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| GD > SEC Filings for GD > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
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. We operate through four business groups - Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology. Our 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 owners of business aircraft. We operate in two primary markets: defense and business aviation. The majority of our revenues derive from contracts with the U.S. military. The following discussion should be read in conjunction with our 2008 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and with the unaudited Consolidated Financial Statements included in this Form 10-Q.
Results of Operations
Consolidated Overview
July 5 June 29
Three Months Ended 2009 2008 Variance
Revenues $ 8,100 $ 7,303 $ 797 10.9 %
Operating earnings 945 921 24 2.6 %
Operating margin 11.7 % 12.6 %
July 5 June 29
Six Months Ended 2009 2008 Variance
Revenues $ 16,364 $ 14,308 $ 2,056 14.4 %
Operating earnings 1,850 1,782 68 3.8 %
Operating margin 11.3 % 12.5 %
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General Dynamics' revenues increased in the second quarter and first half of 2009 compared to the same periods in 2008, with contributions from each of our business groups. The Combat Systems group contributed the most substantial revenue growth on higher volume in its military vehicle programs and an acquisition in the group's weapons systems business. Revenues increased significantly in Marine Systems as a result of higher activity at all of the group's shipyards. In Information Systems and Technology, revenues were up in both the three- and six-month periods in all three of the group's U.S. operations. The acquisition of Jet Aviation generated the revenue growth in the Aerospace group.
In the second quarter of 2009, we generated the highest quarterly operating earnings in General Dynamics' history. Operating earnings increased in both the second quarter and first six months of 2009 over the same periods in 2008, although at a lower rate than the revenue growth. As a result, overall operating margins decreased by 90 basis points in the second quarter and 120 basis points in the first six months of 2009. In the Marine Systems group, operating margins increased significantly in the second
quarter and first half of 2009 because of improved operating performance at each of the group's shipyards. Margins were lower compared to 2008 in the remainder of our business groups. Margins in the Combat Systems and Information Systems and Technology groups were impacted by an unfavorable shift in program mix. In the Aerospace group, margins were down primarily due to the addition of the lower-margin volume from the acquisition of Jet Aviation. The Aerospace group's margins in the first six months of 2009 were also impacted by write-downs of pre-owned aircraft inventories. Company-wide operating margins improved 70 basis points from the first quarter of 2009 to the second quarter on improved performance in each of our business units.
General and administrative (G&A) expenses as a percentage of sales for the first six months of 2009 and 2008 were 6.2 percent. We expect G&A expenses as a percentage of sales for the full-year 2009 to be approximately 6 percent.
Net cash provided by operating activities from continuing operations was $763 in the first half of 2009, compared with $1.5 billion in the same period in 2008. We used our cash to fund acquisitions and capital expenditures, repurchase our common stock, pay dividends and repay maturing debt. Our net debt - debt less cash and equivalents and marketable securities - was $2.2 billion at the end of the second quarter of 2009 compared with $2.3 billion at the end of 2008. Net debt decreased after giving effect to $283 of dividends paid, $257 of company-sponsored research and development, $170 of capital expenditures, $165 spent on acquisitions and $109 of share repurchases during the first six months of the year.
Net interest expense in the first six months of 2009 increased by $46 over the same period in 2008 to $77 due to the issuance of additional debt in 2008 and 2009 and lower interest income on a reduced invested cash balance. We expect full-year net interest expense of approximately $150.
Our effective tax rate for the six-month period ended July 5, 2009, was 31.6 percent compared with 30.8 percent in the same period in 2008. In the second quarter of 2008, the Joint Committee on Taxation of the Congress approved a proposed settlement between General Dynamics 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 in the second quarter of 2008, which reduced the tax rate for the first half of 2008 by 200 basis points. We anticipate an effective tax rate of approximately 31.5 percent for the full-year 2009, compared with 31.2 percent in 2008. For additional discussion of tax matters, see Note I to the unaudited Consolidated Financial Statements.
Our total backlog as of July 5, 2009, was $67.6 billion, down 5 percent from $71.1 billion at the end of the first quarter. Funded backlog was $47.7 billion at the end of the second quarter compared to $49.2 billion at the end of the first quarter. The backlog at the end of the second quarter remained up more than 20 percent compared with the year-ago second quarter. Our 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, which we refer to collectively as estimated potential contract value. As of July 5, 2009, management's estimate of this potential contract value, which we expect to realize over the next 10 to 15 years, was approximately $17.7 billion, down slightly from $17.9 billion at the end of the first quarter.
