General Dynamics Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended October 1, 2017. Comparisons are with the periods ended October 2, 2016; prior-year results were restated for adoption of ASC 606. Dollars are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|
| Revenue | $7,580 | $7,657 | $22,696 | $22,907 |
| Operating earnings | $1,052 | $1,015 | $3,143 | $2,966 |
| Operating margin | 13.9% | 13.3% | 13.8% | 12.9% |
| Continuing-operations earnings | $764 | $731 | $2,276 | $2,099 |
| Net earnings | $764 | $647 | $2,276 | $2,002 |
| Diluted EPS, continuing operations | $2.52 | $2.36 | $7.45 | $6.74 |
| Diluted EPS, net earnings | $2.52 | $2.09 | $7.45 | $6.43 |
- Revenue declined 1.0% in Q3 and 0.9% year to date, mainly from lower Marine Systems shipbuilding and Information Systems and Technology volume. Higher Combat Systems activity and aircraft deliveries partly offset the declines.
- Operating earnings rose 3.6% in Q3 and 6.0% year to date as operating costs fell faster than revenue. Management cited strong program performance and favorable contract mix. The 2016 comparison also included discontinued-operation losses of $84 in Q3 and $97 for nine months.
- Aggregate contract-estimate adjustments increased operating earnings by $103, or $0.22 diluted EPS, in Q3 and $274, or $0.58 diluted EPS, year to date. No individual adjustment was material.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $1,881, versus $1,372 in 2016. Capital expenditures were $273, producing company-defined free cash flow of $1,608, versus $1,128.
- Cash and equivalents were $2,722 at October 1, up $388 from year-end 2016. Net debt was $2.2 billion, compared with $1.6 billion at year-end. Total debt was $4,882, including $903 current and $3,979 long-term; debt principal was $4,935.
- Current assets were $18,080 and current liabilities $13,209. Unbilled receivables increased to $5,609 from $4,212 at year-end, partly because of billing timing on a large Middle Eastern Combat Systems contract. Operating cash flow was also affected by G500/G600 inventory build-up and lower aircraft customer deposits.
- The company had no commercial paper outstanding and had $2 billion of committed credit facilities available. It reported compliance with debt covenants.
- In the first nine months, the company repurchased 5.9 million shares for $1.1 billion and paid $735 in dividends. It issued $1 billion of fixed-rate notes during Q3, primarily to repay $900 of notes maturing in November 2017 and for general corporate purposes.
Segments, backlog and outlook
| Business group | Nine-month revenue | Change | Nine-month operating earnings | Management’s 2017 outlook |
|---|
| Aerospace | $6,147 | +2.6% | $1,253 | Revenue about $8.0–$8.1 billion; margin around 19.6% |
| Combat Systems | $4,201 | +8.6% | $677 | Revenue about $5.9 billion; margin about 15.6–15.7% |
| Information Systems and Technology | $6,404 | −6.8% | $729 | Revenue essentially flat with 2016; margin around 11.3% |
| Marine Systems | $5,944 | −3.7% | $518 | Revenue steady with 2016; margin 8.5–8.6% |
- Total backlog was $63.9 billion at quarter-end, up from $58.6 billion on July 2; total estimated contract value, including potential contract value, was $89.7 billion. The defense groups’ backlog increase included a $5.1 billion Navy award for Columbia-class submarine design and prototype development. Each defense group reported Q3 book-to-bill above 1.0.
- The company expected 2017 capital expenditures of 1%–2% of revenue, net interest expense of about $110, an effective tax rate of about 27%, and corporate operating costs of approximately $50. Full-year 2017 guidance by segment was generally reaffirmed.
- Management said the continuing resolution funding federal agencies at FY 2017 levels through December 8 was not expected to materially affect results. Approximately 60% of revenue came from the U.S. government.
Risks, contingencies and notable items
- Electric Boat faced a Department of Justice investigation, related sealed litigation, and a Navy Show Cause Letter concerning quality-system oversight of supplier parts. The company could not assess the ultimate outcome or estimate a reasonably possible loss; an adverse outcome could materially affect results, financial condition and cash flows.
- Fixed-price contract execution, supplier performance, contract claims and funding, U.S. and international defense spending, business-aircraft demand, and legal or regulatory proceedings were identified as risks. Management noted long-term contract profitability depends on estimates of costs and performance; actual outcomes may differ.
- The company reported $1.2 billion of letters of credit, guarantees and similar arrangements. Other routine litigation and environmental matters were not expected by management to have a material impact.
- ASC 606 adoption changed the timing of profit adjustments and moved new-aircraft revenue recognition to delivery and customer acceptance; comparative periods were restated. Remaining performance obligations were $63.9 billion, with approximately 50% expected to be recognized by 2018 and another 30% by 2020.
Investor facts to verify
- Track unbilled receivables, collections and working-capital effects, particularly the large Middle Eastern contract and aircraft program inventory build.
- Monitor whether margin gains and contract-estimate benefits are sustained, and review the assumptions underlying remaining contract cost estimates.
- Check progress, funding and execution of the Columbia-class award and other backlog, including the distinction between funded backlog and estimated potential contract value.
- Follow the Electric Boat investigation and related Navy action for any change in estimated exposure or contract implications.
- Compare full-year segment, tax, interest and capital-spending outlook with reported results; assess debt maturities, refinancing and capital returns.
