GENERAL DYNAMICS CORP - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - October 26, 2016

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2941 Fairview Park Drive, Suite 100
 
 
Falls Church, VA 22042-4513
 
News
www.generaldynamics.com
 
Contact: Lucy Ryan
Tel: 703 876 3631
lryan@generaldynamics.com
October 26, 2016

General Dynamics Reports Third-Quarter 2016 Results

•
Operating earnings up 3.4% to $1.07 billion
•
Operating margin of 13.8%, a 90 basis-point improvement
•
Earnings from continuing operations up 4.6% to $767 million; return on sales reaches new
high of 9.9%
•
Diluted earnings per share from continuing operations of $2.48, up 8.8%

FALLS CHURCH, Va. – General Dynamics (NYSE: GD) today reported third-quarter 2016 earnings from continuing operations of $767 million, a 4.6 percent increase over the year-ago quarter, on revenue of $7.7 billion. Diluted earnings per share from continuing operations were $2.48 compared to $2.28 in third-quarter 2015, an 8.8 percent increase.

Net earnings for third-quarter 2016 were $683 million, with fully diluted earnings per share of $2.21. Net earnings included an $84 million charge in discontinued operations related to the A-12 settlement reached with the U.S. Navy in 2013.

“General Dynamics had a very strong quarter, clearly demonstrated by our operating earnings, margin and return on sales,” said Phebe N. Novakovic, chairman and chief executive officer. “Our businesses are performing exceptionally well as we remain focused on operating excellence and continuous improvement.”

Margin
Company-wide operating margin for the third quarter of 2016 was 13.8 percent, a 90 basis-point increase when compared to 12.9 percent in third-quarter 2015. Three of the company's four business groups expanded margins over the year-ago period, with the Aerospace group achieving record-setting margins in the third quarter.

Cash
Net cash provided by operating activities in the quarter totaled $499 million. Free cash flow from operations, defined as net cash provided by operating activities less capital expenditures, was $389 million.

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Capital Deployment
The company repurchased 2.3 million of its outstanding shares in the third quarter. Year-to-date, the company has repurchased 11.2 million outstanding shares.

Backlog
General Dynamics’ total backlog at the end of third-quarter 2016 was $62 billion. There was solid demand in the quarter across the company's portfolio. The estimated potential contract value, representing management’s estimate of value in unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options, was $25.2 billion. Total potential contract value, the sum of all backlog components, was $87.2 billion at the end of the quarter.

About General Dynamics
Headquartered in Falls Church, Virginia, General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; C4ISR and IT solutions; and shipbuilding. The company’s 2015 revenue was $31.5 billion. More information is available at www.generaldynamics.com.

Certain statements made in this press release, including any statements as to future results of operations and financial projections, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are based on management’s expectations, estimates, projections and assumptions. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors. Additional information regarding these factors is contained in the company’s filings with the Securities and Exchange Commission, including, without limitation, its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q.

All forward-looking statements speak only as of the date they were made. The company does not undertake any obligation to update or publicly release any revisions to any forward-looking statements to reflect events, circumstances or changes in expectations after the date of this press release.

WEBCAST INFORMATION: General Dynamics will webcast its third-quarter securities analyst conference call at 9 a.m. EDT on Wednesday, October 26, 2016. The webcast will be a listen-only audio event, available at www.generaldynamics.com. An on-demand replay of the webcast will be available by 12 p.m. on October 26 and will continue for 12 months. To hear a recording of
the conference call by telephone, please call 855-859-2056 (international: 404-537-3406); passcode 94369568. The phone replay will be available from 3 p.m. October 26 through November 2, 2016.

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EXHIBIT A
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
 
 
Three Months Ended
 
Variance
 
October 2, 2016
 
 
October 4, 2015
 
$
 
%
Revenue
$
7,731

 
 
$
7,994

 
$
(263
)
 
(3.3
)%
Operating costs and expenses
6,662

 
 
6,960

 
(298
)
 
 
Operating earnings
1,069

 
 
1,034

 
35

 
3.4
 %
Interest, net
(23
)
 
 
(23
)
 
—

 
 
Other, net
2

 
 
2

 
—

 
 
Earnings from continuing operations before income tax
1,048

 
 
1,013

 
35

 
3.5
 %
Provision for income tax, net
281

 
 
280

 
1

 
 
Earnings from continuing operations
767

 
 
