General Dynamics [GD] on Wednesday posted solid third quarter earnings despite flat sales, led by its aviation segment and to a lesser degree a boost from its Combat Systems segment.
Net income increased 7 percent to $696 million, $2.06 earnings per share (EPS), from $651 million ($1.84 EPS). Excluding impacts from discontinued operations, earnings increased 6 percent to $694 million ($2.05 EPS), versus $652 million ($1.84 EPS), easily beating analysts’ expectations of $1.91 EPS.
GD’s Aerospace business drove the higher earnings as the segment’s operating profit increased 11 percent to $411 million while profit at Combat Systems was up 2 percent to $232 million. The gains at these two businesses overcame a 7 percent decline in profit at the Information Systems and Technology (IS&T) segment to $202 million. Operating income at Marine Systems remained level at $170 million.
Total segment operating margins improved a half percent to 12.9 percent as both Aerospace and IS&T improved their margins. Aerospace margins improved due on production improvements on G650 and G280 business jets and better performance from the company’s aviation services business Jet Aviation, Jason Aiken, GD’s chief financial officer, said on an earnings call. Margins at IS&T benefited from all the segment’s businesses, he said.
Phebe Novakovic, GD’s chairman and CEO, said on the call that there is room for further improvement in IS&T’s margins, particularly with a pending consolidation of the C4 Systems and Advanced Information Systems businesses of the segment planned to go in effect on Jan. 1, 2015, which will result in decreasing costs.
Sales in the quarter were essentially level at $7.75 billion with mid-single digit increases at Aerospace, Combat Systems and Marine Systems wiped out by a 13 percent drop at IS&T, which still performed ahead of expectations. Aiken said that the Combat Systems segment appears to have bottomed out in terms of declining sales based on results for the second and third quarters of this year.
GD’s performance so far this year coupled with expectations for the fourth quarter led the company to increases its earnings guidance for 2014 to between $7.60 and $7.70 EPS versus prior projections of between $7.40 to $7.45 EPS, Novakovic said.
“Somewhat higher revenue, higher than anticipated operating earnings, and a modestly lower tax rate combined to permit us to increase EPS guidance,” she said.
Free cash flow in the quarter was a booming $2.3 billion and GD’s total backlog increased 56 percent from a year ago to a record $74.4 billion. Compared to the second quarter, total backlog is up 5 percent driven by orders at Combat Systems.
GD didn’t provide guidance beyond the 2014 earnings expectations but based on the strong backlog, Novakovic said going forward Marine Systems is expected to post year-over-year growth in the low single digits.
In Combat Systems, which this year has won some very large awards, including a potential $13 billion deal with Canada for military and commercial vehicles, and related training and services, and a $5.8 billion deal with the United Kingdom for armored fighting vehicles, the segment should “see good bottom line and top line growth “beginning in 2016 and 2017 as production ramps up, Novakovic said.
She also said that the IS&T segment appears to be at its bottom in terms of sales.