General Dynamics Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 9, 2021. General Dynamics is a global aerospace and defense company with four segments: Aerospace, Marine Systems, Combat Systems and Technologies. Amounts below are in U.S. dollars; financial statement amounts are generally in billions unless stated otherwise.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $37.925 billion | $39.350 billion |
| Operating earnings / margin | $4.133 billion / 10.9% | $4.570 billion / 11.6% |
| Net earnings | $3.167 billion | $3.484 billion |
| Diluted EPS | $11.00 | $11.98 |
| Operating cash flow | $3.858 billion | $2.981 billion |
| Free cash flow from operations | $2.891 billion | $1.994 billion |
| Cash and equivalents at year-end | $2.824 billion | $0.902 billion |
| Total debt | $12.998 billion | $11.930 billion |
| Funded / total backlog | $58.783 billion / $89.489 billion | $57.530 billion / $86.945 billion |
Revenue declined 3.6%, operating earnings 9.6%, and diluted EPS 8.2%. Operating cash flow was 122% of net earnings. Year-end net debt was $10.174 billion. Debt-to-equity was 83.0%, versus 85.3% in 2019; debt-to-capital was 45.4%, versus 46.0%. The company reported no material off-balance-sheet arrangements.
Fourth quarter: Revenue was $10.481 billion, operating earnings $1.293 billion, net earnings $1.002 billion and diluted EPS $3.49. The comparable 2019 quarter recorded revenue of $10.773 billion, operating earnings of $1.308 billion, net earnings of $1.020 billion and diluted EPS of $3.51.
Segment results
| Segment | FY2020 revenue | Change vs. 2019 | FY2020 operating margin |
|---|---|---|---|
| Aerospace | $8.075 billion | Down 17.6% | 13.4% (15.6% in 2019) |
| Marine Systems | $9.979 billion | Up 8.7% | 8.6% (8.5% in 2019) |
| Combat Systems | $7.223 billion | Up 3.1% | 14.4% (14.2% in 2019) |
| Technologies | $12.648 billion | Down 5.3% | 9.6% (9.8% in 2019) |
Aerospace earnings were pressured by fewer aircraft deliveries, lower services activity and $59 million of restructuring charges. Marine Systems benefited from submarine program growth, particularly Columbia-class work. Combat Systems improved on stronger vehicle and weapons activity. Technologies faced lower IT services volume and COVID-related contract disruption.
Material changes and operating context
- COVID-19 reduced Gulfstream aircraft deliveries and aircraft services demand, disrupted some defense and technology contract execution, and contributed to lower Technologies revenue. Defense business revenue overall increased by approximately $300 million.
- Gulfstream delivered 127 aircraft, down from 147 in 2019. Aerospace revenue declined $1.726 billion; Marine Systems revenue increased $796 million.
- Total backlog rose 2.9% to a record $89.489 billion. The $9.5 billion award for the first two Columbia-class submarines was a major contributor. Estimated total contract value, including potential awards and options, was $134.666 billion; potential value is not equivalent to firm backlog.
- The company reorganized Information Technology and Mission Systems into one Technologies segment. Prior-period segment data was restated. It also retrospectively changed accounting for actuarial gains and losses on qualified U.S. government pension plans; reported prior-period figures reflect the revised method.
- U.S. government customers generated 69% of revenue. The Department of Defense alone accounted for $20.840 billion.
Outlook, liquidity and notable items
- 2021 segment outlook: Aerospace revenue around $8.0 billion and margin approximately 12.5%; Marine Systems revenue approximately $10.3 billion and margin approximately 8.3%; Combat Systems revenue about $7.3 billion and margin approximately 14.5%; Technologies revenue approximately $13.2 billion and margin around 9.5%.
- Management expects 2021 net interest expense of approximately $420 million, an effective tax rate around 16%, capital expenditures of approximately 2.5% of revenue, and corporate operating costs of approximately $85 million. It expects G&A as a percentage of revenue to be generally consistent with 2020.
- Management expects COVID-19 to continue to weigh on the business, particularly Aerospace, while noting sequential improvement during 2020. It expects aircraft services to recover as air travel resumes, but customer delivery delays and a prolonged downturn could affect demand.
- Cash and borrowing capacity are considered sufficient for liquidity needs. The company had no commercial paper outstanding at year-end and had $5 billion in committed credit facilities. Scheduled 2021 debt principal maturities were approximately $3.006 billion; management planned repayment using cash and commercial paper.
- Capital deployment included $1.240 billion of cash dividends and $587 million of share repurchases in 2020. The board declared an annual dividend of $4.40 per share, up from $4.08 in 2019.
- Contract estimate adjustments increased 2020 operating earnings by $283 million, or $0.78 per diluted share; no individual contract adjustment was material. These estimates depend on costs, schedule, labor and supplier performance.
Risks, contingencies and audit matters
- High reliance on U.S. government spending exposes results to budget changes, continuing resolutions, funding delays, program reductions and customer termination rights. Fixed-price contracts create cost and execution risk.
- COVID-19, supplier capacity or single-source supply disruptions, skilled-labor availability, international political and currency exposures, cybersecurity incidents, and business-jet market demand are material risk areas identified by the company.
- Electric Boat faces a Department of Justice investigation and related qui tam litigation concerning alleged quality-system failures involving supplier parts. The company could not estimate a reasonably possible loss; an adverse outcome could materially affect results, financial condition or cash flows.
- Environmental matters, government audits, contract claims, letters of credit and guarantees are disclosed. Management did not expect the other matters described to have a material effect, based on information available.
- The pension benefit obligation was $19.7 billion against $14.8 billion of plan assets, a net pension liability of approximately $4.9 billion. Lower discount rates increased the obligation; pension assumptions are subject to market and actuarial uncertainty.
- The independent auditor issued unqualified opinions on the financial statements and internal control. Critical audit matters included estimating costs to complete selected long-term contracts and determining pension discount rates.
Investor verification priorities
- Track Aerospace deliveries, orders, services recovery and execution of the G700 schedule; compare actual results with the 2021 outlook.
- Assess whether Marine Systems can expand submarine production capacity and workforce while controlling lead-boat costs and meeting delivery schedules.
- Monitor backlog conversion and funding, especially the distinction between funded backlog, unfunded backlog and estimated potential contract value.
- Review cash conversion, working-capital needs, aircraft inventory, the large international vehicle-contract receivable collection schedule, and repayment of 2021 debt maturities.
- Follow the Electric Boat litigation and any material developments in contract cost estimates, pension assumptions, COVID-related disruption or supplier performance.