Aerospace
July 5 June 29
Three Months Ended 2009 2008 Variance
Revenues $ 1,415 $ 1,329 $ 86 6.5 %
Operating earnings 215 240 (25 ) (10.4 )%
Operating margin 15.2 % 18.1 %
Aircraft deliveries (in units):
Green 26 39 (13 ) (33.3 )%
Completion 31 40 (9 ) (22.5 )%
July 5 June 29
Six Months Ended 2009 2008 Variance
Revenues $ 2,870 $ 2,608 $ 262 10.0 %
Operating earnings 415 476 (61 ) (12.8 )%
Operating margin 14.5 % 18.3 %
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The Aerospace group's revenues increased in the second quarter and first half of 2009 over 2008 as a result of the addition of Jet Aviation, which was acquired in the fourth quarter of 2008. The global economic crisis has impacted Gulfstream in 2009. Revenues decreased 16 percent in the second quarter and 12 percent in the first half of 2009 compared to the same periods in 2008. Since late 2008, the business-jet market has experienced customer defaults on aircraft contracts, a decline in aircraft order activity and a glut of pre-owned aircraft inventory.
As a result of these conditions, the Aerospace group has produced and delivered fewer aircraft in 2009 than in 2008. In line with the revised production plan, new-aircraft revenues were down 20 percent in the second quarter and 14 percent in the first half of 2009 compared with the prior year. In addition, aircraft services revenues were down 21 percent organically in the quarter and 15 percent year-to-date in 2009, as customer deferrals of optional aircraft maintenance activities and intensified price competition have reduced the group's services volume in 2009. Pre-owned aircraft revenues increased in 2009 as the group sold two pre-owned aircraft for $57 in the first half of 2009 compared with two sales for $17 in the first half of 2008.
Market conditions also led to a decline in the group's operating earnings for the second quarter and first six months of 2009 compared to the prior-year periods. The net reduction in earnings consisted of the following factors:
Second Quarter Six Months
Aircraft manufacturing and completions $ - $ 18
Pre-owned aircraft (3 ) (25 )
Aircraft services (4 ) 1
Other (18 ) (55 )
Total decrease in operating earnings $ (25 ) $ (61 )
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Despite the decline in new aircraft deliveries in 2009, aircraft manufacturing and completion earnings were steady in the second quarter and increased in the first half of 2009 as a result of the addition of Jet Aviation's completions business, a favorable mix of aircraft deliveries, liquidated damages received on defaulted aircraft contracts, and cost-reduction efforts at Gulfstream that resulted in improved manufacturing margins. The group continues to reduce costs through production improvements and operational efficiencies to maintain operating margins in the aircraft manufacturing process, including almost $45 of indirect cost savings in the first half of 2009. As a result, second quarter 2009 manufacturing margins at Gulfstream improved 360 basis points over the second quarter of 2008 and 150 basis points over the first quarter of 2009.
Given the state of the pre-owned market, the group wrote down the carrying value of its pre-owned aircraft inventory in the first quarter of 2009. The group has worked to minimize its exposure to pre-owned aircraft inventory in 2009 and as a result, limited its loss on the sale of pre-owned aircraft to $2 and had no additional inventory write-downs in the second quarter. The group had six pre-owned aircraft in inventory at the end of the second quarter, one of which is under contract for delivery in the third quarter.
Aircraft services earnings, which include Jet Aviation's maintenance and repair activities, fixed-base operations and aircraft management services, were down slightly in the second quarter but remained steady in the first six months of 2009 compared with 2008. The group is experiencing competitive pressure on its aircraft services margins due to the market-wide reduction in maintenance and repair volume.
The group's operating earnings in 2009 were also impacted by severance costs associated with workforce reduction activities and intangible asset amortization related to the Jet Aviation acquisition. As a result, the group's overall operating margins were down 290 basis points in the quarter and 380 basis points in the first six months of 2009 compared to the same periods in 2008, with the first quarter of 2009 accounting for the majority of the first-half decline. Second-quarter 2009 operating margins were 150 basis points higher than the first quarter 2009.
We expect revenues in the Aerospace group for the full-year 2009 to be down approximately 5 percent compared with 2008 despite a full year of Jet Aviation results because of the impact of the reduced aircraft-production schedule. The group's quarterly revenues and operating margins are likely to decline in the second half of the year, particularly in the third quarter as a result of a planned workforce furlough. We expect the group's full-year operating margins to be down from 2008 to a range between 13.3 and 13.5 percent due to the addition of Jet Aviation, losses incurred to date in the pre-owned market and pressures on pricing in the group's services business.
