10-QPeriod: Q3 FY2008

GENERAL DYNAMICS CORP Quarterly Report for Q3 Ended Sep 28, 2008

Filed November 4, 2008For Securities:GD

Summary

General Dynamics Corporation (GD) reported solid financial performance for the third quarter and the first nine months of 2008. Net sales and operating earnings saw significant increases year-over-year, driven by growth across most of its business segments, particularly Aerospace and Combat Systems. The company highlighted strong execution and improving operating margins, reaching an eight-year high in the third quarter. Financially, GD demonstrated robust cash flow generation, enabling significant deployment towards acquisitions, share repurchases, and dividends. Despite a substantial pending liability related to the A-12 contract litigation, the company maintains ample liquidity and believes it has sufficient resources to meet potential obligations. The company also announced a significant acquisition of Jet Aviation, signaling continued strategic growth in its Aerospace segment. Overall, the report indicates a healthy financial position with strong operational performance and strategic investments for future growth.

Financial Highlights

29 data points
Beta

Revenue

$7.14B

42.4% Gross Margin

Net Income

$634.00M

8.9% Net Margin

EPS (Diluted)

$1.59

Cash & Equivalents

$2.62B

Free Cash Flow

$749.00M

Financial Statements
Beta
Revenue$7.14B
Cost of Revenue$4.11B
Gross Profit$3.03B
Operating Expenses$6.21B
Operating Income$933.00M
Net Income$634.00M
EPS (Basic)$1.60
EPS (Diluted)$1.59

Key Highlights

  • 1Net sales increased by 4.5% to $7.14 billion for the third quarter and 8.7% to $21.45 billion for the first nine months of 2008 compared to the prior year periods.
  • 2Operating earnings grew significantly, up 16.5% to $933 million for the third quarter and 21.1% to $2.715 billion for the nine months, with operating margins improving across key segments.
  • 3The Aerospace segment showed strong performance with increased aircraft deliveries and a growing backlog, including significant demand for the new G650 model.
  • 4Combat Systems experienced strong demand for its military vehicles, particularly MRAP and Abrams tank programs, contributing to substantial year-to-date sales growth.
  • 5Net cash provided by operating activities increased to $2.314 billion for the nine months ended September 28, 2008, up from $1.858 billion in the prior year.
  • 6The company announced its agreement to acquire Jet Aviation for approximately $2.25 billion, expected to close in early November 2008, primarily financed with cash on hand.
  • 7General Dynamics maintained a strong liquidity position, with a net cash surplus of $665 million after significant deployments for acquisitions, share repurchases, and dividends over the past 12 months.

Frequently Asked Questions

The company expects full-year 2008 sales growth in the Aerospace group of between 12% and 13%, with margins in the mid-18% range. Combat Systems is projected to have sales growth of about 6% with margins slightly above 13%. Marine Systems is expected to see sales growth approach 8% with operating margins exceeding 9%. Information Systems and Technology is projected to have sales growth between 4% and 5%, with full-year operating margins consistent with 2007.

The A-12 contract termination litigation is ongoing, with the case currently on appeal. If the default termination is ultimately sustained, General Dynamics could be required to repay the U.S. government up to approximately $1.4 billion (pretax), plus interest. The company estimates its after-tax cash obligation would be approximately $685 million. GD believes it has sufficient resources to meet this obligation if required, and it would be recorded in discontinued operations.

General Dynamics generated strong free cash flow from operations ($2.0 billion for the first nine months of 2008), which is being used for strategic investments, debt repayment, dividends, and share repurchases. The company repurchased approximately 14.4 million shares in the first nine months of 2008 and increased its regular quarterly dividend to $0.35 per share. The planned acquisition of Jet Aviation is being financed primarily with cash on hand.

The company adopted SFAS No. 157, Fair Value Measurements, for financial assets and liabilities on January 1, 2008. It expects to adopt SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, in the first quarter of 2009, neither of which are expected to have a material impact on its financial results.