General Dynamics [GD] on Wednesday reported higher earnings in the second quarter on the strength of improved operating income at all four business segments although sales dipped slightly on declines at the business jet and information technology businesses.
Based on the earnings results so far this year, GD raised its guidance for the year by 20 cents earnings per share (EPS) to between $9.70 and $9.75 EPS.
Net income in the quarter rose 5 percent to $749 million ($2.45 EPS) from $714 million ($2.30 EPS), nipping consensus estimates by two pennies per share. Sales fell a percent to just under $7.7 billion from just over $7.7 billion a year ago.
At the operating level, all four segments helped drive the higher earnings, led by Combat Systems, with GD’s platforms, ordnance and ammunition businesses in the United States all performing well, Phebe Novakovic, the company’s chairman and CEO, said on the earnings call.
At GD’s shipbuilding and repair businesses, Novakovic production on the Virginia-class nuclear attack submarines and engineering on the Columbia-class ballistic missile nuclear submarines “continue to perform nicely,” adding later that the design work on the Columbia program is “going extremely well” and holding schedule. She also said that most of the challenges related to restarting production of Arleigh Burke-class DDG-51 destroyers are “largely behind us” and that there has been an “uptick” in demand for ship repair work.
Operating margin was up 60 basis points to 13.8 percent.
On the sales front, declines at the Aerospace, and Information Systems and Technology (IS&T) segments more than outweighed increases at Combat and Marine Systems.
Novakovic broke out the parts that make up the 20 cent EPS increase in the earnings outlook, with nine to 10 cents due to a lower share count, five to six cents from a lower than expected tax rate, and operations adding a nickel.
For the year, sales are expected to be around $31 billion, somewhat lower than previously expected, on a drop in the outlook at Aerospace and IS&T. Operating margin is expected to be between 13.4 percent and 13.5 percent. In 2016 sales were $31.4 billion.
Free cash flow in the quarter was $386 million. For the year, free cash flow is expected to roughly equal net income.
Novakovic said the outlook for defense spending is positive but cautioned that there are concerns about the immediate term.
“There’s clear intent in the [Trump] administration and in parts of the Congress for increased defense spending,” she said. “We believe this intent will manifest in some level of increased defense spending in the procurement and R&D account. The question is how much and when?”
The concerns relate to Congress completing its work on a defense budget for FY ’18 and slowness in getting senior defense leaders appointed and confirmed, Novakovic said, adding that the processing of contracts and the obligation of contract funding is going slower than expected due to the few political appointees at the Defense Department. She is still confident in the direction of defense spending.
Total backlog at the end of the second quarter stood at $58.6 billion, down from $65 billion a year ago.