Lower taxes and improved operating profits more than offset higher costs related to a recent acquisition as General Dynamics [GD] on Wednesday posted higher earnings and sales in its second quarter.

GD said net income increased 5 percent to $786 million, $2.62 earnings per share (EPS), from $749 million ($2.45 EPS) a year ago, topping consensus estimates by 12 cents EPS. Most of the gain was driven by a lower tax rate, which more than offset various transaction costs and higher interest expenses related to the acquisition in April of the former CSRA, Inc.

General Dynamics Chairman and CEO Phebe Novakovic. Photo: General Dynamics
General Dynamics Chairman and CEO Phebe Novakovic. Photo: General Dynamics

Charges related to the CSRA deal totaled $70 million (20 cents EPS). Another $10 million (3 cents EPS) in charges is related to the acquisition are expected in the third quarter.

At the operating level, business at the Information Technology (IT) segment, which includes CSRA, Marine Systems, and Combat Systems, also helped drive the higher earnings.

Sales were up 20 percent to $9.2 billion from $7.7 billion a year ago, driven primarily by the CSRA deal as organic growth was 3 percent. Work at the company’s defense businesses, excluding impacts from CSRA, was up 7 percent on work at Combat Systems, Mission Systems, and Marine Systems.

Phebe Novakovic, GD’s chairman and CEO, mentioned on the company’s earnings call several sales drivers within the operating segments including M1 Abrams tanks, munitions and ordnance, the Ajax armored fighting vehicle for the British army, space payloads, communications, and encryption. She also said work is progressing well on the Navy’s Virginia-class and Columbia-class submarine programs, adding that challenges in DDG-1000 destroyer and restart of DDG-51 destroyer production at Bath “are largely behind us.”

Novakovic told investors that she was “very pleased with the demand signals” in the U.S. related to the Combat Systems portfolio and that the company’s land systems business in Europe “is growing at a nice rate.”

The integration of CSRA is “slightly” ahead of schedule and will be accretive to earnings in the second half of the year, Novakovic said. Cost savings targets related to integration of CSRA are being met with a goal to exceed them this year, she said. The win rate for the IT segment is 75 percent this year, which is “pretty darn impressive,” she added.

With results ahead of company expectations and CSRA now part of the company, GD revised upward its sales and earnings guidance for 2018. Sales are forecast to be in the range of $36.7 billion to $36.8 billion with higher contributions than previously expected from each segment. Operating margin will exceed 12 percent and per share earnings are forecast to be between $11 and $11.05 versus the prior range of between $10.90 and $11.

Free cash flow in the quarter was $612 million and total backlog stood at $66.3 billion, up from $58.6 billion a year ago, with $5.3 billion coming from CSRA.