733

 
34

 
4.6
 %
Discontinued operations, net of tax
(84
)
*
 
—

 
(84
)
 
 
Net earnings
$
683

 
 
$
733

 
$
(50
)
 
(6.8
)%
Earnings per share—basic

 
 
 
 
 


 


Continuing operations
$
2.52

 
 
$
2.31

 
$
0.21

 
9.1
 %
Discontinued operations
(0.27
)
*
 
—

 
(0.27
)
 

Net earnings
$
2.25

 
 
$
2.31

 
$
(0.06
)
 
(2.6
)%
Basic weighted average shares outstanding
303.9

 
 
316.7

 


 


Earnings per share—diluted
 
 
 
 
 
 
 
 
Continuing operations
$
2.48

 
 
$
2.28

 
$
0.20

 
8.8
 %
Discontinued operations
(0.27
)
*
 
—

 
(0.27
)
 
 
Net earnings
$
2.21

 
 
$
2.28

 
$
(0.07
)
 
(3.1
)%
Diluted weighted average shares outstanding
309.7

 
 
321.9

 
 
 
 
*
In the third quarter of 2016, we recognized a loss due to an adjustment of the value of a previously-recognized settlement related to litigation associated with a former business of the company.




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EXHIBIT B
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
 
 
Nine Months Ended
 
Variance
 
October 2, 2016
 
October 4, 2015
 
$
 
%
Revenue
$
23,120

 
$
23,660

 
$
(540
)
 
(2.3
)%
Operating costs and expenses
19,928

 
20,518

 
(590
)
 
 
Operating earnings
3,192

 
3,142

 
50

 
1.6
 %
Interest, net
(68
)
 
(64
)
 
(4
)
 
 
Other, net
13

 
5

 
8

 
 
Earnings from continuing operations before income tax
3,137

 
3,083

 
54

 
1.8
 %
Provision for income tax, net
882

 
882

 
—

 
 
Earnings from continuing operations
2,255

 
2,201

 
54

 
2.5
 %
Discontinued operations, net of tax
(97
)
 
—

 
(97
)
 
 
Net earnings
$
2,158

 
$
2,201

 
$
(43
)
 
(2.0
)%
Earnings per share—basic
 
 
 
 
 
 
 
Continuing operations
$
7.38

 
$
6.79

 
$
0.59

 
8.7
 %
Discontinued operations
(0.31
)
 
—

 
(0.31
)
 
 
Net earnings
$
7.07

 
$
6.79

 
$
0.28

 
4.1
 %
Basic weighted average shares outstanding
305.4

 
324.0

 
 
 
 
Earnings per share—diluted
 
 
 
 
 
 
 
Continuing operations
$
7.25

 
$
6.68

 
$
0.57

 
8.5
 %
Discontinued operations
(0.31
)
 
—

 
(0.31
)
 
 
Net earnings
$
6.94

 
$
6.68

 
$
0.26

 
3.9
 %
Diluted weighted average shares outstanding
311.1

 
329.4

 
 
 
 



 




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EXHIBIT C
REVENUE AND OPERATING EARNINGS BY SEGMENT - (UNAUDITED)
DOLLARS IN MILLIONS
 
 
Three Months Ended
 
Variance
 
October 2, 2016
 
October 4, 2015
 
$
 
%
Revenue:
 
 
 
 
 
 
 
Aerospace
$
2,017

 
$
2,343

 
$
(326
)
 
(13.9
)%
Combat Systems
1,330

 
1,345

 
(15
)
 
(1.1
)%
Information Systems and Technology
2,341

 
2,219

 
122

 
5.5
 %
Marine Systems
2,043

 
2,087

 
(44
)
 
(2.1
)%
Total
$
7,731

 
$
7,994

 
$
(263
)
 
(3.3
)%
Operating earnings:
 
 
 
 
 
 
 
Aerospace
$
437

 
$
426

 
$
11

 
2.6
 %
Combat Systems
219

 
218

 
1

 
0.5
 %
Information Systems and Technology
256

 
219

 
37

 
16.9
 %
Marine Systems
166

 
181

 
(15
)
 
(8.3
)%
Corporate
(9
)
 
(10
)
 
1

 
10.0
 %
Total
$
1,069

 
$
1,034

 
$
35

 
3.4
 %
Operating margin:
 
 
 
 
 
 
 
Aerospace
21.7
%
 
18.2
%
 
 
 
 
Combat Systems
16.5
%
 
16.2
%
 
 
 
