General Dynamics [GD] on Wednesday reported lower net income due to a charge related to the former Navy A-12 stealth bomber program, but the company’s bottom line results topped consensus estimates, excluding the impact from the bomber program, which was killed by the Pentagon 25 years ago.
Net income in the quarter slid 7 percent to $683 million, $2.21 earnings per share (EPS), from $733 million ($2.28 EPS) a year ago, dragged down by an $84 million (27 cents EPS) charge related to A-12 litigation that was settled in 2013.
Terms of the A-12 settlement included different types of consideration to the Navy, including potential reimbursements of shipbuilding costs at GD’s Bath Iron Works shipyard, Jason Aiken, the company’s chief financial officer, said on Wednesday’s earnings call. He said that the actual costs have exceeded the expected costs, which is the reason for the charge.
Excluding the shipbuilding charges, GD’s earnings from continuing operations rose nearly 5 percent to $767 million ($2.48 EPS), beating consensus estimates by 10 cents per share. Segment operating margin improved 90 basis points to 13.8 percent.
At the operating level, the Information Systems and Technology segment drove the higher earnings with strong double-digit jump in income on the strength of higher margins that Phebe Novakovic, GD’s chairman and CEO, attributed to “strong performance” overall.
The Aerospace and Combat Systems segments also posted slight gains in operating income despite declines in sales at the Aerospace segment off nearly 14 percent.
Operating results in the quarter were stronger than GD expected, and combined with a lower tax rate and fewer outstanding shares of the company’s stock led it to increase earnings guidance for this year by a nickel to $9.75 EPS from continuing operations.
GD’s sales in the quarter were down 3 percent to $7.7 billion from $8 billion a year ago. An increase in revenue from the IS&T segment was more than offset by declines at Aerospace, Combat Systems and Marine Systems.
Aiken said that in general if foreign exchange rates had remained stable with a year ago, sales at Combat Systems would have held level.
Aerospace sales suffered from fewer aircraft deliveries but Novakovic said that the third quarter was the strongest order intake in five years for the Gulfstream business jet division, adding that demand remains “nice.” She added that Gulfstream “appears” to be taking market share from its competitors in the business jet market and this trend is expected to continue. The pipeline for business jets is also “stable” and so far fourth quarter activity has also been “good,” she said.
Free cash flow in the quarter was $389 million and total backlog stood at $62 billion, with $51.4 billion funded. A year ago total backlog was $68.7 billion, $53.7 billion of which was funded.