General Dynamics [GD] on Wednesday reported solid financial results in its third quarter with low single digit top and bottom-line growth and strong free cash flow.
Net income rose 3 percent to $860 million, $3.07 earnings per share (EPS), from $834 million ($2.90 EPS) a year ago, topping consensus estimates by 9 cents per share. Segment operating margin dipped 10 basis points to 11.3 percent.
Sales were up 2 percent to $9.6 billion from $9.4 billion, and free cash flow was $1.3 billion.
Results across GD’s operating segments were mixed, with the Marine Systems and Aerospace segments driving the sales growth and the defense and government systems businesses boosting the bottom-line.
The Technologies segment, which includes GD’s Mission Systems and Information Technologies businesses, posted higher operating profit on lower sales on strong operating performance. Mission Systems suffered somewhat during the quarter from the global shortage of computer chips with the impacts continuing into 2022, although the business has “begun to significantly mitigate” the problem, Phebe Novakovic, GD’s chairman and CEO, said on the company’s earnings call.
Supply chain challenges are not “significantly” impacting the rest of GD’s defense businesses, she said.
Given the supply chain drag at Mission Systems, GD is lowering its sales forecast this year for the Technologies segment to $12.6 billion, $400 million below prior guidance, which will lower the company’s overall revenue outlook this year by the same amount, Novakovic said. Improved operating margin in the segment means that the prior earnings guidance remains intact, she said.
GD in July forecast sales of about $39.2 billion and earnings of $11.50 EPS.
Novakovic highlighted cybersecurity as a top priority throughout the federal government and a “significant” business opportunity that GD is “well positioned to support our customers’ needs, particularly as more and more customers move toward a zero-trust model.” There are “10s of billions of dollars in unclassified spending in both the defense and civilian spaces,” she said.
Sales were up 10 percent at Marine Systems with growth balanced across the company’s three shipyards, Novakovic said, adding that work under the construction of the first Columbia-class strategic nuclear missile submarine “remains on cost and schedule.” She also said that the Navy ship repair business was “particularly strong” in the quarter.
Business jet production in the Aerospace segment began accelerating in February and is continuing as demand returns, Novakovic said. She cautioned that as production ramps up, there are operational and supply chain challenges that the company is facing, particularly in 2022.
Still, she said, “On balance, it is a rich problem to have.”
Major aerospace and defense contractors that have already reported third quarter results have all said that supply chain issues have weighed on their businesses to one degree or another due to the ongoing global COVID-19 pandemic. To help combat the pandemic and its ongoing impact on the global economy, the Biden administration has ordered all federal contractors to be vaccinated against COVID.
Novakovic said that company-wide about 75 percent of GD’s employees are fully or partially vaccinated.
“We understand the mandate,” she said.
Backlog at the end of the quarter stood at $88.1 billion, up 8 percent from a year ago. Bookings in the quarter were about 90 percent of sales, driven by strong order activity in Aerospace followed by Technologies, and are 110 percent of sales year-to-date.