General Dynamics Corporation — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited fourth-quarter results. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
General Dynamics operates in Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology, serving defense, government, commercial, and business-aviation markets. Approximately 71% of 2009 revenue came from the U.S. government. The company employed about 91,700 people and completed two acquisitions during the year.
Financial performance and liquidity
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $31,981 | $29,300 |
| Operating earnings / margin | $3,675 / 11.5% | $3,653 / 12.5% |
| Earnings from continuing operations | $2,407 | $2,478 |
| Net earnings | $2,394 | $2,459 |
| Diluted EPS | $6.17 | $6.17 |
| Cash from operating activities | $2,855 | $3,124 |
| Free cash flow from operations | $2,470 | $2,634 |
| Cash and equivalents at year end | $2,263 | $1,621 |
| Total debt at year end | $3,864 | $4,024 |
| Net debt (debt less cash and marketable securities) | $1,241 | $2,260 |
| Total backlog | $65,545 | $74,127 |
Revenue rose 9.2%, while operating earnings were nearly flat and operating margin contracted by 100 basis points. Net earnings declined 2.6%; diluted EPS was unchanged. Operating cash flow exceeded earnings for the 11th consecutive year. The company paid $577 in dividends, repurchased $209 of shares, spent $811 on acquisitions, and invested $385 in capital expenditures. It had no commercial paper outstanding and reported approximately $1.8 billion of undrawn bank credit facilities.
Segment results: Aerospace revenue was $5,171 and operating earnings $707 (13.7% margin); Combat Systems $9,645 and $1,262 (13.1%); Marine Systems $6,363 and $642 (10.1%); Information Systems and Technology $10,802 and $1,151 (10.7%).
Fourth quarter: Revenue was $7,898 versus $7,852 in fourth-quarter 2008; operating earnings were $951 versus $938; continuing-operations earnings were $618 versus $630; net earnings were $614 versus $612; diluted EPS was $1.57 in both periods.
Material changes versus the prior comparable period
- Revenue growth came from all three defense groups, led by Combat Systems (+17.7%) and Marine Systems (+14.5%); Information Systems and Technology increased 7.6%.
- Aerospace revenue fell 6.2% and operating earnings fell 30.8% as the global downturn reduced aircraft production, deliveries, and service activity. Gulfstream green deliveries fell from 156 to 94. Jet Aviation, acquired in 2008, partially offset the decline.
- Operating margin pressure reflected lower Aerospace earnings and a less favorable Combat Systems contract mix. Marine Systems margins improved with stronger shipyard execution; Information Systems and Technology margins were steady.
- Total backlog declined 11.6%; funded backlog fell from $51.7 billion to $45.9 billion. Aerospace backlog decreased 14%, while Marine Systems backlog declined as large multi-year work progressed. Combat Systems backlog also reflected termination of the manned ground-vehicle portion of the Future Combat Systems program.
- Net debt fell by about $1.0 billion, despite acquisition spending. Net interest expense increased to $160 from $66, principally due to debt issuance and reduced interest income.
Guidance, commentary, risks, contingencies, and unusual items
- Management expected 2010 Aerospace revenue to rise in the low- to mid-single digits, with margins around 14%; Combat Systems revenue to grow 4%–5%, with margins in the high-12% range; Marine Systems revenue to grow 7%–8%, with margins in the mid-9% range; and Information Systems and Technology revenue to grow 8%–9%, with margins in the mid-10% range. These are segment expectations, not consolidated guidance.
- Management described business-aviation conditions as stabilizing in the second half of 2009, but noted continuing challenges in the mid-size aircraft market. G250 and G650 service entry was scheduled for 2011 and 2012, respectively.
- Defense outlook depends on U.S. and international budgets, appropriations, contract awards, and program priorities. The company identified risks from government contract funding delays or termination, fixed-price contract cost overruns, supplier availability and pricing, international political and currency exposures, technology development, and workforce retention.
- A-12 litigation: The company and Boeing could collectively be required to repay up to approximately $1.5 billion, including interest. General Dynamics estimated its share at about $1.4 billion pretax; the filing describes an approximately $800 after-tax charge and approximately $715 after-tax cash cost. The company disputed the government’s position and intended to seek Supreme Court review.
- Other disclosed items include pre-owned aircraft inventory write-downs, a five-week Aerospace production furlough, the pending sale of the Spanish nitrocellulose operation, and ongoing environmental, government-contract, and other legal matters. Management did not expect the latter matters to have a material financial impact. The 2009 financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether business-jet demand, customer defaults, pre-owned aircraft pricing, and Gulfstream delivery levels support the Aerospace recovery assumptions.
- Whether defense funding and contract execution sustain the projected segment growth and margins, particularly on large shipbuilding and vehicle programs.
- The timing and funding quality of the $65.5 billion backlog, including unfunded amounts and estimated potential contract value that depends on future orders or options.
- Developments in the A-12 litigation and the potential company-specific cash and earnings exposure.
- Debt maturities, including $700 due in 2010, retirement-plan funding needs, and continued conversion of earnings into operating cash flow.