 
Information Systems and Technology
10.9
%
 
9.9
%
 
 
 
 
Marine Systems
8.1
%
 
8.7
%
 
 
 
 
Total
13.8
%
 
12.9
%
 
 
 
 

 


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EXHIBIT D
REVENUE AND OPERATING EARNINGS BY SEGMENT - (UNAUDITED)
DOLLARS IN MILLIONS
 
 
Nine Months Ended
 
Variance
 
October 2, 2016
 
October 4, 2015
 
$
 
%
Revenue:
 
 
 
 
 
 
 
Aerospace
$
6,138

 
$
6,709

 
$
(571
)
 
(8.5
)%
Combat Systems
3,918

 
4,116

 
(198
)
 
(4.8
)%
Information Systems and Technology
6,903

 
6,804

 
99

 
1.5
 %
Marine Systems
6,161

 
6,031

 
130

 
2.2
 %
Total
$
23,120

 
$
23,660

 
$
(540
)
 
(2.3
)%
Operating earnings:
 
 
 
 
 
 
 
Aerospace
$
1,282

 
$
1,296

 
$
(14
)
 
(1.1
)%
Combat Systems
655

 
648

 
7

 
1.1
 %
Information Systems and Technology
748

 
673

 
75

 
11.1
 %
Marine Systems
539

 
556

 
(17
)
 
(3.1
)%
Corporate
(32
)
 
(31
)
 
(1
)
 
(3.2
)%
Total
$
3,192

 
$
3,142

 
$
50

 
1.6
 %
Operating margin:
 
 
 
 
 
 
 
Aerospace
20.9
%
 
19.3
%
 
 
 
 
Combat Systems
16.7
%
 
15.7
%
 
 
 
 
Information Systems and Technology
10.8
%
 
9.9
%
 
 
 
 
Marine Systems
8.7
%
 
9.2
%
 
 
 
 
Total
13.8
%
 
13.3
%
 
 
 
 

 

 


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EXHIBIT E
CONSOLIDATED BALANCE SHEETS
DOLLARS IN MILLIONS
 
 
(Unaudited)
 
 
 
October 2, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
2,303

 
$
2,785

Accounts receivable
3,502

 
3,446

Contracts in process
5,213

 
4,357

Inventories
3,657

 
3,366

Other current assets
622

 
617

Total current assets
15,297

 
14,571

Noncurrent assets:
 
 
 
Property, plant and equipment, net
3,445

 
3,466

Intangible assets, net
715

 
763

Goodwill
11,581

 
11,443

Other assets
1,630

 
1,754

Total noncurrent assets
17,371

 
17,426

Total assets
$
32,668

 
$
31,997

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1

 
$
501

Accounts payable
2,276

 
1,964

Customer advances and deposits
5,249

 
5,674

Other current liabilities
4,367

 
4,306

Total current liabilities
11,893

 
12,445

Noncurrent liabilities:
 
 
 
Long-term debt
3,885

 
2,898

Other liabilities
5,573

 
5,916

Total noncurrent liabilities
9,458

 
8,814

Shareholders' equity:
 
 
 
Common stock
482

 
482

Surplus
2,789

 
2,730

Retained earnings
24,661

 
23,204

Treasury stock
(13,724
)
 
(12,392
)
Accumulated other comprehensive loss
(2,891
)
 
(3,286
)
Total shareholders' equity
11,317

 
10,738

Total liabilities and shareholders' equity
$
32,668

 
$
31,997


 

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EXHIBIT F
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
DOLLARS IN MILLIONS
 
  
Nine Months Ended
 
October 2, 2016
 
October 4, 2015*
Cash flows from operating activities—continuing operations:
 
 
 
Net earnings
$
2,158

 
$
2,201

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
272

 
272

Amortization of intangible assets
70

 
88

Equity-based compensation expense
76

 
84

Deferred income tax provision
218

 
88

Discontinued operations, net of tax
97

 
—

(Increase) decrease in assets, net of effects of business acquisitions:
 
 
 
Accounts receivable
(52
)
 
254

Contracts in process
(957
)
 
391

Inventories
(288
)
 
(29
)
Increase (decrease) in liabilities, net of effects of business acquisitions:
 
 
 
Accounts payable
305

 
334

Customer advances and deposits
(574
)
 
(1,508
)
Other, net
47

 
95

Net cash provided by operating activities
1,372

 
2,270

Cash flows from investing activities:
 
