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| GD > SEC Filings for GD > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
Business Overview
General Dynamics offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design and construction; and information systems, technologies and services. The company operates through four business groups - Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology. General Dynamics' primary customers are the U.S. military, other U.S. government organizations, the armed forces of other nations, and a diverse base of corporate, government and individual buyers of business aircraft. The company operates in two primary markets: defense and business aviation. The majority of the company's revenues derive from contracts with the U.S. military. The following discussion should be read in conjunction with the company's 2007 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and with the unaudited Consolidated Financial Statements included herein.
Results of Operations
Consolidated Overview
September 28 September 30
Three Months Ended 2008 2007 Variance
Net sales $ 7,140 $ 6,834 $ 306 4.5 %
Operating earnings 933 801 132 16.5 %
Operating margin 13.1 % 11.7 %
September 28 September 30
Nine Months Ended 2008 2007 Variance
Net sales $ 21,448 $ 19,725 $ 1,723 8.7 %
Operating earnings 2,715 2,242 473 21.1 %
Operating margin 12.7 % 11.4 %
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General Dynamics' net sales increased in the third quarter and first nine months of 2008 over the same periods in 2007. The Marine Systems group led the company's sales growth in the third quarter with a double-digit increase over the prior year. Sales in the Aerospace and Information Systems and Technology groups were up in the quarter on higher aircraft deliveries and increased activity on tactical communications programs. The Combat Systems group's sales were down slightly from the third quarter of 2007 as continued growth in the group's military vehicle business was offset by reduced sales in the group's weapons systems business. In the first nine months of 2008, each of the company's business groups contributed to the solid sales growth. Three of the company's four business groups generated double-digit sales growth over the first nine months of 2007, with the most notable increase in sales in the Combat Systems group on strong demand in the U.S. military vehicle business.
The company's operating earnings and margins have increased significantly in 2008. Growth in operating earnings outpaced the sales growth in all of the company's business groups in both the third quarter and first nine months of 2008. As a result, the company's overall operating margins grew by 140 basis points in the third quarter and 130 basis points in the first nine months of 2008. The company's continued focus on program execution has resulted in total operating margins in the third quarter of 2008 in excess of 13 percent, the company's highest quarterly margins in eight years.
General and administrative (G&A) expenses as a percentage of net sales for the first nine months of 2008 were 6.0 percent compared with 6.2 percent in the same period in 2007. The company expects G&A expenses as a percentage of sales for the full-year 2008 to approximate the full-year 2007 rate of 6.0 percent.
Net cash provided by operating activities was $2.3 billion in the first nine months of 2008, compared with $1.9 billion in the same period in 2007. The company used cash to repurchase its common stock, pay dividends, repay maturing debt, and fund acquisitions and capital expenditures. The company's net debt - debt less cash and equivalents and marketable securities - was a net cash surplus of $665 at the end of the third quarter of 2008 compared with net debt of $559 at third quarter 2007. The company achieved this $1.2 billion improvement after deploying approximately $330 on acquisitions, $1.1 billion on share repurchases and $514 on dividends paid during the past 12 months. The company expects to generate cash from operating activities in excess of net earnings for the full-year 2008.
The company's net interest expense in the first nine months of 2008 decreased by $17, or 29 percent, from the first nine months of 2007 due to additional interest income on a higher average invested cash balance. Net interest was essentially unchanged from the third quarter of 2007 to the third quarter of 2008. The company expects full-year net interest expense of approximately $55 to $60.
The company's effective tax rate for the nine-month period ended September 28, 2008, was 30.9 percent compared with 31.3 percent in the same period in 2007. In the second quarter of 2008, the Joint Committee on Taxation of the Congress approved a proposed settlement between the company and the U.S. Department of Justice related to a tax refund suit. This resulted in a $35, or approximately $0.09 per-share benefit, which reduced the tax rate for the first nine months of 2008 by 130 basis points. In the first nine months of 2007, the effective tax rate was impacted favorably by the resolution of the company's 2003-2004 federal income tax audit. This settlement resulted in an $18, or $0.04 per-share benefit, which reduced the effective tax rate in the first nine months of 2007 by 80 basis points. The company anticipates an effective tax rate slightly above 31 percent for the full-year 2008, compared with 31.7 percent in 2007. For additional discussion of tax matters, see Note I to the unaudited Consolidated Financial Statements.
The company completed the sale of its coal mining operation in the third quarter of 2007. The company's reported discontinued operations include the operating results of this business prior to the sale in 2007 and final adjustments to the loss on the sale in 2008.
