General Dynamics Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial amounts are generally in millions unless stated otherwise.
Business context and reporting period
General Dynamics operates in four groups: Aerospace (Gulfstream aircraft and aviation services), Combat Systems (military vehicles, weapons and munitions), Marine Systems (naval and commercial shipbuilding and support), and Information Systems and Technology (communications, IT and intelligence systems). The company had approximately 90,000 employees. The U.S. government generated 72% of FY 2010 revenue, including foreign military sales contracted through the U.S. government.
Financial performance and key metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $32,466 | $31,981 |
| Operating earnings | $3,945 | $3,675 |
| Operating margin | 12.2% | 11.5% |
| Earnings from continuing operations | $2,628 | $2,407 |
| Net earnings | $2,624 | $2,394 |
| Diluted EPS | $6.81 | $6.17 |
| Operating cash flow | $2,986 | $2,855 |
| Free cash flow from operations | $2,616 | $2,470 |
Revenue increased 1.5%, while operating earnings rose 7.3%; margin improved 70 basis points. The effective tax rate was 30.7% (31.5% in 2009). Net interest expense was $157, compared with $160.
| Business group | FY 2010 revenue | FY 2010 operating earnings | FY 2010 margin | FY 2009 margin |
|---|---|---|---|---|
| Aerospace | $5,299 | $860 | 16.2% | 13.7% |
| Combat Systems | $8,878 | $1,275 | 14.4% | 13.1% |
| Marine Systems | $6,677 | $674 | 10.1% | 10.1% |
| Information Systems and Technology | $11,612 | $1,219 | 10.5% | 10.7% |
Fourth quarter: Revenue was $8,601, operating earnings $1,076, continuing-operations earnings $729, and diluted EPS $1.91. In Q4 2009, these were $7,898, $951, $618, and $1.57, respectively.
At year-end, cash and equivalents were $2,613, marketable securities $212, total debt $3,203, and shareholders’ equity $13,316. Net debt was $378, down from $1,241 in 2009; debt-to-equity was 24.1%, versus 31.1%. The company reported no commercial paper outstanding and approximately $2 billion of undrawn bank credit facilities. It repurchased $1,185 of shares and paid $631 in dividends during 2010. The declared annual dividend was $1.68 per share.
Material changes versus the prior comparable period
- Aerospace revenue increased 2.5% and operating earnings 21.6%, primarily from higher aircraft-services activity, improved pricing and the absence of 2009 pre-owned aircraft write-downs. Business-jet demand and orders improved, but deliveries exceeded net orders and Aerospace backlog declined.
- Combat Systems revenue fell 8.0%, mainly because of lower U.S. and European military-vehicle volume. Earnings nevertheless rose 1.0% and margin improved through productivity gains and a more favorable contract mix.
- Marine Systems revenue grew 4.9% with increased U.S. Navy submarine and other program activity; margin remained 10.1%. Lower commercial ship construction partly offset Navy growth.
- Information Systems and Technology revenue rose 7.5%, including more than 5% organic growth, led by tactical communications and IT services. Earnings rose 5.9%, but margin edged down with a shift toward IT-services work.
- Total backlog declined to $59.6 billion from $65.5 billion; funded backlog fell to $43.4 billion from $45.9 billion. Estimated potential contract value from IDIQ contracts and options, which is not firm backlog, increased to approximately $21.8 billion from $17.6 billion.
Outlook, risks, contingencies and unusual items
- 2011 segment outlook: Aerospace revenue expected to increase approximately 15–16%, with margins in the mid-to-high 15% range. Combat Systems revenue expected to be around $9 billion and margin approximately 14%. Marine Systems revenue expected near 2010 levels, with margin in the low-9% range. Information Systems and Technology revenue expected to grow 3–5%, with margins slightly lower but above 10%. No consolidated revenue or earnings forecast is stated in the supplied filing text.
- Management cited a continuing resolution funding the U.S. government at FY 2010 levels through early March 2011 while Congress considered FY 2011 appropriations. Delays or reductions in defense funding could delay, reduce or terminate programs. The company noted proposed longer-term defense-budget restraint.
- Gulfstream’s G250 and G650 were reported on track for 2011 certification; the G250 was scheduled to enter service in 2011 and the G650 in 2012. These schedules and aircraft demand are subject to execution and market risks.
- The long-running A-12 contract termination litigation remained pending before the U.S. Supreme Court. The filing describes a potentially material repayment exposure if the government prevails, but its stated estimates are not fully consistent: it gives an approximate $1.4 billion pretax company exposure and approximately $725 million after-tax cash cost in one discussion, and an approximately $815 million after-tax charge elsewhere. Management said it expected to prevail and believed it could fund an adverse outcome.
- Other risks include contract-cost and fixed-price execution risk; government audits and contract termination rights; supplier availability and pricing; international political, currency and offset risks; business-jet market conditions; and pension funding. Pension plan funded status worsened, and the company expected approximately $350 of pension contributions in 2011. Environmental and other ordinary-course legal matters were not expected by management to have a material impact.
- Three businesses were acquired in 2010 for $233 in aggregate. The Spanish nitrocellulose operation sale was completed and presented as discontinued operations. Capital expenditures were $370; approximately $550 was planned for 2011.
Most important facts for investors to verify
- Reconcile the A-12 litigation exposure estimates and monitor the Supreme Court outcome.
- Track congressional defense appropriations and their effects on contract funding, awards and backlog conversion.
- Assess whether Aerospace order growth, G250/G650 certification and delivery schedules support the stated 2011 outlook.
- Distinguish firm funded and unfunded backlog from the $21.8 billion of estimated potential contract value, which depends on future orders and options.
- Monitor pension funding requirements, the July 2011 $750 debt maturity, and the company’s planned capital returns and investment spending.