General Dynamics [GD] on Wednesday reported higher second quarter sales on strong gains in four of its five operating segments and earnings were also up on lower taxes and other non-operating benefits.
Net income increased 3 percent to $806 million, $2.77 earnings per share (EPS), from $786 million ($2.62 EPS) a year ago, topping analysts’ expectations by 9 cents a share.
Overall segment profits were flat as gains in the Mission Systems, Combat System and Marine Systems segments were offset by declines in Aerospace and Information Technology. Segment operating margin dipped 40 basis points to 11.4 percent.
Sales increased 4 percent to $9.6 billion from $9.2 billion due to increases at Aerospace, Combat Systems, Mission Systems and Marine Systems. Increased business jet deliveries, increased production for Army M1 Abrams tanks, growth in munitions and armaments, space, intelligence, cyber systems, and shipbuilding work drove the topline gains.
Combat Systems is in good position for continued growth with Army demand for upgraded platforms, particularly for Abrams and the Stryker wheeled vehicle, Phebe Novakovic, GD’s chairman and CEO, said on a call with analysts.
Sales at GD’s IT segment, which combines the company’s legacy IT operations with the former CSRA International that was acquired in April 2018, fell largely due to a number of divestitures last year. These divestitures account for about $1 billion in annual sales, Jason Aiken, the company’s chief financial officer, said on the call.
Excluding the divestitures and an acquisition in the Aerospace segment, organic sales topped 4 percent, Novakovic said.
For 2019, GD now expects sales of $39.2 billion versus the prior guidance of around $38.5 billion, operating earnings of about $4.6 billion, she said. Driving the better than expected sales are growth in IT, Mission Systems, Aerospace and Combat Systems. Per share results are now expected to between $11.85 and $11.90 against the prior outlook of $11.60 to $11.70.
The two-year budget deal reached between the White House and House leadership to lift potential federal budget caps is “very good news” as it “looks like we’ve got some clarity in our political landscape at the moment,” Novakovic said.
Responding to a question from Alembic Global Advisors aerospace and defense analyst Pete Skibitski about the affordability of the Navy’s Columbia-class ballistic missile submarine and if that vessel might crowd out other Navy spending if budgets flatten, Novakovic said the new submarine is a “national priority.”
There is “no doubt” about funding Columbia, she said, noting it can be done in various ways, including possibly creating a special account just like was done in the 1980s for current ballistic missile Ohio-class submarines. She added that there is bipartisan “consensus in Washington” to recapitalize the Navy’s ships, including submarines.
Backlog at the end of the quarter stood at $67.7 billion, up from $66.3 billion a year ago. Free cash flow was $110 million. GD continues to experience payment delays from the Canadian organization that contracts with the company for light armored vehicles that are in turn supplied to Saudi Arabia.
Aiken said the payment delays remain a timing item and “considerable funding” from the customer is expected in August and GD expects to resolve the balance of funding it is owed by the end of 2019.