General Dynamics Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020; unaudited. General Dynamics is a global aerospace and defense contractor. Results were materially affected by COVID-19-related disruption, particularly delayed Gulfstream aircraft deliveries.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $8.749 billion | $9.261 billion | Down 5.5% |
| Operating earnings | $941 million | $1.014 billion | Down 7.2% |
| Operating margin | 10.8% | 10.9% | Down 0.1 percentage point |
| Net earnings | $706 million | $745 million | Down 5.2% |
| Diluted EPS | $2.43 | $2.56 | Down 5.1% |
| Net interest expense | $107 million | $117 million | Down $10 million |
| Effective tax rate | 16.7% | 18.6% | Down 1.9 percentage points |
Operating cash flow was a use of $666 million, versus a use of $795 million in Q1 2019. Capital expenditures were $185 million, resulting in negative free cash flow from operations of $851 million, compared with negative $976 million. Cash generation remained pressured by working-capital needs and aircraft delivery delays.
At March 29, cash and equivalents were $5.330 billion, compared with $902 million at year-end 2019. Total debt was $17.998 billion on the balance sheet ($18.132 billion principal); net debt was $12.7 billion, up from $11.0 billion at year-end. The company had $5 billion of committed credit facilities and reported compliance with debt covenants.
Segment results and material changes
- Aerospace: Revenue fell 24.5% to $1.691 billion; operating earnings declined 26.8% to $240 million and margin was 14.2%, down from 14.6%. Gulfstream deliveries fell to 23 from 34; 11 scheduled deliveries were delayed by travel and quarantine restrictions.
- Combat Systems: Revenue rose 4.4% to $1.708 billion and operating earnings increased 8.3% to $223 million, reflecting higher U.S. vehicle and weapons/munitions volume and a favorable comparison with a prior-year settlement.
- Information Technology: Revenue declined 8.3% to $1.988 billion, mainly from exited non-core businesses, completed legacy programs, and customer-site closures. Operating earnings were $150 million, down 3.8%; margin improved to 7.5%.
- Mission Systems: Revenue decreased 3.6% to $1.116 billion; operating earnings were unchanged at $148 million. Margin improved to 13.3% on favorable mix.
- Marine Systems: Revenue increased 9.1% to $2.246 billion, supported by submarine construction and ship repair. Operating earnings rose 2.2% to $184 million; margin declined to 8.2% due to mix and commercial-ship delays.
Total backlog was $85.7 billion, down from $86.9 billion at December 31, 2019. Estimated total contract value, including potential contract value, was $123.9 billion. The company expects to recognize about 55% of remaining performance obligations as revenue by year-end 2021 and another 30% by year-end 2023.
Outlook, risks, and unusual items
- For 2020, Aerospace reduced its delivery expectation from somewhat more than 150 Gulfstream aircraft to 125–130. The company forecast Aerospace revenue of about $8.5 billion and operating earnings of approximately $1.15 billion.
- The company said the defense-segment full-year earnings outlook remained unchanged, while acknowledging modest revenue pressure and continuing COVID-19 uncertainty.
- Management expected 2020 net interest expense of approximately $490 million and a full-year effective tax rate of approximately 17%.
- COVID-19 caused aircraft delivery delays, supply-chain and productivity impacts, some customer-site closures, and reduced late-quarter aircraft order activity. Management said the longer-term effects were unknown. Contract estimates assumed no material COVID-related impact, partly on the expectation that related costs would be reimbursed; reimbursement could be less than full, potentially reducing contract profitability.
- The company issued $4 billion of fixed-rate notes in March, with proceeds intended partly to refinance $2.5 billion of notes maturing in May and partly for general corporate purposes. It also had $2.3 billion of commercial paper outstanding at quarter-end.
- Contract-estimate adjustments increased Q1 operating earnings by $90 million and diluted EPS by $0.25, compared with $68 million and $0.18, respectively, in Q1 2019. No single adjustment was material.
- An Electric Boat False Claims Act-related matter remains unresolved; the company could not estimate a reasonably possible loss, and an adverse outcome could materially affect results, financial condition, or cash flows. Other disclosed litigation and environmental matters were not expected to be material in aggregate.
Important facts for investors to verify
- Whether Gulfstream delivery rates, order activity, and Aerospace guidance recover or require further revision as pandemic and supplier effects develop.
- Whether COVID-related costs are reimbursed by government customers and how any shortfall affects contract margins and estimates.
- Cash conversion and working-capital trends, especially aircraft inventory and collections, alongside the company’s debt refinancing and commercial-paper needs.
- Backlog funding, conversion into revenue, and the resolution and potential financial exposure of the Electric Boat matter.