10-QPeriod: Q2 FY2018

GENERAL DYNAMICS CORP Quarterly Report for Q2 Ended Apr 1, 2018

Filed April 25, 2018For Securities:GD

Summary

General Dynamics Corporation (GD) reported its first-quarter 2018 financial results, showing a slight increase in revenue year-over-year to $7.535 billion, up from $7.441 billion in the prior-year period. Net earnings also saw an increase to $799 million, or $2.65 per diluted share, compared to $763 million, or $2.48 per diluted share, in the first quarter of 2017. The company's operating earnings, however, experienced a slight decrease of 3.6% to $1.008 billion from $1.046 billion, resulting in a lower operating margin of 13.4% compared to 14.1% in the prior year. The significant event during the quarter was the subsequent completion of the acquisition of CSRA Inc. on April 3, 2018, for approximately $9.7 billion, which is expected to significantly bolster the Information Systems and Technology segment. The company also reported substantial financing activities, including a $7.5 billion borrowing to partially fund the CSRA acquisition and $2.5 billion in commercial paper issuances. Despite a dip in operating margin, the company's core defense segments (Combat Systems, Information Systems and Technology, and Marine Systems) demonstrated revenue growth, offsetting a decline in the Aerospace segment primarily due to fewer aircraft deliveries. The company's backlog remained strong at $62.1 billion, indicating a robust pipeline of future work.

Financial Highlights

48 data points
Beta

Revenue

$7.54B

20.5% Gross Margin

Net Income

$799.00M

10.6% Net Margin

Total Assets

$37.22B

Cash & Equivalents

$4.33B

Free Cash Flow

-$600.00M

Financial Statements
Beta
Revenue$7.54B
Cost of Revenue$5.99B
Gross Profit$1.54B
Operating Expenses$6.53B
Operating Income$1.01B
Net Income$799.00M
Shares Outstanding (Basic)296.40M
Shares Outstanding (Diluted)301.10M

Key Highlights

  • 1Revenue increased by 1.3% to $7.535 billion, driven by growth in defense segments (Combat Systems, Information Systems and Technology, Marine Systems) offsetting a decline in Aerospace.
  • 2Net earnings rose to $799 million ($2.65 diluted EPS) from $763 million ($2.48 diluted EPS) in the prior year's quarter.
  • 3Operating earnings decreased by 3.6% to $1.008 billion, and operating margin declined to 13.4% from 14.1%, primarily due to the aircraft delivery mix in the Aerospace segment.
  • 4The company completed the significant acquisition of CSRA Inc. for approximately $9.7 billion on April 3, 2018, which will be integrated into the Information Systems and Technology group.
  • 5Cash used by operating activities was $(496) million, a significant decrease from $533 million provided in the prior year, largely due to a build-up in operating working capital.
  • 6Financing activities were robust, with $2.5 billion in commercial paper issuances and a $7.5 billion borrowing to fund the CSRA acquisition.
  • 7Total backlog remained strong at $62.1 billion as of April 1, 2018, indicating continued demand for the company's products and services.

Frequently Asked Questions

The acquisition of CSRA Inc., completed on April 3, 2018, for approximately $9.7 billion, is expected to add about $3.6 billion in revenue to the Information Systems and Technology group in 2018. While there's an anticipated $80 million one-time charge in Q2 2018 for acquisition costs, the company expects the acquisition to be break-even to slightly accretive to diluted EPS in the second half of 2018.

The decrease in operating earnings and margin was primarily driven by the Aerospace segment, specifically due to the mix of aircraft deliveries in the first quarter of 2018. Although revenue from defense segments grew, the lower margin profile of certain Aerospace deliveries impacted the overall consolidated results.

The company experienced a significant decrease in cash from operating activities to $(496) million in Q1 2018, compared to $533 million provided in Q1 2017. This was primarily due to an increase in operating working capital, particularly related to the timing of billings and collections on large international vehicle contracts, as well as inventory build-up for new aircraft programs and liquidation of customer deposits for aircraft deliveries.

General Dynamics has significantly increased its borrowing capacity by entering into a $7.5 billion, 364-day credit facility and renewing/increasing existing credit facilities. The company borrowed $7.5 billion under the new facility to partially fund the CSRA acquisition and intends to issue debt securities in the future to repay these borrowings. Despite a substantial increase in debt related to the acquisition, the company ended the quarter with a cash balance of $4.3 billion.