Combat Systems
July 5 June 29
Three Months Ended 2009 2008 Variance
Revenues $ 2,405 $ 2,015 $ 390 19.4 %
Operating earnings 300 282 18 6.4 %
Operating margin 12.5 % 14.0 %
July 5 June 29
Six Months Ended 2009 2008 Variance
Revenues $ 4,812 $ 4,012 $ 800 19.9 %
Operating earnings 579 541 38 7.0 %
Operating margin 12.0 % 13.5 %
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The Combat Systems group was our revenue growth leader in the second quarter and first half of 2009 compared to the same prior-year periods. Strong volume in the group's U.S. military vehicle business and the acquisition of AxleTech International (AxleTech) resulted in nearly 20 percent growth in the three- and six-month periods ended July 5, 2009. The group's organic growth was 14 percent for both periods. The increase in the group's revenues consisted of the following:
Second Quarter Six Months
U.S. military vehicles $ 272 $ 529
Weapons systems 121 210
Munitions 11 57
European military vehicles (14 ) 4
Total increase in revenues $ 390 $ 800
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The increase in U.S. military vehicle revenues was driven primarily by higher activity on the Stryker wheeled combat vehicle program, as well as several contracts in support of the Abrams main battle tank, including the System Enhancement Package (SEP) upgrade and M1A1 Abrams tank kits for Egypt. Revenues also increased because of the acquisition of AxleTech in the fourth quarter of 2008. In the group's munitions business, revenues were up in the second quarter and first half of 2009 from higher activity on munitions supply contracts for the United States and Canada. Revenues decreased slightly in the European military vehicle business compared to the second quarter of 2008 because of fewer deliveries on several vehicle production programs, including the Pandur wheeled armored vehicle contract for Portugal and the Piranha wheeled armored vehicle contracts for Belgium and Romania. In the first six months of 2009, revenues were steady in Europe as lower activity on vehicle production programs was offset by increased volume on arms and munitions and mobile bridge programs.
The Combat Systems group's operating earnings increased in the second quarter and first six months of 2009, though operating margins decreased 150 basis points in both periods. The group's margins in 2008 were unusually high because of a favorable program mix, most notably within the mine-resistant, ambush-protected (MRAP) vehicle program. Operating margins for the second quarter 2009 showed a 90 basis-point improvement over first quarter 2009, driven by productivity improvements across all of the North American operations.
We expect 2009 full-year revenue growth in Combat Systems of about 22 percent over 2008 with margins in the mid-12 percent range.
Marine Systems
July 5 June 29
Three Months Ended 2009 2008 Variance
Revenues $ 1,625 $ 1,394 $ 231 16.6 %
Operating earnings 168 127 41 32.3 %
Operating margin 10.3 % 9.1 %
July 5 June 29
Six Months Ended 2009 2008 Variance
Revenues $ 3,294 $ 2,772 $ 522 18.8 %
Operating earnings 331 249 82 32.9 %
Operating margin 10.0 % 9.0 %
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The Marine Systems group generated significant increases in revenues and operating earnings in the second quarter and first six months of 2009 over the same prior-year periods. Each of the group's shipyards contributed to this revenue growth:
Second Quarter Six Months
Multi-year Navy ship construction $ 128 $ 366
Other Navy ship design and construction,
engineering and repair 81 110
Commercial ship construction 22 46
Total increase in revenues $ 231 $ 522
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The group's multi-year ship-construction programs for the U.S. Navy include submarines (Virginia Class), combat-logistics ships (T-AKE) and destroyers (DDG-51 and DDG-1000). Increased activity on the Virginia-class program was the principal driver of the group's revenue growth in 2009. The group continued building the remaining five submarines under the Block II contract and ramp-up activities on the eight-ship Block III contract, which was awarded in the fourth quarter of 2008. The second Block II ship is scheduled for delivery in the third quarter of 2009, and deliveries on the Block II and III contracts are scheduled through 2019.
Activity on the group's 14-ship T-AKE program was down slightly in the second quarter but up year-to-date in 2009 as construction continued on the eighth through 11th ships. The group delivered the seventh T-AKE in the first quarter of 2009, the eighth ship is scheduled for delivery in the third quarter of 2009 and deliveries of the remaining ships are scheduled through 2012.
Destroyer construction revenues were up as activity increased on the group's design and production contracts for the DDG-1000 next-generation destroyer, while the workload on the DDG-51 Arleigh Burke program decreased slightly, in line with our expectations. The group began construction of the first DDG-1000 in 2009 and continued work on the remaining four DDG-51s under contract, one of which delivered shortly after the end of the quarter. DDG-51 deliveries are scheduled through 2011.
In addition to the large, multi-ship programs, volume increased significantly in the second quarter and first half of 2009 on engineering and repair programs for the Navy. In commercial shipbuilding, volume was up on the group's five-ship product carrier program in the first half of the year. The first two ships under contract were delivered in the first half of 2009, and construction is in process on the remaining three ships. The third ship is scheduled to be delivered in the fourth quarter of 2009. The current construction plan includes deliveries through the fourth quarter of 2010.
