General Dynamics Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended October 1, 2023; comparative periods ended October 2, 2022. Dollar amounts are in millions unless otherwise noted. General Dynamics operates Aerospace, Marine Systems, Combat Systems and Technologies; approximately 70% of revenue is tied to U.S. government work.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $10,571 | $9,975 | $30,604 | $28,556 |
| Operating earnings | $1,057 | $1,098 | $2,957 | $2,984 |
| Operating margin | 10.0% | 11.0% | 9.7% | 10.4% |
| Net earnings | $836 | $902 | $2,310 | $2,398 |
| Diluted EPS | $3.04 | $3.26 | $8.39 | $8.61 |
For Q3, revenue rose 6.0%, but operating earnings fell 3.7% and operating margin contracted 100 basis points. For nine months, revenue increased 7.2%, while operating earnings declined 0.9% and margin contracted 70 basis points. Management attributed margin pressure principally to program mix and supply-chain-driven costs.
Nine-month operating cash flow was $3,514 versus $3,910; capital expenditures were $600 versus $620; and free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $2,914 versus $3,290. Cash and equivalents were $1,352 at October 1, 2023, compared with $1,242 at December 31, 2022.
Total debt was $9,255, including $9,248 of long-term debt and $7 current, versus $10,496 at year-end 2022. The company repaid $1,250 of notes at scheduled maturities during 2023. It had no commercial paper outstanding and maintained a $4 billion committed credit facility, expiring in March 2027; it reported compliance with debt covenants. Current assets were $22,779 and current liabilities $15,962. Customer advances and deposits increased to $9,351 from $7,436, while inventory rose to $8,282 from $6,322.
Business trends and segment performance
| Segment | Q3 revenue change | Q3 operating earnings | Management discussion |
|---|---|---|---|
| Aerospace | Down 13.4% | $268, down 14.1% | Fewer aircraft deliveries, especially large-cabin aircraft, amid supply constraints; services revenue increased. |
| Marine Systems | Up 8.4% | $211, down 11.3% | Higher Columbia-class submarine activity lifted revenue; margin was pressured by Virginia-class supply-chain impacts and DDG-51 cost growth. |
| Combat Systems | Up 24.4% | $300, up 10.7% | Growth from international vehicles and weapons/munitions; margin fell with contract mix and lower-margin artillery capacity expansion. |
| Technologies | Up 7.9% | $315, up 10.5% | Growth across C5ISR and IT services; Q3 margin improved, while nine-month margin declined due to program mix. |
Gulfstream deliveries were 27 in Q3 versus 35 a year earlier and 72 for nine months versus 82. Inventory growth primarily reflected ramping new Gulfstream models, including the G700 ahead of anticipated fourth-quarter 2023 FAA certification, and increased production to meet demand.
Total backlog was $95.6 billion at October 1, up from $91.4 billion at the end of Q2; funded backlog was $74.3 billion and unfunded backlog $21.3 billion. Estimated total contract value, including potential options and other work, was $132.9 billion. The company expects to recognize approximately 45% of remaining performance obligations as revenue by year-end 2024, another 35% by year-end 2026, and the balance thereafter. Q3 book-to-bill was 1.4-to-1 overall and 2.3-to-1 for Marine Systems.
Outlook, risks and contingencies
- Management continued to anticipate a full-year 2023 effective tax rate of approximately 17%.
- A continuing resolution funded federal agencies through November 17, 2023. Management did not expect the current CR to have a material effect, but the impact of an extended CR or shutdown was uncertain.
- Supply-chain challenges and inflation continued to constrain aircraft production and affect Marine Systems and Technologies. The Ukraine conflict has supported additional demand, particularly in Combat Systems, but timing and scale remain uncertain; effects of the Israel conflict were also unknown.
- Long-term contract estimates involve assumptions about costs, productivity, suppliers and funding. Contract estimate adjustments added $11 to Q3 operating earnings and $98 for nine months, below prior-year contributions of $115 and $321, respectively. Management cautioned that the actual recovery of estimated equitable adjustments on Virginia-class submarine contracts could be lower, potentially materially affecting results.
- Electric Boat’s False Claims Act-related litigation dismissal was affirmed on appeal in Q3 2023; a rehearing petition was filed. The company could not estimate a reasonably possible loss if the outcome is adverse. It stated other identified litigation and environmental exposures were not expected to have a material impact.
- Other stated risks include government budget changes or contract termination, program execution and supplier performance, aircraft demand, commodity costs, government audits, cybersecurity, acquisitions and regulatory changes.
The board declared quarterly dividends of $1.32 per share, up from $1.26 in the comparative period. Nine-month dividends paid were $1,068; share repurchases were $434, compared with $1,119 in the prior-year period.
Important facts for investors to verify
- Whether aircraft supply constraints ease, G700 certification proceeds as anticipated, and Gulfstream deliveries recover.
- Whether Marine Systems can contain Virginia-class schedule impacts and DDG-51 cost growth, and how submarine contract adjustments are ultimately resolved.
- Whether backlog converts to funded orders and revenue as expected, particularly its unfunded and option-related components.
- Whether operating cash flow and free cash flow recover from the nine-month year-over-year decline as inventory investment and customer deposits evolve.
- Developments in defense appropriations, the continuing resolution, and the Electric Boat litigation and rehearing petition.