GD Reports Solid Earnings, Flat Sales In Third Quarter

General Dynamics [GD] on Wednesday posted solid earnings results in its third quarter driven by its combat vehicles business amid a downtick in sales.

Net income jumped 18 percent to $764 million, $2.52 earnings per share (EPS), from $647 million ($2.13 EPS) a year ago, topping consensus estimates by nine cents per share. Last year’s third quarter included an $84 million loss associated with the company’s 2013 settlement of litigation with the Navy over the former A-12 stealth bomber program, which was terminated by the Pentagon in the early 1990s.

Excluding the A-12 loss, which GD reported as discontinued operations a year ago, net income was still up nearly 5 percent, mostly on the strength of operating results at the Combat Systems segment, and to a lesser degree higher earnings at the Information Systems & Technology, and Aerospace segments.

AJAX armored fighting vehicle being developed by General Dyanmics's U.K. business for the British Army. Photo: General Dynamics

AJAX armored fighting vehicle developed by General Dynamics's U.K. business for the British army. AJAX, and another armored vehicle being produced by GD's operations in Canada for a Middle East customer, are in production and helped drive higher sales and income in the Combat Systems segment.  Photo: General Dynamics

Combat Systems posted strong sales and operating income, driven by international vehicle programs that are transitioning to production, Jason Aiken, GD’s chief financial officer, said on the company’s earnings call. He added that all major programs in the segment are “performing well.”

Aiken stood in for Phebe Novakovic, GD’s chairman and CEO, who was out with the flu.

Operating profits at the IS&T segment were up on strong operating performance despite a decline in sales, Aiken said.

Aiken was asked by one analyst on the call about the Army’s recent decision to halt procurement on tactical battlefield network program done by GD and the impact going forward. He said the company will continue to perform a systems integration role and that the decision on the Warfighter Information Network-Tactical (WIN-T) program will have minimal, if any, impact to results in 2018.

The Army still has to “define” its tactical network, he said.

Given IS&T’s “vast portfolio of programs and opportunities,” the decision on WIN-T won’t impact the long-term outlook for the segment, Aiken said.

Overall, GD’s ales in the quarter dipped a percent to $7.6 billion from $7.7 billion as declines at IS&T and Marine Systems outweighed increases at Combat Systems and Aerospace.

Stronger than expected operating results so far this year coupled with a lower tax than expected rate and a lower share count led GD to boost its per share earnings guidance for the year by a nickel to between $9.75 and $9.80. The company will provide an outlook for 2018 when it reports its 2017 results in January.

GD disclosed that it made a small acquisition at the close of the third quarter in its IS&T segment of a company that provides mission-critical support services and technology solutions. The company hasn’t disclosed the name of the firm it acquired. So far this year GD has acquired three businesses for a total of $364 million.

Aiken said the company’s approach to acquisitions remains opportunistic, noting that they have to be accretive to earnings in the first full year as part of GD and fit within its core set of capabilities. Overall, GD has been quiet on the acquisition front the past few years, with just $56 million spent on two deals in 2016.

Total operating margin in the quarter rose 60 basis points to 13.9 percent and free cash flow was a solid $751 million. Total backlog at the end of the quarter stood at $63.9 billion, up a percent from a year ago.

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