General Dynamics Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. General Dynamics operates in aerospace, combat systems, marine systems, and information systems and technology. Approximately 66% of 2012 revenue came from the U.S. government.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $31.513 billion | $32.677 billion |
| Operating earnings / margin | $833 million / 2.6% | $3.826 billion / 11.7% |
| Continuing operations earnings (loss) | $(332) million | $2.552 billion |
| Net earnings (loss) / diluted EPS | $(332) million / $(0.94) | $2.526 billion / $6.87 |
| Operating cash flow | $2.687 billion | $3.238 billion |
| Free cash flow from operations | $2.237 billion | $2.780 billion |
| Cash and equivalents | $3.296 billion | $2.649 billion |
| Total debt | $3.909 billion | $3.930 billion |
| Total backlog | $51.281 billion | $57.410 billion |
Amounts are in U.S. dollars. Free cash flow is a company-defined non-GAAP measure: operating cash flow less capital expenditures. Year-end net debt was $613 million. The company reported a 34.3% debt-to-equity ratio and $11.390 billion of shareholders’ equity.
Business results and material changes
- Aerospace: Revenue rose 15.2% to $6.912 billion; operating earnings increased to $858 million and margin was 12.4%. Higher Gulfstream G650 deliveries were the main driver. Green aircraft deliveries increased to 121 from 107.
- Combat Systems: Revenue fell 9.5% to $7.992 billion; operating earnings fell to $663 million and margin to 8.3%. Lower European vehicle activity and discrete contract, restructuring, and adjustment charges weighed on results.
- Marine Systems: Revenue was nearly flat at $6.592 billion; operating earnings rose to $750 million and margin to 11.4%, aided by favorable performance on the final T-AKE ships and higher repair activity.
- Information Systems and Technology: Revenue declined 10.7% to $10.017 billion. The group recorded a $1.994 billion goodwill impairment and $110 million of intangible-asset impairments, contributing to an operating loss of $1.369 billion.
- Consolidated revenue declined 3.6%. The company recorded $2.295 billion of goodwill and intangible-asset impairments, principally in Information Systems and Technology and Aerospace. The largely non-deductible goodwill charge contributed to an unusually high 161.4% effective tax rate.
- Fourth-quarter revenue was $8.078 billion, but operating loss was $1.902 billion and net loss was $2.130 billion, including impairment charges and other discrete items.
Cash, debt, and capital allocation
Operating cash flow was $2.687 billion, down from $3.238 billion; free cash flow was $2.237 billion. Capital expenditures were $450 million. The company paid $893 million in dividends and repurchased 9.1 million shares for $602 million. It declared $2.04 per share in dividends for the year and had approximately 10.9 million shares remaining under repurchase authorization.
In December 2012, General Dynamics refinanced $2.4 billion of higher-rate notes. Management reported that the refinancing reduced the weighted-average interest rate on outstanding debt from 3.9% to 2.2% and extended the weighted-average maturity from 2.6 to 9.5 years. It had no commercial paper outstanding and maintained $2 billion in bank credit facilities. About $1 billion of cash was held by international operations and was not immediately available for domestic use without repatriation.
Outlook, risks, and contingencies
- 2013 outlook: Aerospace revenue expected to rise approximately 16%, with operating margin in the mid-15% range. Combat Systems revenue expected to fall approximately 6%, with margin in the mid-13% range. Marine Systems revenue expected to increase approximately 2%, with margin in the low-to-mid-9% range. Information Systems and Technology revenue expected to decline approximately 5%, with margin in the low-8% range.
- Management’s 2013 assumptions included continued U.S. government operation under a continuing resolution and no significant reductions to the proposed defense budget. The filing gives no consolidated revenue or earnings forecast. Other expectations included G&A expense of about 6.5% of revenue, net interest expense of approximately $90 million, an effective tax rate near 32%, and capital expenditures of approximately $640 million.
- U.S. defense budget uncertainty was a major risk. The filing discussed continuing-resolution funding, legislated defense reductions, and potential sequestration; the precise effects on programs and results were uncertain. Information Systems and Technology was identified as more sensitive to further cuts.
- A-12 litigation: The company recorded no accrual and believed it would prevail. If the government ultimately prevails on its claims, General Dynamics estimated its potential pretax exposure at approximately $1.5 billion; estimated after-tax cash cost was approximately $740 million.
- Portugal Pandur contract: After termination of the vehicle contract, the company recorded $258 million for written-off balances and estimated close-out costs. Approximately $195 million of related bank guarantees remained outstanding and could be drawn through 2014; about $75 million had already been drawn. The company disputed the termination and sought arbitration.
- Other key risks include contract cost overruns and estimate changes, government audits or termination of contracts, aircraft demand, supplier disruption, international political and currency risks, cyber incidents, and pension funding. Pension-plan funded status was a liability of $4.887 billion; other post-retirement plans had a $958 million unfunded status. Pension contributions were expected to rise to $600 million in 2013.
Important facts for investors to verify
- Review the impairment charges, fourth-quarter results, and their tax effects; distinguish the reported loss from underlying segment performance.
- Assess whether 2013 segment forecasts remain achievable under actual defense appropriations, continuing-resolution funding, and any sequestration or other budget cuts.
- Track backlog conversion and new awards: total backlog fell to $51.281 billion, while estimated potential contract value is not firm backlog and may not be funded or exercised.
- Monitor the A-12 litigation and Portugal arbitration, including any changes to the stated potential exposure, guarantees, or recorded reserves.
- Verify cash-flow conversion, pension contributions and funded status, debt maturities, and the availability of international cash.