Driven by higher operating profits across most of its segments and lower taxes, General Dynamics [GD] on Wednesday posted higher net earnings and sales in its third quarter and raised its earnings guidance for 2015.
Net income rose 5 percent to $733 million, $2.28 earnings per share (EPS), from $696 million ($2.06 EPS) a year ago, beating consensus estimates by 15 cents per share. A lower tax rate added 5 cents EPS in the quarter. Sales increased 3 percent to $8 billion from $7.8 billion a year ago.
The company’s operating results were better than expected and when combined with a lower than planned tax rate and a lower share count due to stock repurchases, GD said it is increasing its earnings guidance for 2015 by 20 cents to between $8.90 and $9 EPS.
At the segment level the bottom line gains were helped by continued strong performance across the board at the company’s Information Systems and Technology (IS&T) segment, record sales at the Marine Systems segment despite lower operating margin, and sales and margin expansion in the Aerospace segment.
Phebe Novakovic, GD’s chairman and CEO, said on an analyst call that IS&T’s performance has been marked by a lower cost structure, which has led to businesses in the segment winning “more than their fair share” of new work with the bookings rate so far this year level with sales.
The Marine Systems segment recorded a one-time charge in its commercial shipbuilding operations related to a bearing issue in a drive-shaft but the problem is in the “rear view mirror,” Novakovic said.
Marine Systems posted a 15 percent increase in sales to $2.1 billion and combined with a 2 percent gain in sales at Aerospace to a record $2.3 billion led GD to a higher top line in the quarter. The sales increase at Marine Systems was driven by construction, repair and engineering work on submarine programs and, to a lesser extent, commercial shipbuilding work, Novakovic said.
GD’s Combat Systems segment posted lower sales and operating earnings as margins declined. Jason Aiken, GD’s chief financial officer, said foreign exchange rate volatility is affecting the company more than in the past and more so in Combat Systems where a good chunk of its business is based in other countries. He said if exchange rates of the dollar with the Euro and the Canadian Dollar had held steady with 2014 levels, Combat Systems sales through the first three quarters of 2015 would be up 8 percent instead of being flat.
“As Combat Systems shifts away from a heavy reliance on U.S. military sales to an increasing level of international activity, we expect foreign currency fluctuations to continue to be a part of the group’s story,” Aiken said.
GD didn’t provide guidance for 2016 but Novakovic said the budget deal worked out between the Obama administration and retiring House Speaker Rep. John Boehner (R-Ohio) “would be very welcome news from a national security perspective and certainly for us. Our programs are fully funded in the president’s request and as we understand in the proposed budget agreement.”
GD continues to favor share repurchases and dividends over acquisitions for its cash deployment, Novakovic said. She said there are no “interesting” properties on the market that would be accretive to the company.
Free cash flow in the quarter was $652 million and total backlog at the end of the quarter stood at $68.7 billion, down from $74.4 billion a year ago. Funded backlog stood at $53.7 billion versus $54.5 billion a year ago.