The company generated total new orders of $12.7 billion in the third quarter of 2008. As a result, total backlog grew more than 9 percent to $60.5 billion over the second quarter of 2008. Funded backlog was $49.7 billion as of September 28, 2008, up 10 percent over the second quarter of 2008. Each of the Aerospace, Combat Systems and Information Systems and Technology groups experienced strong order activity in the quarter, contributing to this backlog growth. The company's total backlog does not include work awarded under unfunded indefinite delivery, indefinite quantity (IDIQ) contracts, unexercised options associated with existing firm contracts or options to purchase new aircraft. Management's estimate of this potential contract value, which may be realized by the company over the next 14 years, was approximately $17.7 billion at the end of the third quarter 2008, up slightly from $17.4 billion at the end of the second quarter.
Aerospace
September 28 September 30
Three Months Ended 2008 2007 Variance
Net sales $ 1,372 $ 1,315 $ 57 4.3 %
Operating earnings 281 226 55 24.3 %
Operating margin 20.5 % 17.2 %
Aircraft deliveries (in units):
Green 39 37 2 5.4 %
Completion 38 35 3 8.6 %
September 28 September 30
Nine Months Ended 2008 2007 Variance
Net sales $ 3,980 $ 3,617 $ 363 10.0 %
Operating earnings 757 598 159 26.6 %
Operating margin 19.0 % 16.5 %
Aircraft deliveries (in units):
Green 115 103 12 11.7 %
Completion 114 101 13 12.9 %
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The Aerospace group's sales increased in both the third quarter and first nine months of 2008 compared with the same periods in 2007 primarily on increased deliveries of green and completed aircraft. The group has steadily increased production rates to facilitate increased aircraft deliveries in response to a growing backlog of aircraft. As a result, new aircraft sales increased 8 percent in the third quarter and 12 percent in the first nine months of 2008. Aircraft services volume was essentially unchanged in the third quarter of 2008 compared with the same period in 2007. Year-to-date, the group's aircraft services sales grew by 10 percent over 2007. There were no pre-owned aircraft sales in the third quarter of 2008 compared with $35 in the third quarter of 2007. Pre-owned aircraft sales were $17 in the first nine months of 2008, down from $78 in the same period in 2007. The group had one pre-owned aircraft available for sale at the end of the third quarter of 2008.
The group's operating earnings improved substantially in the third quarter and first nine months of 2008, growing at a significantly higher rate than sales in both periods. Three primary factors impacted the growth in the group's operating earnings:
Third Quarter Nine Months
Increased aircraft deliveries $ 24 $ 96
Pricing, delivery mix and labor efficiencies 36 92
General and administrative expenses - (33 )
Other (5 ) 4
Total increase in operating earnings $ 55 $ 159
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Operating earnings in 2008 have benefitted from higher prices on aircraft deliveries over those delivered in 2007. In addition, the group has continued to realize operational efficiencies in the aircraft manufacturing process. Year-to-date in 2008, improvements in productivity have offset supply-chain cost growth, allowing the group to fully benefit from the year-over-year pricing increases on aircraft deliveries. Earnings in 2008 also included the delivery in the third quarter of a special-mission aircraft, which had above-average margins. The group's G&A costs remained unchanged from the third quarter of 2007 but were up for the first nine months as a result of increased selling expenses from strong order activity and higher product development costs. Operating margins increased 330 basis points in the third quarter and 250 basis points in the first nine months over the same periods in 2007.
The company expects full-year 2008 sales growth in the Aerospace group of between 12 and 13 percent based on the planned number and mix of aircraft deliveries. The company expects the group's full-year margins to be in the mid-18 percent range based on the projected mix of aircraft deliveries and operational efficiencies realized to date.
Combat Systems
September 28 September 30
Three Months Ended 2008 2007 Variance
Net sales $ 1,850 $ 1,872 $ (22 ) (1.2 )%
Operating earnings 262 228 34 14.9 %
Operating margin 14.2 % 12.2 %
September 28 September 30
Nine Months Ended 2008 2007 Variance
Net sales $ 5,862 $ 5,152 $ 710 13.8 %
Operating earnings 803 593 210 35.4 %
Operating margin 13.7 % 11.5 %
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The Combat Systems group's net sales decreased slightly in the third quarter of 2008 compared to the third quarter of 2007 but were up significantly in the first nine months of 2008 compared with last year. The changes in the group's sales from 2007 to 2008 were driven primarily by the group's U.S. military vehicle and weapons systems businesses:
Third Quarter Nine Months
U.S. military vehicles $ 107 $ 742
Weapons systems (117 ) (79 )
Other (12 ) 47
Total (decrease) increase in sales $ (22 ) $ 710
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The growth in military vehicle sales in the third quarter resulted from higher activity on several contracts in support of the Abrams main battle tank, including the System Enhancement Package (SEP) upgrade and the M1A1 reset programs, as well as the Expeditionary Fighting Vehicle (EFV) program. Year-to-date sales in the U.S. military vehicle business were up significantly, due largely to increased
volume on the group's contracts to produce RG-31 and Cougar armored vehicles under the mine-resistant, ambush-protected (MRAP) vehicle program. The group has completed deliveries of initial orders under this program but has received an order to deliver additional units between December 2008 and April 2009. The remainder of the year-to-date sales growth in this business was generated by higher activity on several Abrams tank support contracts. Sales volume in the group's weapons systems business decreased in the third quarter and first nine months of 2008 due to lower deliveries of systems that help protect U.S. combat forces from improvised explosive devices.
