General Dynamics [GD] on Wednesday posted first quarter sales and earnings that were basically in line with results from a year ago although the bottom line beat analysts’ expectations.
Net income was $717 million, $2.30 earnings per share (EPS), versus $716 million ($2.14 EPS) a year ago. Per share results were up 8 percent on fewer shares outstanding as a result of GD’s stock repurchases.
Excluding a $13 million (4 cents EPS) loss from the company’s former AxleTech business that was sold last year, earnings from continuing operations rose 2 percent to $730 million ($2.34 EPS), topping consensus estimates by 18 cents per share.
GD invested more than $1 billion in buying back its stock, which helped reduce the share count and buttress the improved per share results.
At the segment level, operating income rose nearly 3 percent to almost $1.1 billion driven by a double-digit gain at Information Systems and Technology, a solid rise at Combat Systems, and a slight increase at Marine Systems. Profits fell 5 percent at the Aerospace segment.
The company’s operating margins rallied with the higher income, tallying 13.6 percent versus 13.2 percent a year ago.
Sales in the quarter fell less than a percent to $7.7 billion from $7.8 billion a year ago. A 10 percent increase at Marine Systems was more than offset by single-digit declines at the other segments.
As with last year, the strong U.S. dollar continues to impact GD’s sales as it relates to the company’s international business. Jason Aiken, the company’s chief financial officer, said on the analyst call the decline sales at Combat Systems in the quarter would have been lower if exchange rates had remained stable and overall sales for GD would have been up slightly.
Results in the quarter beat the company’s prior guidance due to stronger than expected operating performance, which more than offset a higher than expected tax rate, Phebe Novakovic, GD’s chairman and CEO, said on the analyst call.
As a practice GD doesn’t update its annual guidance until the mid-point of the year but Novakovic pointed to potential upside to the prior guidance given first quarter operating expectations and potential orders in the second half of the year from the Army’s potential $12.7 billion award to three companies in February for the Manpack portion of the Joint Tactical Radio System (JTRS) program. Harris [HRS] and Rockwell Collins [COL] were also selected to compete for orders under the handheld portion of JTRS.
Novakovic said GD will deliver its next-generation radio hardware in the second quarter for evaluation with full-rate production to follow, “conceivably this quarter or next.” She said a competitive advantage for GD is that its radio is the only one with a proven capability to operate via the Mobile User Objective System tactical satellite communications system.
Regarding GD’s selection by the Navy last month to take the lead role in design and construction of a replacement for the Ohio-class nuclear missile submarine program, Novakovic said the company for the past three years has been increasing its revenue on the engineering and design portion of the program. She said this work will remain stable going forward until it begins to go down later this decade leading to production in the 2020 to 2021 timeframe.
“So that program will really begin to ramp up, really in the ‘20s and go on for some time,” Novakovic said. The eventual margin profile for the program will depend on the contract structure and that hasn’t been determined, she said.
GD’s Electric Boat division is the prime contractor on the Ohio replacement submarine with an 80 percent work share and Huntington Ingalls Shipbuilding’s [HII] Newport News Shipbuilding division is the main subcontractor with a 20 percent share.
Free cash flow in the quarter was $374 million and the company. Total backlog at the end of the quarter stood at $64.7 billion, with $54.7 billion funded, versus total backlog of $66.1 billion at the end of 2015, $51.8 billion of which was funded.