General Dynamics [GD] on Friday reported mid-single digit increases in its top and bottom lines with positive contributions from each operating segment in its fourth quarter.
GD also took unusual the step of providing somewhat detailed guidance for its business segments and overall outlook over five years, with prospects looking solid. For the period stretching from 2016 to 2020 the compounded annual growth rate in sales will be nearly 6 percent and for operating earnings just over 7 percent, Jason Aiken, GD’s chief financial officer, said on the earnings call.
Most defense companies typically provide guidance for the current year although some firms late in the year will give projections for the next year.
Aiken said the long-term outlook is based on “notionally” upward projections for defense spending as well as executing on the company’s backlog, particularly at the Combat Systems and Marine Systems segments.
Total backlog at the end of 2016 stood at $59.8 billion, down 10 percent from $66.1 billion a year ago. Funded backlog at the end of December was $49.4 billion, down 5 percent from $51.8 billion from a year ago.
Net income in the quarter increased 4 percent to $797 million, $2.58 earnings per share (EPS), from $764 million ($2.40 EPS) a year ago. Excluding a hit from discontinued operations, earnings from continuing operations were up nearly 6 percent to $807 million ($2.62 EPS), topping consensus estimates by 10 cents per share. Operating margin was 13.6 percent, up 30 basis points from a year ago.
GD recorded a $10 million (4 cents EPS) charge in the quarter stemming from an environmental matter for a business it divested in the early 1980s.
Sales increased more than 5 percent to $8.2 billion from $7.8 billion a year ago.
At the segment level Combat Systems led the way for GD, posting 11 percent increases in revenue and operating income, and Aiken said the segment is “poised for quite significant growth” between 2017 and 2020 “as we begin delivering on our backlog.” Total backlog at Combat Systems stands at $17.7 billion, only $597 million of which is unfunded.
At GD’s other segments, sales were up 6 percent at Information Systems and Technology, 4 percent at Aerospace, and 3 percent at Marine Systems. All three segments posted solid single-digit percentage increases in operating earnings.
Overall in 2016, net income was essentially flat at $31.4 billion while net income also held level at $3 billion, although per share earnings rose 7 percent to $9.52 as stock repurchases during the year lowered the overall share count. Operating margin for the year was 13.7 percent, a 40 basis point gain from 2015.
Free cash flow for the year was $1.8 billion.
Beginning Jan. 1, GD adopted new accounting standards that change the way it records revenue on work it does, which in turn impacts earnings. Aiken said sales in 2017 are expected to be $31.4B, up nearly 3 percent after restating 2016 results in accordance with the new standards. The increase will be driven primarily by high single-digit percentage increase at Aerospace and Combat Systems, and a “modest” increase at Information Systems and Technology, he said. Marine Systems will be down nearly 3 percent, he said.
The outlook for operating earnings is $4.2 billion, up by about 11.5 percent against restated 2016 results, with operating margin at 13.3 percent, more than a percent higher than last year, Aiken said
Aiken said that per share earnings in 2017 are expected to be between $9.50 and $9.55, with upside coming down to three variables, better than planned operating performance, changes in the tax rate, and share repurchases. GD plans to use all of its free cash flow this year on dividends and stock buybacks, he said, adding that this repurchases will provide a “boost” to the EPS guidance.