General Dynamics [GD] on Wednesday posted lower earnings and sales in its second quarter on continued weakness in its Aerospace segment and an overall decline in its government and defense businesses due to impacts from the COVID-19 pandemic.
Net income fell 23 percent to $625 million, $2.18 earnings per share (EPS), from $806 million ($2.77 EPS), three pennies above consensus expectations. Segment operating margin slid to 9.1 percent from 11.4 percent.
Sales dipped 3 percent to $9.3 billion from $9.6 billion.
Through the first half of the year, GD said impacts from COVID have gouged $1.2 billion out of the company’s expected sales and $451 million ($1.25 EPS) in operating income, with most of the hits to the Aerospace segment followed by the Information Technology (IT) segment.
There have been direct costs associated with GD’s response to COVID-19 and about $127 million in programmatic costs during the first half of the year, Phebe Novakovic, GD’s chairman and CEO, said at the outset of the company’s earnings call.
GD’s Aerospace segment drove the earnings decline in the second quarter as profits dropped more than 50 percent on charges at its Jet Aviation services and Gulfstream business jet divisions. At Jet Aviation, the charges stemmed from lower sales and severance costs, and Gulfstream was hit by severance costs, a loss on used aircraft, and a delivery mix skewed toward lower margin aircraft, Novakovic said.
Sales at Aerospace were down nearly 8 percent due to continued uncertainties around the economy related to COVID and the inability to deliver some aircraft, Novakovic said.
Despite COVID, Novakovic said that operations at Gulfstream are performing well and operating margin will improve through the second half of 2020 at the business jet manufacturer and the same with sales and margin Jet Aviation.
In GD’s government and defense businesses, the GDIT segment registered top and bottom-line declines as sales were down nearly 13 percent and operating profit fell 46 percent. The IT segment suffered from a $40 million charge in a legacy program in Europe, Novakovic said, adding “We can’t get our people from here to there to do the work required by this contract. This is the most painful programmatic impact from COVID-19 we have experienced.”
Novakovic said the company will “aggressively seek contract relief as we move forward” on the contract in Europe. She also said that GDIT’s “highest margin programs have come to a hard stop because of COVID-19.”
On the good news front at GDIT, Novakovic said the segment’s funded backlog is at a record and that the pipeline of bidding opportunities is “unprecedented” due to the government’s adoption of cloud computing, use of data analytics, enterprise IT integration, and demand for artificial intelligence and cyber security. She also said that free cash flow in the segment exceeded earnings.
Marine Systems was the only segment to increase sales and earnings, with revenue up 6 percent and operating profit nearly 2 percent higher. The modest uptick in earnings were hindered by product mix at the company’s National Steel and Shipbuilding Co. operations in California and a strike at its Bath Iron Works facility in Maine, Novakovic said.
The strike at BIW was “immaterial to our results,” she said, pointing out that the business is the company’s smallest shipyard and generates less than 2 percent of profit.
The Mission Systems segment eked out a 1 percent increase in earnings on good performance despite an 8 percent drop in sales, which was due in part to the recent divestment of a ground-based satellite antenna business. The divestiture will account for $150 million less in sales this year.
The Combat Systems segment posted a percent decline in earnings on a 6 percent increase in sales. The dip in operating profit was mainly due to temporary shutdowns of two manufacturing sites in Spain in response to COVID-19 impacts, Novakovic said.
The plants have resumed production, she said.
Overall sales this year are expected to be around $38.4 billion, down about $750 million to $850 million from the prior outlook mainly to lower revenue from GDIT, followed by Marine and Aerospace and the divestiture of the antenna business, Novakovic said. Operating income is expected to be around $4.2 billion with per share earnings between $11 and $11.10, 30 cents EPS lower than the forecast three months ago, she said.
GD’s total backlog at the end of the second quarter stood at $82.7 billion, down nearly 4 percent from $85.8 billion at the end of the first quarter but up 22 percent from $67.7 billion a year ago. Funded backlog at the end of the quarter stood at $61.2 billion, down 4 percent from $63.8 billion at the end of the first quarter but up 12 percent from $54.4 billion a year ago. Free cash flow in the quarter was a strong $622 million.
Free cash flow for the year is still expected to be between 80 and 85 percent of net income, Jason Aiken, GD’s chief financial officer, said on the call.
GD continues to pay its quarterly dividends but didn’t repurchase any of its stock during the quarter. Novakovic said that given the present uncertainty, “preserving liquidity is the most important thing…And we’ll hold pat for now with respect to that.”
GD has worked to keep its supply chain healthy, the company said. During the quarter, GD advanced more than $1.1 billion in payments to suppliers to help them with liquidity while the company has received about $360 million in accelerated progress payments from its customers, Aiken said.