General Dynamics 2015 Annual Report Download - page 24

the group’s earnings and margin include the volume, mix and
profitability of completions and services work performed, the volume of
and market for pre-owned aircraft and the level of general and
administrative (G&A) and net R&D costs incurred by the group.
In the three defense groups, revenue on long-term government
contracts is recognized as work progresses, as either products are
produced or services are rendered. As a result, variations in revenue
are discussed generally in terms of volume, typically measured by the
level of activity on individual contracts or programs. Year-over-year
variances attributed to volume are due to changes in production or
service levels and delivery schedules.
Operating costs for the defense groups consist of labor, material,
subcontractor, overhead and G&A costs and are recognized generally
as incurred. Variances in costs recognized from period to period
primarily reflect increases and decreases in production or activity levels
on individual contracts and, therefore, result largely from the same
factors that drive variances in revenue.
Operating earnings and margin in the defense groups are driven by
changes in volume, performance or contract mix. Performance refers
to changes in profitability based on revisions to estimates at completion
on individual contracts. These revisions result from increases or
decreases to the estimated value of the contract, the estimated costs
to complete or both. Therefore, changes in costs incurred in the period
compared with prior periods do not necessarily impact profitability. It is
only when total estimated costs at completion on a given contract
change without a corresponding change in the contract value that the
profitability of that contract may be impacted. Contract mix refers to
changes in the volume of higher- vs. lower-margin work. Additionally,
higher or lower margins can be inherent in the contract type (e.g.,
fixed-price/cost-reimbursable) or type of work (e.g., development/
production).
CONSOLIDATED OVERVIEW
2015 IN REVIEW
•Outstanding operating performance:
▪Revenue increased $617, or 2 percent, to $31.5 billion, with
growth in our Aerospace and defense groups.
▪Record-high operating earnings of $4.2 billion and operating
margin of 13.3 percent increased 7.4 percent and 70 basis
points, respectively, from 2014.
▪Return on sales increased 70 basis points from 2014 to 9.4
percent.
▪$9.08 of earnings from continuing operations per diluted share
increased 16 percent from 2014 to the highest level in our
history.
•Robust backlog providing stability well into the future, including
increased Aerospace backlog from year-end 2014.
•22.8 million outstanding shares repurchased for $3.2 billion and
$873 paid in cash dividends, returning over 200 percent of our free
cash from operations to shareholders.
•Return on invested capital (ROIC) of 17.4 percent, 230 basis points
higher than 2014.
REVIEW OF 2015 VS. 2014
Year Ended December 31 2015 2014 Variance
Revenue $ 31,469 $ 30,852 $ 617 2.0%
Operating costs and expenses 27,291 26,963 (328) (1.2)%
Operating earnings 4,178 3,889 289 7.4%
Operating margin 13.3% 12.6%
We realized top-line revenue growth in 2015, driven primarily by higher
ship construction and engineering activity in our Marine Systems group
and additional deliveries of G650 aircraft in our Aerospace group.
Revenue was down slightly in our Combat Systems and Information
Systems and Technology groups. Operating costs and expenses
increased less than revenue in 2015, resulting in robust levels of
operating earnings and margin. Consolidated operating margin expanded
70 basis points, due largely to improved performance and continued
cost-reduction efforts in the Aerospace, Combat Systems and
Information Systems and Technology groups.
REVIEW OF 2014 VS. 2013
Year Ended December 31 2014 2013 Variance
Revenue $ 30,852 $ 30,930 $ (78) (0.3)%
Operating costs and expenses 26,963 27,241 278 1.0%
Operating earnings 3,889 3,689 200 5.4%
Operating margin 12.6% 11.9%
While our revenue was essentially flat in 2014 compared with 2013,
operating earnings and margin increased in 2014. Decreased U.S. Army
spending affected our Information Systems and Technology and Combat
Systems groups. This was essentially offset by higher Aerospace and
Marine Systems revenue due to increased aircraft deliveries and higher
ship construction activity, respectively. We reduced our operating costs
and expenses more than our revenue declined in 2014, resulting in
positive operating leverage. The primary drivers of the decrease in
operating costs and expenses were improved performance in aircraft
manufacturing and outfitting activities in the Aerospace group and
significant cost reductions in the Information Systems and Technology
group. The resulting consolidated operating margin of 12.6 percent was
up 70 basis points over 2013.
20 General Dynamics Annual Report 2015