Just as it did in the opening quarter, General Dynamics [GD] on Wednesday posted strong second quarter results with a double-digit rise in net income, leading the company to increase its earnings guidance for 2015.
Net income increased 39 percent to $752 million, $2.27 earnings per share (EPS), from $541 million ($1.58 EPS), cruising above consensus estimates by 21 cents per share. Results a year ago included a $105 million (30 cents EPS) loss from discontinued operations, which is the former AxleTech business that was sold. Excluding AxleTech, earnings from continuing operations were still up a robust 16 percent.
Sales increased nearly 6 percent to $7.9 billion from $7.5 billion a year ago.
The second quarter results resemble GD’s opening quarter when it posted a 7 percent increase to the top line and 20 percent to the bottom line (Defense Daily, April 29).
With a strong first half to 2015, GD raised its earnings expectations for the year to between $8.70 and $8.80 EPS versus prior guidance of between $8.05 to $8.10 EPS due to better than expected operating earnings, a modestly lower tax rate, and a lower share count, Phebe Novakovic, GD’s chairman and CEO, said on the quarterly earnings call.
Sales for the year are expected to range between $31.7 billion and $31.8 billion, up from prior guidance of between $31.3 billion and $31.5 billion, due to higher than projected increases in GD’s defense businesses, which are more than making up for $250 million to $300 million lower than anticipated revenues in the aerospace segment.
Novakovic said the outlook for growth continues into 2016 and beyond. Going back to 2014, GD has focused on building its backlog by lowering its cost structure and improving operating performance, she said. Total backlog at the end of the second quarter stood at $70 billion, down from $72.4 billion at the end of 2014, while funded backlog stood at $55.4 billion, up from $52.9 billion.
Given the backlog and “low cost basis,” Novakovic said, “we are poised for growth, this year, next year and through my current planning horizon.” The company’s defense business have the backlog to continue growing, she added, “so now it’s about growing earnings” based on sales increases and productivity gains.
GD has its “focus on the core, blocking and tackling; might not be the sexiest thing, but, boy, it really makes all the difference in performance,” Novakovic said. The company will continue to focus on reducing costs and improving performance, she added.
The company continues to be focused on organic growth. Novakovic said her view of mergers and acquisitions hasn’t changed. GD will be focused on returning its cash to shareholders through dividends and stock repurchases, she said.
In the quarter all four of GD’s business segments contributed to the earnings increase although the biggest gainers were the information systems and technology (IS&T), and the aerospace segments, which each reported solid double-digit gains.
At IS&T, operating profit soared 26 percent to $237 million, thanks in part to profit gain from the sale of its former Fidelis cyber security products business that has an emphasis on commercial markets. Even without Fidelis, segment operating margins increased a percent. Sales in the segment were up 2 percent to $2.2 billion. Novakovic said that segment profit was up across the different business areas, adding that a lower cost structure is leading to more contract wins.
Novakovic said the sale of Fidelis added a nickel to GD’s EPS results.
Operating profit at aerospace increased 14 percent to $439 million while sales increased 13 percent to $2.3 billion. The increases were driven by higher deliveries of business jets and the jet aviation aircraft completions business. Novakovic said demand for business jets remains strong, driven by customers in the United States and to a lesser extent the Middle East.
GD’s marine systems segment also posted handsome gains, with sales and operating income up 8 percent to $2 billion and $187 million respectively, driven by work on the Virginia-class submarine and Ohio-class replacement submarine programs, and commercial shipbuilding.
The combat systems segment reported a 3 percent increase in operating profit to $237 million despite a four percent decline in sales to $1.4 billion. Novakovic lauded the “great quarter” by the segment for the strong performance that led to higher operating margins.
Overall operating margins in the quarter were 13.7 percent, 1 percent higher than a year ago. Absent the gain from the Fidelis sale, margins were 13.4 percent. Free cash flow was $511 million.