General Dynamics Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended April 3, 2022; compared with the three months ended April 4, 2021. Dollar amounts are in millions unless stated otherwise. General Dynamics operates in Aerospace, Marine Systems, Combat Systems and Technologies.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $9,392 | $9,389 | Flat |
| Operating earnings | $908 | $938 | Down 3.2% |
| Operating margin | 9.7% | 10.0% | Down 0.3 percentage points |
| Net earnings | $730 | $708 | Up 3.1% |
| Diluted EPS | $2.61 | $2.48 | Up 5.2% |
| Operating cash flow | $1,968 | $3 | Improved substantially |
| Free cash flow | $1,827 | $(131) | Improved substantially |
Product revenue declined 2.7% to $5,209, while services revenue rose 3.7% to $4,183. G&A expense was 6.7% of revenue versus 6.0%, primarily reflecting accelerated equity-based compensation expense. The effective tax rate fell to 14.0% from 16.2%; net interest expense declined to $98 from $123.
By segment, Aerospace revenue was $1,903 and operating earnings $243; Marine Systems $2,651 and $211; Combat Systems $1,675 and $227; and Technologies $3,163 and $298. Segment earnings increased in Aerospace and Marine Systems, but declined in Combat Systems and Technologies. Corporate operating expense rose to $71 from $32, more than offsetting the aggregate increase in segment operating earnings.
Cash, debt and liquidity
Cash and equivalents were $2,907 at April 3, 2022, versus $1,603 at December 31, 2021. Total debt was $11,496, including $1,005 current and $10,491 long-term, broadly unchanged from year-end. The company had no commercial paper outstanding and reported a $4 billion committed credit facility expiring in March 2027; it was in compliance with debt covenants. Current assets were $20,794 and current liabilities $14,036.
Q1 operating cash flow benefited from increased customer deposits, driven by Gulfstream orders, and progress payments that reduced unbilled receivables on a large international wheeled-vehicle contract. These working-capital movements contributed materially to the year-over-year cash-flow improvement. Capital expenditures were $141; dividends paid were $330; and share repurchases were $294.
Material changes and operating developments
- Marine Systems revenue increased 6.8%, mainly from Columbia-class submarine work, destroyer and oiler construction, and Navy services.
- Combat Systems revenue declined 8.0%, primarily due to timing on international vehicle contracts and lower weapons and munitions activity.
- Technologies revenue declined 1.1%; C5ISR weakness from supply constraints and delayed customer activity was partly offset by higher IT services revenue.
- Aerospace revenue rose 0.8% and operating margin improved to 12.8% from 11.7%. Gulfstream deliveries fell to 25 from 28, while aircraft services benefited from higher maintenance and FBO activity.
- Total backlog was $87.2 billion, down from $87.6 billion at year-end; estimated total contract value, including potential contract value, was $129.0 billion. Aerospace backlog grew 8.1% sequentially, and its book-to-bill ratio was 1.7-to-1.
- Contract-estimate adjustments added $105 to operating earnings and $0.30 to diluted EPS, compared with $63 and $0.17, respectively, a year earlier. No individual contract adjustment was material.
Outlook, risks and contingencies
The filing does not provide specific full-year financial guidance. Management said higher aircraft production rates are expected to result in increased deliveries beginning in the second half of 2022. The G700 was targeted to enter service in Q4 2022; management noted a modest certification-timing risk that it said did not affect its 2022 or later outlook.
Management reported strong Gulfstream order activity and said the FY2022 U.S. defense appropriations bill was supportive of key programs but did not materially change its 2022 financial outlook. The Russia-Ukraine conflict and related sanctions have increased cybersecurity, supply-chain, energy-cost, foreign-exchange and inflation risks. Potential effects on the business had not been material through the filing date, but longer-term impacts were uncertain. Technologies also cited supply shortages; management noted broader risks from government spending and priorities, contract performance and estimates, aircraft demand, input costs, litigation, audits and cybersecurity.
Net unbilled receivables were $7,888, including $1.4 billion on a tracked-vehicle contract with customer concerns still being resolved. A separate wheeled-vehicle contract’s remaining unbilled balance was $1 billion, with scheduled progress payments expected to liquidate it by the end of 2023. In a separate Electric Boat matter involving alleged supplier-part quality-system failures, a dismissed qui tam complaint was on appeal; the company could not estimate a reasonably possible loss, and an adverse outcome could materially affect results, financial condition or cash flows. The company did not expect other disclosed litigation or environmental matters to have a material impact.
Important facts for investors to verify
- Whether the exceptional operating cash-flow result persists after the favorable deposit and progress-payment timing effects.
- Progress in resolving the tracked-vehicle contract’s $1.4 billion unbilled balance and collection of the other large contract balance.
- Aircraft production ramp, Gulfstream delivery trends and G700 certification and entry-into-service timing.
- Whether supply-chain constraints, inflation and sanctions affect segment performance or contract costs beyond the quarter.
- The trajectory of corporate costs and equity-based compensation, and the contribution of contract-estimate adjustments to earnings.
- Developments in the Electric Boat appeal and any change in the company’s ability to assess potential exposure.