Buoyed by all of its operating segments, General Dynamics [GD] on Wednesday reported strong fourth quarter top and bottom lines to finish 2017 and the company said a new tax bill that went into effect this year will bolster its cash generation.
Net income jumped 12 percent to $636 million, $2.10 earnings per share (EPS), from $570 million ($1.85 EPS) a year ago, despite a $119 million (40 cents EPS) one-time non-cash hit to earnings stemming from a tax reform bill signed by President Donald Trump in December. Excluding the impact to earnings from the tax legislation, net income topped consensus estimates of $2.38 EPS by 12 cents per share.
The Tax Cut and Jobs Act lowers corporate income taxes to 21 percent from 35 percent beginning in 2018 but the new law requires related adjustments for deferred tax assets and liabilities to be made in 2017, which is the reason for the tax provision in the fourth quarter. GD said it expects its effective tax rate to be 19 percent this year versus 28.6 percent in 2017.
Phebe Novakovic, GD’s chairman and CEO, on the company’s earnings call called the tax cut “a happy event,” adding that it “gives us more free cash flow,” which the company will put toward investing in certain of its businesses “where we believe that we can get a good return. We’re in a period right now of growth that needs to be supported by investments.”
Novakovic said over the next few years GD will make $1.7 billion in capital investments in its Electric Boat nuclear submarine yardd in Connecticut and Rhode Island in response to expected increases in production on the Block V Virginia-class attack submarine and the Columbia-class ballistic missile submarine. The company is also increasing its internal training efforts for skilled workers at its submarine yard.
In addition to the planned capital expenditures at Electric Boat, GD is investing more than $200 million in capital investments at its Maine-based Bath Iron Works and San Diego-based NASSCO shipyards to meet increased Navy demand for destroyers and auxiliary ships, she said.
“Suffice it to say, we are poised to support our Navy customer as they increase the size of the fleet,” Novakovic said.
Jason Aiken, GD’s chief financial officer, said on the call that tax reform may allow the company to fund its pension plans beyond current expectations in 2018. Novakovic said GD will continue to return cash to shareholders through dividends and share repurchases, and will be on the lookout for potential acquisitions.
The company’s earnings were founded on strong operating income at all four operating segments, with Marine Systems nearly quadrupling its bottom line to $167 million. A year ago the shipbuilding segment’s results were hindered by a charge at Bath related to the restart of the Navy’s DDG-51 destroyer program.
GD’s other three segments all posted double-digit percentage gains in operating income in the quarter.
Overall operating margin in the quarter was 12.5 percent, up 2.5 percent from a year ago.
Sales in the quarter increased 8 percent to $8.3 billion from $7.7 billion a year ago, driven by a 10 percent gain at the Information Systems and Technology segment, 9 percent pickups at Aerospace and Marine Systems, and a 5 percent increase at Combat Systems.
For 2017, sales inched up a percent to $31 billion from $30.6 billion in 2016, and net income leapt 13 percent to $2.9 billion ($9.56 EPS) from $2.6 billion ($8.29 EPS) a year ago. Operating margin was 13.5 percent, up 1.3 percent from 2016.
Free cash flow in the quarter was $1.8 billion and for the year was $3.5 billion. Backlog at the end of 2017 stood at $63.2 billion, of which $52 billion was funded, versus backlog a year ago of $62.2 billion, of which $51.8 billion was funded.
The guidance provides hedges for an extended continuing resolution, Novakovic said. The federal government, except for a two-plus day period this month when there was no budget, has been operating under a continuing resolution since the start of the fiscal year in October.
Novakovic provided guidance for 2018 and an update to the company’s general five-year outlook. Sales this year are expected to be between $32.4 billion and $32.5 billion, operating earnings of $4.3 billion, 13.1 percent operating margin, and earnings between $10.90 and $11 EPS. GD is forecasting sales growth in all of its segments and earnings growth in all but the Aerospace segment.
Looking out through 2021, Novakovic projects compound annual growth rates in sales between 5-plus and 7-plus percent depending on the segment, all of which are also expected to post mid-single digit earning growth rates each year.