10-QPeriod: Q3 FY2018

GENERAL DYNAMICS CORP Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 24, 2018For Securities:GD

Summary

General Dynamics Corporation (GD) reported robust financial results for the nine months ended September 30, 2018, driven significantly by the acquisition of CSRA Inc. Revenue for the nine months increased by 13.7% to $25.8 billion, while operating earnings saw a modest 1.7% rise to $3.2 billion. The Information Technology segment, bolstered by the CSRA acquisition, experienced substantial revenue growth. However, operating margins across the company were compressed, largely due to intangible asset amortization from the acquisition and integration costs. Despite increased revenue, free cash flow from operations decreased year-over-year, reflecting the significant investments made, particularly the CSRA acquisition which absorbed $9.7 billion of cash. The company's backlog also showed healthy growth, ending the period at $69.5 billion, indicating strong future revenue potential across its defense segments. Investors should note the strategic shift towards IT services with the CSRA acquisition, while acknowledging the short-term impact on profitability and cash flow due to integration expenses.

Key Highlights

  • 1Revenue increased by 13.7% to $25.8 billion for the nine months ended September 30, 2018, largely driven by the acquisition of CSRA.
  • 2Operating earnings grew by 1.7% to $3.2 billion for the nine months ended September 30, 2018.
  • 3The Information Technology segment saw a significant revenue increase of 85.2% due to the CSRA acquisition.
  • 4Free cash flow from operations decreased to $634 million for the nine months ended September 30, 2018, from $1.6 billion in the prior year, primarily due to the CSRA acquisition.
  • 5Total backlog increased to $69.5 billion as of September 30, 2018, indicating strong future revenue potential.
  • 6The company reported a significant increase in debt due to financing the CSRA acquisition, with total debt rising to $13.1 billion.
  • 7The effective tax rate decreased to 17.1% for the nine months ended September 30, 2018, from 25.8% in the prior year, mainly due to the Tax Cuts and Jobs Act.

Frequently Asked Questions

The primary driver of the significant revenue increase was the acquisition of CSRA Inc. (CSRA), which was completed on April 3, 2018. This acquisition substantially boosted the revenue of the Information Technology segment.

While the CSRA acquisition significantly increased revenue, it also led to a decrease in operating margins due to intangible asset amortization expenses and transaction-related costs. Free cash flow from operations also decreased substantially, reflecting the large cash outlay for the acquisition.

General Dynamics reported a healthy increase in its total backlog to $69.5 billion as of September 30, 2018. This growth, particularly in the defense segments, suggests a strong pipeline of future work and revenue.

The company's debt position significantly increased. Total debt rose to $13.1 billion as of September 30, 2018, primarily due to the issuance of $7.5 billion in fixed- and floating-rate notes to finance the CSRA acquisition.