 
 
Capital expenditures
(244
)
 
(360
)
Maturities of held-to-maturity securities
—

 
500

Proceeds from sales of assets
4

 
290

Other, net
(42
)
 
(12
)
Net cash (used) provided by investing activities
(282
)
 
418

Cash flows from financing activities:
 
 
 
Purchases of common stock
(1,514
)
 
(2,729
)
Proceeds from fixed-rate notes
992

 
—

Dividends paid
(678
)
 
(655
)
Repayment of fixed-rate notes
(500
)
 
(500
)
Proceeds from stock option exercises
211

 
240

Other, net
(39
)
 
(29
)
Net cash used by financing activities
(1,528
)
 
(3,673
)
Net cash used by discontinued operations
(44
)
 
(31
)
Net decrease in cash and equivalents
(482
)
 
(1,016
)
Cash and equivalents at beginning of period
2,785

 
4,388

Cash and equivalents at end of period
$
2,303

 
$
3,372


*
Prior period information has been restated to reflect the reclassification of certain items in accordance with Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which we adopted in the second quarter of 2016.

 

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EXHIBIT G
PRELIMINARY FINANCIAL INFORMATION - (UNAUDITED)
DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS
 
 
 
2016
 
 
 
2015
 
 
 
Third Quarter
 
 
 
Third Quarter (a)
 
 
Other Financial Information:
 
 
 
 
 
 
 
Debt-to-equity (b)
34.3
%
 
 
 
31.7
%
 
 
Debt-to-capital (c)
25.6
%
 
 
 
24.0
%
 
 
Book value per share (d)
$
37.16

 
 
 
$
33.95

 
 
Total taxes paid
$
217

 
 
 
$
246

 
 
Company-sponsored research and development (e)
$
99

 
 
 
$
104

 
 
Shares outstanding
304,519,550

 
 
 
316,128,160

 
 
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures:
 
 
 
 
 
 
 
 
2016
 
2015 (f)
 
Third Quarter
 
Nine Months
 
Third Quarter
 
Nine Months
Free cash flow from operations:
 
 
 
 
 
 
 
Net cash provided by operating activities
$
499

 
$
1,372

 
$
837

 
$
2,270

Capital expenditures
(110
)
 
(244
)
 
(170
)
 
(360
)
Free cash flow from operations (g)
$
389

 
$
1,128

 
$
667

 
$
1,910


(a)
Prior period information has been restated to reflect the reclassification of debt issuance costs from other assets to debt in accordance with ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which we adopted in the fourth quarter of 2015.

(b)
Debt-to-equity ratio is calculated as total debt divided by total equity as of the end of the period.

(c)
Debt-to-capital ratio is calculated as total debt divided by the sum of total debt plus total equity as of the end of the period.

(d)
Book value per share is calculated as total equity divided by total outstanding shares as of the end of the period.

(e)
Includes independent research and development and Aerospace product-development costs.

(f)
Prior period information has been restated to reflect the reclassification of certain items in accordance with ASU 2016-09, which we adopted in the second quarter of 2016.

(g)
We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a performance measure in evaluating management. The most directly comparable GAAP measure to free cash flow from operations is net cash provided by operating activities.

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EXHIBIT H
BACKLOG - (UNAUDITED)
DOLLARS IN MILLIONS
 
 
 
Funded
 
Unfunded
 
Total
Backlog
 
Estimated
Potential
Contract Value*
 
Total Potential
Contract
Value
Third Quarter 2016
 
 
 
 
 
 
 
 
 
 
Aerospace
 
$
11,415

 
$
108

 
$
11,523

 
$
2,158

 
$
13,681

Combat Systems
 
17,659

 
436

 
18,095

 
4,469

 
22,564

Information Systems and Technology
 
7,143

 
2,057

 
9,200

 
14,444

 
23,644

Marine Systems
 
15,152

 
8,001

 
23,153

 
4,172

 
27,325

Total
 
$
51,369

 
$
10,602

 
$
61,971

 
$
25,243

 
$
87,214

Second Quarter 2016
 
 
 
 
 
 
 
 
 
 
Aerospace
 
$
11,629

 
$
126

 
$
11,755

 
$
2,221

 
$
13,976

Combat Systems
 
18,032

 
478

 
18,510

 
4,812

 
23,322

Information Systems and Technology
 
7,508

 
2,292

 
9,800

 
14,560

 
24,360

Marine Systems
 
15,908

 
7,260

 
23,168

 
4,237

 
27,405

Total
 
$
53,077

 
$
10,156

 
$
63,233

 
$
25,830

 
$
89,063

Third Quarter 2015
 
 
 