In the second quarter of 2008, the company entered into a memorandum of understanding and a testing agreement with the Czech Republic regarding the testing and acceptance of 17 Pandur II vehicles completed by the group under a contract for 199 vehicles. These agreements are part of ongoing negotiations between the company and the Czech Republic following a notice of termination delivered by the customer in December 2007. The parties are negotiating a revised contract for the purchase of 107 vehicles, including the 17 completed vehicles. The company does not believe the outcome of the negotiations will have a material effect on the group's operating results. Due to ongoing negotiations, additional sales under this contract that the company expected to recognize in the second half of 2008 are now expected to materialize beginning in 2009.
The Combat Systems group's operating earnings were up significantly on lower sales volume in the third quarter of 2008 and increased at almost three times the rate of sales growth in the first nine months of 2008. The substantial growth in operating earnings produced a 200 basis-point increase in operating margins in the quarter and a 220 basis-point improvement year-to-date over the same prior-year periods. The earnings and margin growth in 2008 resulted primarily from improved performance in the group's U.S. military vehicle business, particularly on the MRAP and Abrams programs.
The company expects Combat Systems to generate sales growth of about 6 percent for the full year 2008 with margins slightly above 13 percent. Total expected sales growth for the year is lower than previously projected due to the timing of funding on several U.S. and international programs, including the Czech Pandur contract, which has pushed some anticipated revenues to 2009. The outlook for the group's full-year operating margins has improved as a result of operational efficiencies realized to date.
Marine Systems
September 28 September 30
Three Months Ended 2008 2007 Variance
Net sales $ 1,404 $ 1,246 $ 158 12.7 %
Operating earnings 140 110 30 27.3 %
Operating margin 10.0 % 8.8 %
September 28 September 30
Nine Months Ended 2008 2007 Variance
Net sales $ 4,176 $ 3,775 $ 401 10.6 %
Operating earnings 389 320 69 21.6 %
Operating margin 9.3 % 8.5 %
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The Marine Systems group's net sales increased significantly in the three- and nine-month periods ended September 28, 2008, over the same prior-year periods. The growth in the group's sales consisted of the following:
Third Quarter Nine Months
Mature Navy ship production $ 107 $ 222
Commercial ship production 42 135
Navy design and early-stage production 26 99
Other (17 ) (55 )
Total increase in sales $ 158 $ 401
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The group's mature ship-production programs for the U.S. Navy include the Virginia-class submarine, the T-AKE combat-logistics ship and the Arleigh Burke-class (DDG-51) destroyer. The Virginia program experienced significantly higher activity in 2008 as construction continues on the remaining five ships under the fixed-price Block II contract. The final Block I ship was delivered in the first quarter of 2008, and the first Block II ship was delivered in the third quarter of 2008. Deliveries are scheduled through 2013. The company expects to finalize negotiations for an eight-ship Block III contract by the end of 2008. On the T-AKE program, construction is in process on the sixth through tenth ships of the group's 14-ship program. The group delivered the fifth T-AKE in June 2008, and the sixth ship was delivered in October 2008. Volume on the Arleigh Burke destroyer program in 2008 is down slightly compared to 2007. The group continues construction on the remaining five ships under contract with deliveries scheduled through 2011. The next destroyer is scheduled to be delivered in the fourth quarter of 2008.
Increased commercial shipbuilding volume resulted from higher activity on the group's nine-ship, product carrier program. Construction is in process on the first three ships, and the first ship is scheduled to be delivered in the first quarter of 2009. Volume was also up in design and early-stage production activities for the Navy in 2008 from continued design work on the group's DDG-1000 next-generation destroyer. The volume increases in the group in 2008 were offset slightly by the completion of the group's SSGN submarine conversion contract in the fourth quarter of 2007.
The Marine Systems group has generated substantial improvement in operating earnings and margins in 2008 compared to 2007. The group has increased its labor efficiencies at each of its shipyards and, as a result, improved its operating performance on several key programs. Most notably, the group increased program earnings rates on the Virginia-class, T-AKE and commercial product carrier programs in the third quarter of 2008. The group's margins increased 120 basis points in the third quarter and 80 basis points year-to-date due to the improved contract performance.
