General Dynamics [GD] on Wednesday reported flat income on higher sales in its first quarter as higher taxes wiped away bottom line gains at the operating level.
Net income in the quarter was $730 million, $2.64 earnings per share (EPS), level with a year ago although per share results then were $2.61 with the year-over-year gain due to a lower share count. The results topped analysts’ expectations by a nickel.
Operating income was higher at Combat Systems, down at Aerospace, and flat at Marine Systems and Technologies. Segment margin dipped 20 basis points to 9.5 percent.
Sales increased 5 percent to $9.9 billion versus $9.4 billion a year ago driven mainly by a double-digit uptick at Marine Systems due to work on Navy vessels, mainly the Columbia-class nuclear ballistic missile submarine, followed by the
Arleigh Burke-class DDG-51 destroyer, and the T-AO fleet oiler ships.
Sales were also higher at the Combat Systems and Technologies segments with Combat benefiting from work on the Mobile Protected Firepower, Stryker short-range air defense wheeled vehicle program, and programs for Poland and Australia. Sales would have been even higher at Combat Systems except for headwinds stemming from foreign currency exchange rates.
Phebe Novakovic, GD’s chairwoman and CEO, said that orders at Combat systems are at an eight-year high on “strong demand for munitions and international combat vehicles.” There is positive pressure on the segment’s sales and earnings outlook, she said on the company’s earnings call.
Working with the Army and the Defense Department, GD has been upgrading existing facilities, building new ones with more modern equipment, and adding production shifts to increase munitions production and throughput, and plans to do more, she said.
“So, we have been receiving…completely adequate funding to execute all of this and we are quite confident that we will move throughput much quicker and will expedited the delivery of this critical capability to the Army,” Novakovic said.
Supply chain issues weighed somewhat on sales and earnings and appeared to be most pronounced at Aerospace and Marine Systems.
Aerospace, the lone segment to report lower sales, down less than a percent, suffered from supply chain disruptions that led to lower business jet deliveries. GD delivered three fewer business jets than planned, two due to late engine deliveries from a supplier, marking it the first quarter where the company missed an aircraft delivery due to supply chain issues, she said
At Marine Systems, GD took a charge related to the Navy’s Virginia-class submarine related to “cost pressure within our supply chain and efficiency impacts at Electric Boat [shipbuilding division] as a result of late material deliveries,” Novakovic said.
The supply chain issues date back to the COVID-19 pandemic and the impacts of the virus on the workforce at suppliers both large and small, Novakovic said. These issues are beginning to “remedy with the help of the Navy,” which is “very engaged to ensure that we can get that Virginia cadence back on schedule.”
GD expects continued improvement as the Virginia-class program transitions to the Block V submarines “but we’ve got a ways to go there,” she said.
Ultimately, the focus is on Electric Boat, which builds the submarines, she said.
“Electric Boat just has to get better faster to overcome any unexpected additional future supply chain challenges that may hit us,” Novakovic said.
The sales performance at Marine Systems was due in part to “extremely strong throughput” at Electric Boat’s Quonset Point facility in Rhode Island, which does substantial work on the Virginia-class vessels, Novakovic said. This performance was due to “robust hiring” and training of the workforce “so that they hit the ground running” and is a “good bellwether” in terms of continuing to bolster the workforce to meet future production needs, she said.
Free cash flow in the quarter was strong at $1.3 billion. The strong cash flow was aided by Britain’s Ajax armored vehicle program, which the United Kingdom resumed payment for, and progress payments on another large international vehicle program, Jason Aiken, GD’s chief financial officer and chief of the Technologies segment, said on the call. Backlog at the end of March stood at $89.8 billion, up 3 percent from $87.2 billion a year ago.