General Dynamics [GD] on Wednesday reported higher sales and earnings in its fourth quarter, although results across its operating segments were mixed.
Net income rose a percent to $1 billion, $3.64 earnings per share (EPS), from $992 million ($3.58 EPS) a year ago, falling short of consensus estimates by 7 cents per share. Sales were strong, up 8 percent to $11.7 billion from $10.9 a year ago.
Overall, in 2023 net income fell 2 percent to $3.3. billion ($12.02 EPS) from $3.4 billion ($12.19 EPS) in 2022 despite a 7 percent increase in sales to a record $42.3 billion from $39.4 billion.
A key driver in the lower earnings in 2023 was a delay in deliveries of the new G700 business jet, which GD had expected to be certified by the Federal Aviation Administration (FAA) during the fourth quarter, an event that would have triggered the delivery of the first 15 aircraft to customers. GD’s Gulfstream division currently expects to deliver those aircraft in the first quarter of 2024, pending FAA certification.
The G700 holdup led to more than $1 billion in fewer revenues and nearly $250 million less in operating earnings in the fourth quarter, Phebe Novakovic, GD’s chairwoman and CEO, said during the company’s earnings call.
Net income for 2023 was also lower due to decline in non-operating earnings and a lower tax provision in 2022, Novakovic said.
GD is expecting a robust 2024, with sales expected to increase about 10 percent to between $46.3 billion to $46.4 billion and per share earnings between $14.35 and $14.45. Operating margin is expected to be 11 percent, up a percent from 2023.
Growth this year will be led by the Aerospace segment on higher business jet deliveries but still fewer than forecast two years ago due to impacts on an Israel-based supplier stemming from Israel’s war against Hama, Novakovic said. Aerospace sales are expected to be around $12 billion, up 40 percent, and operating margin is expected to climb 1.3 percent to 15 percent.
Combat Systems, which generated $8.3 billion in sales in 2023, up 13 percent from 2022, is expected to be up 3 percent in 2024 to $8.5 billion on strong order flow in 2023 and demand signals from Europe, Novakovic said. Operating margin at Combat Systems in 2024 is forecast to increase 50 basis points to 14.4 percent.
In the fourth quarter, growth at Combat Systems was driven by ordnance and tactical systems, and the European Land Systems business due to demand for higher artillery, propellant volume and programs to expand propellant production, Piranha and Eagle wheeled vehicles, bridges, and international tank programs.
Marine Systems, which grew sales nearly 13 percent in 2023 to $12.5 billion, is projected to increase about 2 percent this year to $12.8 billion. Operating margin is expected to be up 60 basis points to 7.6 percent.
Growth at Marine in 2023 was driven by work on the Navy’s Columbia-class submarine, T-AO refueling ships, and service work. Operating income fell nearly 3 percent due to lower estimates to complete work, which Novakovic attributed to delays in supplier material deliveries to the Electric Boat (EB) submarine business, and quality issues with some vendors.
“On the positive side, we are continuing to work with the Navy and the Congress to help further stabilize the supply chain with additional funding for work,” she said. “We are also working with certain suppliers to set up process improvements where we can. EB also needs to continue to improve its productivity to help offset some of the financial impacts from the supply chain.”
The COVID-19 pandemic led to a surge in employee retirements “seasoned workers” across the industrial base, including for submarines, Novakovic said. Combined with labor shortages after the pandemic waned, the retirements and worker shortfall “caused considerable perturbation in the supply chain,” she said.
The labor market is beginning to stabilize, but there will still be a learning curve to come down, she said.
The Technologies segment, which includes the GD Information Technology and Mission Systems groups, reported a 3 percent increase in sales to $12.9 billion and a 2 percent decline in operating income to $1.2 billion in 2023. This year, sales are forecast to increase a percent to $13 billion driven by GDIT, and operating margin is expected to increase 20 basis points to 9.5 percent.
Backlog at the end of 2023 stood at a record $96.3 billion, up nearly 3 percent from $91.1 billion at the end of 2022. Strong orders at Aerospace and Combat System drove an overall book-to-bill ratio of 1.1 times sales in 2023. Free cash flow was a strong $3.8 billion. In 2024, the company expects free cash flow to equal net income.