The company expects the Marine Systems group's full-year 2008 sales growth to approach 8 percent over 2007. The group expects operating margins for the full year to exceed 9 percent as the group pursues further efficiencies on its ship-construction programs.
Information Systems and Technology
September 28 September 30
Three Months Ended 2008 2007 Variance
Net sales $ 2,514 $ 2,401 $ 113 4.7 %
Operating earnings 270 254 16 6.3 %
Operating margin 10.7 % 10.6 %
September 28 September 30
Nine Months Ended 2008 2007 Variance
Net sales $ 7,430 $ 7,181 $ 249 3.5 %
Operating earnings 822 773 49 6.3 %
Operating margin 11.1 % 10.8 %
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The Information Systems and Technology group's sales increased in the third quarter and first nine months of 2008 compared with 2007, led by double-digit growth in the group's tactical and strategic mission systems business. The group's 2008 sales increase consisted of the following:
Third Quarter Nine Months
U.S. defense $ 104 $ 329
United Kingdom 7 (31 )
Commercial wireless 2 (49 )
Total increase in sales $ 113 $ 249
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The group's U.S. defense market consists of the tactical and strategic mission systems, information technology (IT) and mission services, and intelligence mission systems businesses. Sales in the tactical systems business were up as a result of increased volume on the group's ground-based satellite communications programs and several key contracts that support the U.S. military. Most notably, activity increased on the Warfighter Information Network - Tactical (WIN-T) program, which provides warfighters fast, secure, mobile command-and-control capabilities, and the Common Hardware/Software III (CHS-3) program, which provides commercial and ruggedized computers, network equipment and software to the U.S. armed forces and other U.S. federal agencies worldwide. In the IT services business, ramp-up activity on the group's contract to provide technology operations and maintenance infrastructure support (TOMIS) services for U.S. Citizenship and Immigration Services was offset by decreased volume on the Intelligence Information, Command-and-Control Equipment and Enhancements (ICE2) program. The group's intelligence systems business has experienced program funding delays in 2008 that have resulted in a reduction in volume from 2007, but volume has steadied in recent quarters.
In the group's United Kingdom operation, sales increased in the third quarter but decreased in the first nine months of 2008 compared to the same prior-year periods. Activity on the group's BOWMAN communications program is down slightly from 2007, but the program has reached a steady-state level of volume for the foreseeable future. This scheduled decline on the BOWMAN program has been partially offset in 2008 by increased activity on various other command, control, communications, computing and intelligence systems (C4I) programs.
Sales in the commercial wireless market stabilized in the third quarter as volume was steady compared to the same period in 2007. Year-to-date commercial wireless sales were down compared with 2007 due to reduced demand in this market.
Operating earnings and margins in the Information Systems and Technology group increased in both the third quarter and first nine months of 2008 compared to 2007. Operating performance improved in both the group's tactical systems and intelligence systems businesses, resulting in an increase to margins of 10 basis points in the quarter and 30 basis points year-to-date.
In the Information Systems and Technology group, the company expects full-year 2008 sales growth between 4 and 5 percent. The company expects the group's operating margins to decline slightly in the fourth quarter due to a shift in contract mix toward IT services work. Margins for the full year are expected to be consistent with those achieved in 2007.
Corporate
Corporate results consist primarily of the company's stock option expense and a portion of the results of the company's commercial pension plans. Corporate operating expenses totaled $20 in the third quarter of 2008 compared with $17 in the third quarter of 2007. Year-to-date corporate operating expenses were $56 in the first nine months of 2008 compared with $42 in the same period in 2007. The increase in both periods resulted from higher stock option expense. The company expects 2008 stock option expense of $75.
Backlog
The following table details the backlog and the total estimated contract value
of each business group at the end of the third and second quarters of 2008:
Estimated Total
Potential Estimated
Total Contract Contract
September 28, 2008 Funded Unfunded Backlog Value Value
Aerospace $ 21,466 $ 618 $ 22,084 $ 2,278 $ 24,362
Combat Systems 12,540 3,300 15,840 2,625 18,465
Marine Systems 7,907 3,573 11,480 2,143 13,623
Information Systems and Technology 7,761 3,324 11,085 10,649 21,734
Total $ 49,674 $ 10,815 $ 60,489 $ 17,695 $ 78,184
June 29, 2008
Aerospace $ 18,195 $ 634 $ 18,829 $ 2,309 $ 21,138
Combat Systems 10,611 3,263 13,874 2,610 16,484
Marine Systems 8,899 3,239 12,138 2,167 14,305
Information Systems and Technology 7,531 2,950 10,481 10,348 20,829
Total $ 45,236 $ 10,086 $ 55,322 $ 17,434 $ 72,756
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