply-chain-related cost pressure. Six-month operating earnings rose slightly despite the margin decline.
- Operating cash flow was $2,193 for the first half, versus $2,627 in 2022. Capital expenditures were $373; free cash flow, defined by the company as operating cash flow less capital expenditures, was $1,820 versus $2,262.
- Cash and equivalents were $1,154 at July 2, 2023, compared with $1,242 at year-end 2022. Total debt was $9,755, including $508 current debt; the company had no commercial paper outstanding and a $4 billion committed credit facility expiring in March 2027.
- Current assets were $21,825 and current liabilities $15,686. Inventory rose to $7,642 from $6,322 at year-end, mainly reflecting increased Gulfstream production and preparation for G700 certification. Customer advances and deposits rose to $8,628 from $7,436.
Segments and changes versus prior year
| Segment | Q2 revenue | Q2 operating earnings | Q2 margin | Key reported change |
|---|---|---|---|---|
| Aerospace | $1,953 (+4.6%) | $236 (−0.8%) | 12.1% (12.7%) | Higher ultra-large-cabin deliveries; supply-chain costs and increased G700-related R&D pressured results. |
| Marine Systems | $3,059 (+15.4%) | $235 (+11.4%) | 7.7% (8.0%) | Higher Columbia-class submarine volume; Virginia-class supply-chain impacts and DDG-51 cost growth weighed on margin. |
| Combat Systems | $1,924 (+15.5%) | $251 (+2.4%) | 13.0% (14.7%) | International vehicle and munitions growth; lower-margin U.S. program mix reduced margin. |
| Technologies | $3,216 (+7.0%) | $283 (−6.9%) | 8.8% (10.1%) | IT and C5ISR revenue grew, including acquired business contribution; program mix reduced margin. |
Parentheses in the margin column show the comparable Q2 2022 margin. Contract-estimate adjustments contributed $10 to Q2 operating earnings ($0.03 diluted EPS), versus $101 ($0.29) a year earlier. For the first half, the contribution was $87 ($0.25), versus $206 ($0.58).
Backlog, outlook and management commentary
- Total backlog was $91.4 billion at July 2, 2023, including $73.4 billion funded and $17.9 billion unfunded; estimated potential contract value brought the total to $129.3 billion. Management expects about 53% of remaining performance obligations to be recognized as revenue by year-end 2024 and a further 31% by year-end 2026. Unfunded backlog and potential contract value are subject to future appropriations, customer options and funding.
- 2023 segment outlook: Aerospace revenue about $10.2 billion and margin about 14.1%; Marine Systems revenue about $11.8 billion and margin about 7.6%; Combat Systems revenue about $7.8 billion and margin about 14.2%; Technologies revenue about $12.7 billion and margin about 9.4%. Corporate costs are expected to be about $160. No consolidated full-year revenue or earnings guidance is stated in the provided filing text.
- Management expects 2023 net other income of about $90, net interest expense consistent with 2022, and an effective tax rate of about 17%. Aerospace’s outlook assumes G700 certification and entry into service in Q4 2023.
- Management cited persistent supply-chain constraints and inflation, particularly for Marine Systems and Technologies, and constraints on Aerospace production ramp-up. The timing and extent of additional demand related to the Russia-Ukraine conflict remain uncertain.
Risks, contingencies and unusual items
- Marine Systems’ Virginia-class contracts include estimated additional revenue for equitable adjustments; actual recovery could be lower, potentially materially affecting results. The filing also identifies Virginia-class schedule impacts and DDG-51 cost growth.
- A long-running Electric Boat False Claims Act-related matter remained subject to appeal. The company said it could not assess the ultimate outcome or estimate a reasonably possible loss; an adverse outcome could materially affect results, financial condition or cash flows.
- Other government contract audits, claims, environmental matters and litigation are discussed; management did not expect most of these matters to have a material aggregate impact. Letters of credit, guarantees and similar arrangements totaled approximately $1.4 billion.
- Long-term contract profitability depends on estimates of costs, schedule, supplier performance, funding and claims. The company recognizes estimate changes through cumulative catch-up accounting, so revisions can affect reported earnings in the period identified.
Investor verification priorities
- Track whether G700 certification, entry into service and Aerospace production assumptions support the stated 2023 outlook.
- Monitor Marine Systems’ submarine supply chain, DDG-51 costs and recovery of Virginia-class equitable adjustments.
- Assess whether inventory growth converts to deliveries and cash, and whether operating cash flow recovers from the prior-year decline.
- Distinguish funded backlog from unfunded backlog and estimated potential contract value when evaluating revenue visibility.
- Review the Electric Boat litigation appeal and any changes to management’s assessment of potential exposure.