General Dynamics' backlog doubles on submarine awards, but most of the gain is not yet funded

General Dynamics now has $220.3 billion of work on its books, twice the level of a year earlier. Most of the jump came from its shipbuilding segment, led by two submarine awards in the third quarter: the Navy awarded $42.1 billion for nine more Virginia-class attack submarines and $29.5 billion for five more Columbia-class ballistic-missile submarines. Marine Systems, the shipbuilding segment, accounted for more than four-fifths of the company's backlog increase, calculated from the filed segment figures.

That size says more about how long the yards are booked than about how quickly money arrives. Backlog counts signed contracts whether or not the customer has yet committed the money. Funded backlog grew by less than a third from a year earlier. The unfunded part rose from $24.1 billion to $108.5 billion and made up about three-quarters of the increase, calculated from the filed figures.

Even the funded part is a long queue. Marine's funded backlog alone is about 3.4 times the segment's revenue in the first nine months of the year, calculated from the filed figures. Danny Deep, the president, said Marine would add close to $2 billion of revenue this year with further growth to follow, though perhaps at a slower rate as the segment gets larger.

What the yards earn on that work matters as much as how much of it there is. Marine's operating margin, operating profit as a share of revenue, was 7.9% last quarter against 7.1% a year earlier. Deep put part of the improvement down to a one-off: Block IV, the previous batch of Virginia-class boats, is nearing its last delivery, and better cost performance let the yard raise the profit rate it books on that contract, with the adjustment for all the work done so far landing in a single quarter. He said the new awards made no significant difference to the margin and told analysts to think of the segment as "in that mid-7% range as a baseline, with the opportunity to grow from there". Over nine months the margin was 7.5%, slightly above the 7.4% full-year guidance given in July, which the company said it would not update.

Spending on the yards was planned before the awards and is only now accelerating. In January the company guided capital expenditure to 3.5% to 4% of sales, with spending aimed especially at its shipyards. Capital expenditure more than doubled last quarter from a year earlier, yet over nine months it came to only 2.2% of sales. The company kept that guidance for the year. Applied to its revenue guidance, that range leaves roughly $1.1 billion to $1.35 billion for the fourth quarter, calculated from the guided ranges.

Kim Kuryea, the chief financial officer, said some of that spending "could slip over into 2027, but we intend to keep on track there", and that capital spending would probably stay high next year as well. Some of the cash is arriving early: customers paying ahead of the work added $1.2 billion to nine-month operating cash flow, money that can unwind as the work is done.

Kuryea also said free cash flow could come in above the guided level for the year if the capital projects move more slowly. So the doubled backlog sits on top of an investment ramp already under way, and management's margin baseline for the work is mid-7%.