General Dynamics Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Unless otherwise indicated, financial amounts are in U.S. dollars.
Business context
General Dynamics is an aerospace and defense contractor operating through Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology. Its largest customer is the U.S. government, which generated 62% of 2013 revenue, down from 66% in 2012. Business aviation, principally Gulfstream aircraft and services, is a significant commercial business.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $31.218 billion | $31.513 billion |
| Operating earnings / margin | $3.685 billion / 11.8% | $833 million / 2.6% |
| Earnings from continuing operations | $2.486 billion | Loss of $332 million |
| Net earnings (loss) | $2.357 billion | Loss of $332 million |
| Diluted EPS, net earnings | $6.67 | Loss of $0.94 |
| Operating cash flow | $3.106 billion | $2.687 billion |
| Free cash flow from operations | $2.666 billion | $2.237 billion |
Revenue declined 0.9%, while operating earnings rebounded substantially from 2012, which included a $1.994 billion goodwill impairment and other discrete charges. The 2013 net result includes a $129 million after-tax loss from settlement of the A-12 litigation. Fourth-quarter 2013 revenue was $8.107 billion, operating earnings $921 million, net earnings $495 million, and diluted EPS $1.40; fourth-quarter 2012 included major impairment and other charges.
At year-end, cash and equivalents were $5.301 billion, debt was $3.909 billion, and net cash was $1.392 billion. Total assets were $35.448 billion and shareholders’ equity $14.501 billion. Debt-to-equity was 27.0%, compared with 34.3% in 2012. The company reported $2 billion in committed bank credit facilities, no commercial paper outstanding at year-end, and no material off-balance-sheet arrangements other than operating leases. Pension plans remained underfunded: the reported pension funded-status liability was $2.537 billion, improved from $4.887 billion in 2012.
Business-group results and changes
| Group | 2013 revenue | 2013 operating earnings | Notable year-over-year change |
|---|---|---|---|
| Aerospace | $8.118 billion | $1.416 billion | Revenue up 17.4%; higher G650 and G280 deliveries supported growth. |
| Combat Systems | $6.120 billion | $904 million | Revenue down 23.4% on reduced U.S. Army spending and delayed international orders; earnings improved from 2012 charges and cost reductions. |
| Marine Systems | $6.712 billion | $666 million | Revenue up 1.8%; earnings declined as the mature, higher-margin T-AKE program ended. |
| Information Systems and Technology | $10.268 billion | $795 million | Revenue up 2.5%; earnings recovered from the prior-year goodwill impairment, though underlying margins softened. |
Total backlog fell to $46.0 billion at year-end from $51.3 billion, including funded backlog of $38.4 billion versus $44.5 billion. Estimated potential contract value from IDIQ contracts and options was approximately $27.6 billion, but is not firm backlog and may not be funded or exercised.
Outlook, commentary and key risks
- Management expected 2014 Aerospace revenue to rise approximately 11%, with margins around 17%, on continued growth in newer Gulfstream deliveries.
- Combat Systems revenue was expected to fall 4%–4.5%, with margins around 14%; the forecast assumed approximately $1.2 billion of international orders expected in the first quarter of 2014.
- Marine Systems revenue was expected to increase 2.5%, with margins around 9.5%. Information Systems and Technology revenue was expected to decline nearly 20%, with margins in the low-8% range. Corporate costs were expected to be about $85 million.
- Company-wide 2014 expectations included capital expenditures of about 2% of anticipated revenue, pension contributions of approximately $550 million, net interest expense of about $90 million, an effective tax rate of 30.5%–31%, and G&A expense of approximately 6.5% of revenue.
- Management cited near-term U.S. defense budget stability under the 2013 Bipartisan Budget Act, while warning that sequestration, appropriations delays, spending changes, and program reductions or cancellations could affect awards, funding, and revenue. U.S. government concentration, fixed-price contract execution, supplier performance, international political and currency risks, business-jet demand, cybersecurity, and workforce availability are material risks.
- Information Systems and Technology goodwill had only about a 15% estimated fair-value cushion over carrying value, leaving it exposed to weaker projected cash flows or further increases in carrying value. The Combat Systems axle business also had limited recoverability headroom; approximately $175 million of identified intangible assets could be impaired if future cash flows weaken.
- The A-12 settlement required a $198 million in-kind credit against DDG-1000 work; the company recorded a $129 million after-tax loss. The Portuguese Pandur dispute remained in arbitration, with approximately $145 million of bank guarantee outstanding at year-end and subject to possible draw through 2014.
- Shareholder returns included declared dividends of $2.24 per share for 2013. In January 2014, the company repurchased 11.4 million shares for $1.2 billion under an accelerated repurchase agreement and subsequently authorized repurchases of up to 20 million additional shares.
Important facts for investors to verify
- Whether the expected international Combat Systems order underlying 2014 guidance was awarded, funded, and delivered on the assumed schedule.
- How the decline in total and funded backlog translates into future revenue, particularly in defense programs exposed to appropriations and award timing.
- Whether Aerospace delivery growth and the forecast margin level were sustained, and how G650 backlog normalization affected orders and production.
- Whether Information Systems and Technology performance, including goodwill impairment headroom, and the Combat Systems axle business’s recoverability improved or deteriorated.
- Developments in pension funding, the A-12 settlement credit, the Portuguese Pandur arbitration and guarantee, and the company’s substantial purchase obligations and customer advances.
- Cash deployment after year-end, including the accelerated share repurchase and additional repurchase authorization, relative to debt, capital spending, dividends, and pension contributions.