General Dynamics [GD] yesterday said its net income in the third quarter remained level despite a slight dip in sales as the company continues to aggressively manage costs and find performance improvements.
Earnings were hurt by a $13 million environmental bill related to a former business unit versus a $1 million gain a year ago. Net income was $652 million, $1.80 earnings per share (EPS), compared to $650 million ($1.70 EPS) a year ago. Absent the charge, earnings from continuing operations were up nearly 3 percent to $665 million ($1.83 EPS), topping consensus estimates by six cents EPS.
Sales fell 2 percent to $7.9 billion from $8 billion as declines in the Information Systems & Technology (IS&T) and Marine Systems segments more than offset gains at Aerospace and Combat Systems.
Despite the drop in sales, GD’s operating earnings increased due to a 60 basis point boost in margins to 12.7 percent, which the company said was driven by improvement in the IS&T and Marine Systems segments.
The company left its earnings guidance intact for the year at between $7.15 and $7.20 EPS, although Jay Johnson, the company’s chairman and CEO, said to expect earnings to come in at the high end of the range.
Johnson said it is obvious that defense spending will suffer to help address federal fiscal woes and that GD is forecasting a “moderate pace” of decline in the coming years but that continued global threats, election year politics, concerns about the defense industrial base and existing investment outlays will help “mitigate the decline.”
For its part, Johnson said there are steps GD is taking to “mitigate” the pressure on defense spending.
“This includes continuous improvement, restructuring, head count reductions, and various other cost cutting initiatives essential to driving profitability as the top line becomes pressured,” he said. “We are divesting those businesses that are no longer core to our portfolio and identifying areas in our business where acquisitions will shore up our outlook or improve our competitiveness in faster growing market channels.”
At the operating level, segment income was up 3 percent due to increases across all of the company’s segments, led by Aerospace. The segment benefited from higher deliveries of Gulfstream business jets as well as increased service revenue.
The drop in sales at IS&T was driven by less volume in its tactical communications business, particularly due to “prolonged award activity” for rugged and mobile computing equipment, which more than offset gains in information technology services, particularly large infrastructure support projects, Johnson said.
Sales at Marine Systems dipped on lower destroyer sales for the Navy.
Backlog at the end of the quarter stood at $58.5 billion, up $1.4 billion. Free cash flow was just $15 million in the quarter, which Johnson attributed to inventory growth at Aerospace as the company prepares to begin deliveries of the ultra-large cabin G650 business jet in the fourth quarter. Free cash will benefit in the fourth quarter from those aircraft deliveries, he said.