Improved performance at each of the Marine Systems group's shipyards resulted in substantial operating earnings growth in 2009. Given the efficiencies achieved at all of the shipyards, the group increased earnings rates on several key programs in 2009, including the Virginia-class, DDG-51, DDG-1000 and commercial product carrier programs. As a result, the group's operating margins increased 120 basis points in the second quarter and 100 basis points in the first half of 2009 compared with 2008. This performance is particularly notable following 24 percent earnings growth and 100 basis points of margin improvement in the full-year 2008 over 2007. As the group's workload increases, we remain focused on achieving continued operational efficiencies across the shipyards.
We expect full-year 2009 revenue growth in the Marine Systems group of approximately 16 percent based on the group's significant increase in volume thus far in 2009. We expect full-year operating margins in the group to increase approximately 40 to 50 basis points compared to the 9.4 percent margins achieved in the full-year 2008.
Information Systems and Technology
July 5 June 29
Three Months Ended 2009 2008 Variance
Revenues $ 2,655 $ 2,565 $ 90 3.5 %
Operating earnings 284 292 (8 ) (2.7 )%
Operating margin 10.7 % 11.4 %
July 5 June 29
Six Months Ended 2009 2008 Variance
Revenues $ 5,388 $ 4,916 $ 472 9.6 %
Operating earnings 573 552 21 3.8 %
Operating margin 10.6 % 11.2 %
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The Information Systems and Technology group's revenues increased in the second quarter and first six months of 2009 compared with the same periods in 2008. This included organic growth of 1 percent in the second quarter and 7 percent in the first half of 2009. Acquisitions in the group's IT services business provided the balance of the growth. The increase in the group's revenues derived from each of the group's market segments and consisted of the following:
Second Quarter Six Months
Information technology (IT) and mission services $ 38 $ 200
Tactical and strategic mission systems 24 187
Intelligence mission systems 28 85
Total increase in revenues $ 90 $ 472
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Revenues in the group's IT services business increased in both periods driven principally by additional volume from recent acquisitions. In the second quarter of 2009, organic revenues in the IT services business were down because of lower commercial wireless activity and decreased volume on the group's Network-Centric Solutions (NETCENTS) contract compared to the second quarter of 2008. Organic IT services revenues were up in the first six months of 2009 from increased volume on the group's IT infrastructure programs, including its New Campus East (NCE) contract for the National Geospatial Intelligence Agency and the Technology Operations and Maintenance Infrastructure Support (TOMIS) contract for the U.S. Bureau of Citizenship and Immigration.
Revenues in the tactical systems business in the second quarter were up primarily as a result of increased activity on several of the group's battle management systems programs. In the first half of 2009, tactical systems revenues increased from higher activity on several key U.S. military programs, including the Warfighter Information Network - Tactical (WIN-T) program and the Common Hardware/Software III (CHS-3) program.
In the group's intelligence systems business, volume has increased in 2009 on several integrated combat systems contracts, cyber forensics programs and a contract to build the spacecraft for NASA's Landsat Data Continuity Mission.
Operating earnings in the Information Systems and Technology group were down slightly in the second quarter of 2009, but increased over the first half of 2008. The group's contract mix in 2009 includes a higher percentage of lower-margin services contracts. This shift resulted in a 70-basis-point decrease in the group's operating margins in the quarter and a 60-basis-point decrease year-to-date compared to 2008. The group's operating margins remained steady from the first quarter to the second quarter of 2009.
We expect Information Systems and Technology to generate revenue growth of approximately 8 percent for the full year 2009. Based on the group's scheduled program mix for 2009, we expect full-year operating margins to decline approximately 30 to 40 basis points compared to the 10.7 percent margins achieved in 2008.
Corporate
Corporate results consist primarily of compensation expense for stock options and a portion of the results from our commercial pension plans. Corporate operating expenses totaled $22 in the second quarter of 2009 compared with $20 in the second quarter of 2008. Year-to-date Corporate operating expenses were $48 in the first six months of 2009 compared with $36 in the same period in 2008. The increase in both periods resulted primarily from higher stock option expense. We expect 2009 Corporate expense to be approximately $90 to $100.
Backlog
The following table details the backlog and the total estimated contract value
of each business group at the end of the second and first quarters of 2009:
Estimated Total
Potential Estimated
Total Contract Contract
July 5, 2009 Funded Unfunded Backlog Value Value
Aerospace $ 19,306 $ 570 $ 19,876 $ 1,633 $ 21,509
Combat Systems 11,494 1,364 12,858 2,451 15,309
Marine Systems 8,645 15,724 24,369 1,241 25,610
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