General Dynamics 2015 Annual Report Download - page 27

IT services revenue decreased in 2015 due to lower volume on
several programs, including our commercial wireless work. These
decreases were offset partially by revenue from the late 2014
acquisition of a provider of IT support to U.S. special operations forces.
Revenue decreased slightly in our C4ISR solutions business due in part
to lower volume on the Handheld, Manpack and Small Form Fit (HMS)
radio program.
The group’s operating margin increased 150 basis points in 2015.
This margin expansion was driven primarily by improved program
performance and rightsizing across the group, including the favorable
impact from the early 2015 consolidation of two of our businesses to
form General Dynamics Mission Systems. Operating earnings in 2015
also included a gain of $23 on the sale of a commercial cyber security
product business, a 30 basis-point impact.
Review of 2014 vs. 2013
Year Ended December 31 2014 2013 Variance
Revenue $ 9,159 $ 10,268 $ (1,109) (10.8)%
Operating earnings 785 795 (10) (1.3)%
Operating margin 8.6% 7.7%
In 2014, revenue was down across the Information Systems and
Technology group. Revenue decreased in the C4ISR solutions business
in 2014 primarily as a result of lower U.S. Army spending on several
programs. Revenue decreased in 2014 in our IT services business due
to lower volume on multiple programs, including our commercial
wireless work, offset partially by increased contact-center services
work under our contract with the Centers for Medicare & Medicaid
Services. Despite the revenue decline, the group’s operating margin
increased 90 basis points in 2014, the result of solid operating
performance and ongoing cost-reduction efforts across our businesses.
2016 Outlook
We expect 2016 revenue in the Information Systems and Technology
group to be consistent with 2015. Operating margins are expected to
approach double-digits.
MARINE SYSTEMS
Review of 2015 vs. 2014
Year Ended December 31 2015 2014 Variance
Revenue $ 8,013 $ 7,312 $ 701 9.6%
Operating earnings 728 703 25 3.6%
Operating margin 9.1% 9.6%
The increase in the Marine Systems group’s revenue in 2015 consisted
of the following:
U.S. Navy ship construction $ 327
U.S. Navy ship engineering, repair and other services 210
Commercial ship construction 164
Total increase $ 701
The increase in U.S. Navy ship construction revenue in 2015 is due to
higher volume on the Virginia-class submarine program. In 2015, we
completed the ramp-up in construction from one to two Virginia-class
submarines per year. This increase was offset partially by lower volume
on the Expeditionary Mobile Base (ESB) program. Revenue from U.S.
Navy ship engineering, repair and other services increased in 2015 due
primarily to development work on the Ohio-class submarine replacement
program. Commercial ship construction revenue increased in 2015 as
work ramped up on the group’s construction of Jones Act ships.
Operating margin decreased 50 basis points in 2015 due primarily to
a shift in contract mix, including a gap in production on the mature ESB
program that was replaced by Jones Act commercial ship contracts and
the transition from Block III to Block IV of the Virginia-class submarine
program. The group’s operating margin was also affected unfavorably by
cost growth on the Navy’s DDG-1000 program and the restart of the
DDG-51 program.
Review of 2014 vs. 2013
Year Ended December 31 2014 2013 Variance
Revenue $ 7,312 $ 6,712 $ 600 8.9%
Operating earnings 703 666 37 5.6%
Operating margin 9.6% 9.9%
The Marine Systems group’s revenue increased in 2014 due primarily to
higher volume on the Virginia-class submarine program, including long-
lead materials for the Block IV contract, and increased work on the
group’s construction of Jones Act ships. Revenue for Navy engineering,
repair and other services decreased in 2014 caused by lower spending
by the Navy on submarine-related overhaul and repair services.
Operating margin decreased 30 basis points in 2014 due primarily to a
shift in contract mix as work on the Block IV Virginia-class and Jones Act
commercial ship contracts ramped up and volume decreased on mature
contracts, including ESB and Blocks II and III of the Virginia-class
program. In addition, construction progressed on the first of the three
DDG-1000 ships and two of the DDG-51 ships in the Navy’s restart of
the program.
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