General Dynamics [GD] on Wednesday posted increased sales and earnings in its third quarter due to its recent acquisition of CSRA Inc. and higher revenue and income at its operating segments.
Sales increased 20 percent to $9.1 billion from $7.6 billion a year ago, with organic revenue up nearly 5 percent and the CSRA deal accounting for the remainder. GD completed its $9.7 billion acquisition of CSRA in April. All four of GD’s operating segments contributed to the organic growth.
Net income increased 11 percent to $851 million, $2.85 earnings per share (EPS), from $764 million ($2.52 EPS). Excluding a $13 million loss related to the sale of an engineering services business unit to CACI International [CACI] in August to avoid organizational conflicts of interest, per share earnings from continuing operations were $2.89, which topped consensus estimates by 13 cents.
The earnings increase was driven by higher segment operating income as gains at Information Technology and Mission Systems more than offset declines at Aerospace and Marine Systems and lower taxes, which more than offset higher interest expenses related to the CSRA deal.
The company’s operating margin declined 1.5 percent to 12.5 percent largely due to amortization expense related to the CSRA deal. GD Chairman and CEO Phebe Novakovic said on the company’s analyst call that CSRA’s contribution to the bottom line was “modestly accretive,” adding a nickel per share so far this year, excluding integration costs, which she said is “quite remarkable” six months after an acquisition. She said the integration plan “continues to deliver early results.”
Earlier this month, GD also sold its federal public call center business to government services provider MAXIMUS [MMS] for $400 million in cash. Novakovic said the divestiture is immaterial to GD’s results this year.
The citizen engagement centers, with were part of GD’s Information Technology segment, had sales of $670 million for the one-year period that ended in June, according to MAXIMUS. Novakovic said the divestiture shifts GD away from public facing markets and keeps its focus on its business to business model.
Total backlog at the end of the quarter stood at $69.5 billion, up $3.2 billion or about 5 percent from the second quarter, and $5.6 billion higher than a year ago. The increased backlog was driven by order flow at Marine Systems, IT and Mission Systems, Novakovic said. Funded backlog stood at $54.4 billion, down a billion dollars from the second quarter.
Novakovic said that GD’s book-to-bill ratio in the quarter was 1.4 times sales, which means the company tallied roughly $12.7 billion in orders.
In the fourth quarter, Novakovic said sales would be greater than $10 billion, which puts overall sales in the lower $36 billion range, and taxes would be higher than expected. With better overall performance and lower taxes than expected for the year, GD raised its earnings guidance by a dime to between $11.10 and $11.15 EPS, she said.
GD will provide guidance for 2019 in January when it reports fourth quarter results, but Novakovic indicated the outlook is healthy.
“The CSRA acquisition is ahead of schedule,” she said. “The U.S. Army is recapitalizing and the Marine group is steady as she goes. And Mission Systems is performing beautifully. And finally, our backlog is large and growing, which puts us in very good stead for next year.”
Asked by Vertical Research Partners analyst Robert Stallard about GD’s backlog exposure to deals with Saudi Arabia, Novakovic said she couldn’t quantify it but that the largest contract the company has with the Kingdom is through its business in Canada and that work on the light armored vehicle continues on schedule.