General Dynamics Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021, compared with the three months ended March 29, 2020. Unaudited results; dollars in millions except per-share amounts.
Business context
General Dynamics operates in Aerospace, Marine Systems, Combat Systems and Technologies. Its businesses span business aviation, shipbuilding and repair, combat vehicles and weapons, and technology services. The U.S. government is its primary customer.
Financial performance
| Metric | Q1 2021 | Prior year |
|---|---|---|
| Revenue | $9,389 | $8,749 |
| Operating earnings | $938 | $934 |
| Operating margin | 10.0% | 10.7% |
| Net earnings | $708 | $706 |
| Diluted EPS | $2.48 | $2.43 |
| Operating cash flow | $3 | $(666) |
| Free cash flow from operations | $(131) | $(851) |
Revenue grew 7.3%, while operating earnings increased 0.4%; the margin fell 70 basis points. The effective tax rate was 16.2%, versus 16.7%. Net interest expense rose to $123 from $107.
Revenue increased across all four segments. Aerospace revenue rose 11.6% to $1,887, but earnings fell 8.3% to $220 and margin declined to 11.7% from 14.2%. Marine Systems revenue grew 10.6% to $2,483 and earnings rose 8.7% to $200. Combat Systems revenue increased 6.6% to $1,820 and earnings grew 9.4% to $244. Technologies revenue rose 3.1% to $3,199 and earnings increased 2.7% to $306.
Liquidity, debt and capital allocation
Cash and equivalents were $1,811 at quarter-end, down from $2,824 at December 31, 2020. Total debt was $13,181 and net debt was $11,370, compared with $12,998 and $10,174, respectively, at year-end. Current liabilities were $15,153 against current assets of $20,408. The company reported no commercial paper outstanding and had $5 billion of committed credit facilities; it was in compliance with debt covenants.
Operating cash flow was nearly break-even as working capital movements, including lower customer advances and deposits, weighed on cash generation. Capital expenditures were $134. The company repurchased $759 of stock and paid $315 of dividends. It declared a quarterly dividend of $1.19 per share. Debt maturities included $2.5 billion in May 2021 and $500 million in July 2021; management planned to refinance part of the maturities and repay the remainder with cash and commercial paper.
Backlog, outlook and management commentary
Total backlog was $89.6 billion, broadly stable against $89.5 billion at year-end; total estimated contract value, including potential contract value, was $131.4 billion. The company expected to recognize approximately 50% of remaining performance obligations by year-end 2022 and another 25% by year-end 2024. Aerospace orders were strong, with a 1.3-to-1 book-to-bill ratio.
Management said Aerospace continued to experience the greatest pandemic impact. Lower production rates adopted in 2020 affect 2021 deliveries; management expected steady revenue growth in the third and fourth quarters as scheduled deliveries increase. Aircraft-services demand had improved but remained below pre-pandemic levels. COVID-related customer site restrictions also affected Technologies. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
Consolidated margin pressure primarily reflected G500 flight-test aircraft mark-to-market adjustments and a less favorable aircraft delivery mix. Contract estimate adjustments added $63 to operating earnings and $0.17 to diluted EPS, compared with $90 and $0.25 in the prior-year quarter. Management stated that results for this quarter are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- COVID-19 duration and effects on aviation demand, operations, supply chains and government customer access remain uncertain.
- Fixed-price contracts expose the company to cost, productivity, supplier and execution risks; estimates on long-term contracts can affect recognized profit.
- Electric Boat faces a False Claims Act-related matter concerning supplier quality oversight. The company could not estimate a reasonably possible loss; an adverse outcome could materially affect results, financial condition or cash flows.
- Unfunded defense backlog depends on future appropriations and customer funding. Other cited risks include defense-budget changes, contract performance, claims recovery, aircraft demand, government audits, litigation and cybersecurity.
- Environmental, warranty, government-contract and other claims were not expected by management to have a material aggregate impact, except as described for the Electric Boat matter.
Most important facts for investors to verify
- Whether Aerospace deliveries and margins improve as management expected in the second half of 2021, and how the G500 flight-test adjustments develop.
- Whether working capital converts into stronger operating and free cash flow after the near-zero operating cash flow this quarter.
- How the May and July 2021 maturities are refinanced or repaid, and the effect on debt and interest expense.
- Backlog funding, conversion timing and execution on major shipbuilding and defense programs.
- Updates on the Electric Boat investigation and litigation, including any change in the company’s ability to estimate potential exposure.