General Dynamics Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report; fourth-quarter figures are noted separately where useful. General Dynamics is a global aerospace and defense company with five segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine Systems.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $39.35 billion | $36.19 billion | Up 8.7% |
| Operating earnings | $4.65 billion | $4.46 billion | Up 4.3% |
| Operating margin | 11.8% | 12.3% | Down 0.5 percentage points |
| Net earnings | $3.48 billion | $3.35 billion | Up 4.2% |
| Diluted EPS | $11.98 | $11.18 | Up 7.2% |
| Operating cash flow | $2.98 billion | $3.15 billion | Down 5.3% |
| Free cash flow from operations | $1.99 billion | $2.46 billion | Down 18.9% |
| Net interest expense | $460 million | $356 million | Up, primarily due to CSRA acquisition financing |
Revenue growth was led by aircraft deliveries and higher defense-program activity. Operating margin declined as newer aircraft, vehicle and ship programs generally carried lower initial margins than mature programs. Contract-estimate adjustments increased 2019 operating earnings by $271 million ($0.74 per diluted share); no individual contract adjustment was material.
Segment results
| Segment | 2019 revenue | 2019 operating earnings | Margin |
|---|---|---|---|
| Aerospace | $9.80 billion | $1.53 billion | 15.6% (2018: 17.6%) |
| Combat Systems | $7.01 billion | $996 million | 14.2% (2018: 15.4%) |
| Information Technology | $8.42 billion | $628 million | 7.5% (2018: 7.4%) |
| Mission Systems | $4.94 billion | $683 million | 13.8% (2018: 13.9%) |
| Marine Systems | $9.18 billion | $785 million | 8.5% (2018: 9.0%) |
Aerospace revenue rose 15.9%, supported by G500 and initial G600 deliveries; 147 Gulfstream aircraft were delivered, versus 121 in 2018. IT revenue rose modestly, reflecting an additional quarter of CSRA results, partly offset by divestitures and program timing. Marine Systems benefited from increased Navy submarine and destroyer construction activity.
Fourth-quarter 2019 revenue was $10.77 billion, operating earnings were $1.33 billion and diluted EPS was $3.51.
Cash, debt and liquidity
- Cash and equivalents were $902 million at year-end, versus $963 million in 2018.
- Total debt was $11.93 billion, down from $12.42 billion; net debt was $11.03 billion. Debt-to-equity was 87.9%, compared with 105.8% in 2018.
- Operating cash flow was $2.98 billion; capital expenditures were $987 million, producing reported free cash flow from operations of $1.99 billion. Cash generation was affected by working-capital growth, including delayed payments on a large international vehicle contract.
- The company reported $5 billion in committed credit facilities and no commercial paper outstanding at year-end. It expected to repay $2.5 billion of notes due in May 2020 using cash and commercial paper.
- Dividends paid were $1.15 billion; the 2019 declared dividend was $4.08 per share. The company repurchased 1.1 million shares for $184 million.
Backlog, outlook and management commentary
- Total backlog reached a record $86.9 billion, up 28.1%; funded backlog was $57.5 billion. Management expected approximately 35% of remaining performance obligations to be recognized as revenue in 2020 and another 35% by 2022.
- Marine Systems backlog rose to $44.2 billion, primarily following the Navy’s $22.2 billion Block V Virginia-class submarine award for nine boats, with an option for a tenth. Backlog includes 19 Virginia-class submarines scheduled for delivery through 2029.
- Management cited strong Gulfstream demand: aircraft net orders increased more than 57% year over year, with significant interest in the G700, which was expected to enter service in 2022.
- 2020 segment outlook: Aerospace revenue around $10.0 billion and margin 15.7%–15.8%; Combat Systems revenue about $7.3 billion and margin about 14.3%; IT revenue $8.4–$8.5 billion and margin about 7.6%; Mission Systems revenue $5.0–$5.1 billion and margin about 14.1%; Marine Systems revenue about $9.8 billion and margin about 8.6%.
- Other 2020 expectations included net interest expense of approximately $410 million, an effective tax rate of approximately 17.5%, and capital expenditures of about 2.5% of revenue. Management said G&A as a percentage of revenue should remain generally consistent with 2019.
Risks, contingencies and unusual items
- Approximately 65%–66% of revenue came from the U.S. government, creating exposure to defense budgets, appropriations delays, program changes and contract termination rights.
- A $2.9 billion net unbilled receivable was associated with a large international wheeled-vehicle contract routed through the Canadian government. The company disclosed payment delays; it received a $500 million progress payment in January 2020 and expected to collect the outstanding balance.
- Electric Boat faced a U.S. Department of Justice investigation and related False Claims Act litigation concerning alleged supplier-part quality-system failures. The company could not estimate a reasonably possible loss; an adverse outcome could materially affect results, financial condition or cash flows.
- Other key risks include fixed-price contract cost overruns, subcontractor or supplier disruptions, foreign political and currency risks, cybersecurity events, business-jet demand changes, and workforce availability. The IT reporting unit’s estimated fair value exceeded carrying value by about 25%; management noted that materially weaker CSRA synergies, government funding or higher interest rates could increase impairment risk.
- Warranty liabilities increased to $619 million from $480 million, including 2019 warranty expense of $258 million. Pension obligations were sensitive to discount-rate assumptions; the year-end pension funded status was a $4.9 billion liability.
- The company adopted lease accounting in 2019, recognizing $1.4 billion of operating lease right-of-use assets and liabilities at adoption; management reported no material effect on results, financial condition or cash flows. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Progress and cash collection on the delayed international vehicle-contract receivable, including subsequent collections and working-capital effects.
- Execution, costs and margin progression for G500/G600 production, G700 development, and newer Combat and Marine Systems programs.
- Funding, schedule and contract terms for the Virginia-class Block V and Columbia-class submarine programs, including the Block V option.
- Developments and potential financial exposure in the Electric Boat investigation and related litigation.
- Debt refinancing and liquidity after the $2.5 billion May 2020 maturity, and the effect of interest expense on cash generation.
- Whether backlog converts to funded orders and revenue as expected, particularly the unfunded portion and estimated potential contract value.