General Dynamics Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 3, 2021; comparisons are to the periods ended September 27, 2020, unless otherwise noted. Dollar amounts are in millions except per-share amounts. General Dynamics operates Aerospace, Marine Systems, Combat Systems and Technologies.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $9,568 | $9,431 | $28,177 | $27,444 |
| Operating earnings | $1,080 | $1,072 | $2,977 | $2,840 |
| Operating margin | 11.3% | 11.4% | 10.6% | 10.3% |
| Net earnings | $860 | $834 | $2,305 | $2,165 |
| Diluted EPS | $3.07 | $2.90 | $8.16 | $7.52 |
For the nine months, revenue increased 2.7%, net earnings 6.5%, and diluted EPS 8.5%. Growth in the defense businesses more than offset lower aircraft manufacturing revenue. Q3 revenue rose 1.5%, while operating margin edged down 0.1 percentage point.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2,589, up from $1,296; capital expenditures were $502 versus $622. Free cash flow from operations, a non-GAAP measure, was $2,087 versus $674.
- Cash and equivalents were $3,139 at October 3, 2021, versus $2,824 at December 31, 2020. Total debt was $13,668 versus $12,998; net debt, as defined by the company, was $10,529 versus $10,174.
- The company had $2,000 of commercial paper outstanding and $5 billion in committed credit facilities. Management said it expects to generate funds in excess of liquidity needs and believes available funds and borrowing capacity are adequate. The company reported compliance with debt covenants.
- Financing cash use was $1,757, including $1,491 of share repurchases and $983 of dividends paid. The company repurchased 8.5 million shares during the nine months.
Segments and material changes
- Aerospace: Q3 revenue increased 4.6% to $2,066, but operating earnings fell 7.4% to $262 and margin declined to 12.7% from 14.3%. Nine-month revenue declined 1.2%, with 80 Gulfstream deliveries versus 87. Lower aircraft production and delivery volume and mix weighed on manufacturing; services and completions improved.
- Marine Systems: Nine-month revenue rose 7.5% to $7,656, led by U.S. Navy ship construction; operating earnings increased 5.3%. Margin eased to 8.3% from 8.5%, partly due to early work on new submarine programs.
- Combat Systems: Nine-month revenue grew 3.8% and operating earnings 7.4%; margin improved to 14.4% from 13.9%, reflecting program performance, mix and cost reductions.
- Technologies: Nine-month revenue rose 0.7% and operating earnings 9.5%; margin improved to 9.9% from 9.1%. Q3 revenue declined 4.0%, mainly from lower C4ISR program activity and supply constraints, partly offset by IT services growth.
Backlog, outlook and risks
- Backlog was $88.1 billion at quarter-end, down from $89.2 billion at July 4, 2021; estimated total contract value, including potential contract value, was $129.6 billion. The company expects to recognize about 45% of remaining performance obligations as revenue by year-end 2022, another 30% by year-end 2024, and the balance thereafter.
- No specific company-wide earnings or revenue guidance is provided in the filing. Management said aircraft orders were strong in the first nine months and deliveries were increasing in the second half of 2021. The G700 was scheduled to enter service in Q4 2022.
- COVID-19 continues to affect supply chains, customer access and aircraft demand. Federal contractor vaccine requirements could cause employee attrition, work stoppages, higher costs or schedule delays. Semiconductor and other supply constraints affected Technologies programs.
- A continuing U.S. government funding resolution ran through December 3, 2021. Management did not anticipate a material impact from the current resolution or extensions, but noted possible delays to revenue growth and new program starts.
- Contract-estimate adjustments increased nine-month operating earnings by $273 and diluted EPS by $0.76; no single contract adjustment was material. Results depend on estimates of long-term contract costs and performance.
- A False Claims Act-related case involving Electric Boat was dismissed with prejudice, but the relator appealed in October 2021. The company could not estimate potential loss or the outcome; an adverse result could materially affect results, financial condition or cash flows. The company viewed other disclosed contingencies as not expected to be material.
Important facts for investors to verify
- Whether aerospace deliveries and margins recover, and whether strong aircraft orders convert into deliveries and cash.
- Progress on Technologies C4ISR programs, chip and supply-chain constraints, and any resulting schedule or cost impacts.
- Execution and funding of large defense programs, including the distinction between funded backlog and unfunded or potential contract value.
- Collection and billing progress on unbilled receivables, including the $1.9 billion balance on the wheeled-vehicle contract and $1.1 billion on the tracked-vehicle program with technical issues.
- Developments in the Electric Boat appeal, federal contractor vaccine requirements, and U.S. government appropriations.
- Continued contract-estimate revisions, capital returns and net-debt movement; the filing cautions that interim results are not necessarily indicative of full-year results.