Letter to Shareholders
Dear Fellow Shareholder:
For General Dynamics, 2016 was another year of very strong financial performance. Our continued focus on operations and the prudent deployment of capital resulted in the highest operating earnings, operating margin and earnings per share (EPS) in the company’s history. Diluted EPS from continuing operations was $9.87, up 8.7 percent from the prior year. Operating earnings increased 3.1 percent to $4.3 billion, on sales of $31.4 billion, resulting in a 13.7 percent operating margin, 40 basis points better than 2015. The company secured over $25 billion in new orders, providing stability and clarity well into the future.
Key metrics also increased including a 9.8 percent return on sales, an 18.1 percent return on invested capital, a return on assets of 9.5 percent and a return on equity of 28 percent, all higher than the prior year. The market once again rewarded this performance with a 25.7 percent increase in our stock price, driving our market capitalization to $52.6 billion at year end.
Net cash from operating activities in 2016 totaled $2.2 billion and free cash flow from operations was $1.81 billion. We continue to work off large advance payments received in 2014 on a Combat Systems program and our operating working capital at Gulfstream increased in connection with the G500 and G600 flight test programs.
Prudent capital deployment is a constant focus of this management team and the Board. Over the course of the year, we paid $911 million in dividends and repurchased 14.2 million shares of common stock for $2 billion. In March 2017, our board of directors authorized the 20th consecutive annual dividend increase and raised the company’s dividend by 10.5 percent to $0.84 per quarter.
All of our operating groups performed well in 2016. Aerospace had very strong operating leverage and solid order intake across the portfolio. For the year, the group’s revenue was $8.4 billion and operating earnings were $1.72 billion. The group’s 20.5 percent operating margin was 120 basis points higher than 2015, which in turn was 70 basis points higher than 2014.
The Combat Systems story is one of outstanding cost and margin performance. Revenue was $5.6 billion with operating earnings of $914 million and an operating margin of 16.3 percent, 70 basis points above record-high 2015 performance.
It was also a very good year for the Information Systems and Technology group. Revenue increased to $9.2 billion, and earnings increased almost 10 percent to $992 million. This positive operating leverage resulted in a margin of 10.8 percent, a 70 basis point improvement over 2015.
The Marine Systems group’s revenue for the year was $8.2 billion, following two years of significant growth in 2014 and 2015. The group’s revenue has increased by more than 20 percent over a three-year period as we deliver ships and submarines to the U.S. Navy and Jones Act ships to commercial customers. Operating earnings for 2016 were $725 million with an operating margin of 8.8 percent.
Demand for our products and services across the business was solid in 2016. Our defense business added several significant contract awards to an already robust backlog, and we booked new orders throughout our Aerospace offerings. This durable backlog provides General Dynamics with confidence in the future as we work to execute efficiently on the programs, delivering consistently strong performance and shareholder value.
2017 is shaping up to be another productive year. This management team remains committed to the business fundamentals that have driven our growth over the past four years: improving margins, generating cash and increasing return on invested capital. Our consistent focus on operational improvement, successful execution on our robust backlog, and continued demand for our products and services leave us well positioned to deliver on our commitment to long-term value creation.
Phebe N. Novakovic
Chairman and Chief Executive Officer
March 10, 2017
Our ongoing focus on operations and wise deployment of capital resulted in the highest operating earnings, operating margin and earnings per share (EPS) in the company's history.