 
 
 
 
 
 
 
Aerospace
 
$
13,459

 
$
100

 
$
13,559

 
$
2,479

 
$
16,038

Combat Systems
 
18,591

 
658

 
$
19,249

 
5,261

 
24,510

Information Systems and Technology
 
7,294

 
2,122

 
$
9,416

 
15,074

 
24,490

Marine Systems
 
14,391

 
12,127

 
$
26,518

 
2,734

 
29,252

Total
 
$
53,735

 
$
15,007

 
$
68,742

 
$
25,548

 
$
94,290

*
The estimated potential contract value represents management's estimate of our future contract value under unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options associated with existing firm contracts, including options to purchase new aircraft and long-term agreements with fleet customers, as applicable. Because the value in the unfunded IDIQ arrangements is subject to the customer's future exercise of an indeterminate quantity of orders, we recognize these contracts in backlog only when they are funded. Unexercised options are recognized in backlog when the customer exercises the option and establishes a firm order.

 



 






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EXHIBIT I
THIRD QUARTER 2016 SIGNIFICANT ORDERS (UNAUDITED)
DOLLARS IN MILLIONS
We received the following significant orders during the third quarter of 2016:
Combat Systems
•
$170 from the U.S. Army for the production of Hydra-70 rockets.
•
$165 from the Army to produce various calibers of ammunition and ordnance.
•
$145 from the Swiss government to produce Piranha armored vehicles equipped with mortar systems.
•
$100 from the Army for Abrams M1A2 System Enhancement Program (SEP) components and associated program management.
•
$75 to provide munitions to the government of Israel.
•
$55 from the Army for Abrams technical support and engineering services.
•
$40 for technical assistance with Abrams tank kits for Egypt.
•
$35 from the U.S. Marine Corps for the reset of Cougar vehicles.
Information Systems and Technology
•
$105 from the U.S. Air Force for the Battlefield Information Collection and Exploitation System (BICES) program to provide intelligence information sharing and support to coalition operations.
•
$90 from the Army for ruggedized computing equipment under the Common Hardware Systems-4 (CHS-4) program.
•
$75 from the U.S. Navy for missile guidance systems.
•
$65 from the Army for system engineering and program management for the Warfighter Information Network-Tactical (WIN-T) program.
•
$35 from the National Geospatial-Intelligence Agency for full motion video processing, dissemination and exploitation.
•
A contract from the U.S. Census Bureau to provide contact-center systems and operations support for the 2020 Census Questionnaire Assistance program, a key component of the 2020 Decennial Census. The contract has a value of $430 over five years.
Marine Systems
•
$300 from the Navy for lead-yard services, development studies and design efforts for Virginia-class submarines.
•
$235 from the Navy to provide design, engineering, material and logistics support and research and development activities for active U.S submarines.
•
$215 from the Navy to provide in-service support of systems and components on the USS Jimmy Carter (SSN23).
•
$205 from the Navy to perform non-nuclear planning and maintenance work on five aircraft carriers.
•
$40 from the Navy for the repair and alteration of the USS Oak Hill (LSD-51).
•
$25 from the Navy for ship-repair services for the USS Harry S. Truman (CVN-75).
•
The design and construction of two liquefied natural gas (LNG)-capable containerships for Matson Navigation Company, Inc. Construction of the first containership will begin in early 2018, with deliveries in 2019 and 2020, respectively.


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EXHIBIT J
AEROSPACE SUPPLEMENTAL DATA - (UNAUDITED)
 
 
 
Third Quarter
 
Nine Months
 
 
2016
 
2015
 
2016
 
2015
Gulfstream Green Deliveries (units):
 
 
 
 
 
 
 
 
Large-cabin aircraft
 
24

 
31

 
74

 
87

Mid-cabin aircraft
 
6

 
9

 
18

 
23

Total
 
30

 
40

 
92

 
110

Gulfstream Outfitted Deliveries (units):
 
 
 
 
 
 
 
 
Large-cabin aircraft
 
21

 
31

 
67

 
89

Mid-cabin aircraft
 
6

 
12

 
21

 
27

Total
 
27

 
43

 
88

 
116

Pre-owned Deliveries (units):
 
1

 
—

 
6

 
5



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