General Dynamics [GD] on Wednesday posted lower net income despite strong sales growth in its second quarter in part due to a decline in operating earnings at its Technologies and Aerospace segments and a combination of other items.
The company’s defense businesses did well overall with sales up 12 percent driven by demand for domestic and international combat vehicles, munitions, work on the Columbia-class ballistic missile nuclear submarine—the first vessel is about 36 percent complete—fleet oilers, and new programs at the Technologies segment.
Overall, GD’s sales increased nearly 11 percent to $10.2 billion from $9.2 billion on gains across each operating segment, including Aerospace, which delivered more business jets than a year ago but fewer than planned due to ongoing supply chain issues.
The Gulfstream business jet business is contending with a “significant backlog of late parts” but aircraft delivery rates are improving and “suppliers are more predictable and are complying with catch-up schedules” which will lead to improved sales and operating margin, Phebe Novakovic, GD’s chairman and CEO, said during the company’s earnings call.
Net income dropped 3 percent to $744 million, $2.70 earnings per share (EPS), from $766 million ($2.75 EPS) a year ago, still topping consensus estimates of $2.56 EPS. Segment operating margins fell 1.1 percent to 9.5 percent.
Operating income was lower due to declines at Technologies and Aerospace. Despite better sales at Technologies, margins dipped on new program starts and a business mix weighted toward lower margin work. In addition to the supply chain challenges, higher research and development spending at the segment also contributed to lower operating profit.
GD’s Combat Systems segment is benefiting from a higher threat level globally. A 16 percent increase in sales to $1.9 billion was driven by increased production at the U.S. and European-based land systems businesses, higher artillery programs, and work to expand artillery production that is currently compressing margin, Novakovic said.
The Marine Systems segment, which also boasted strong sales growth, posted double-digit operating profit despite ongoing supply chain issues. Novakovic said all the company’s shipyards “are now well positioned for slow but steady incremental margin growth over time with fewer perturbations.”
Orders in the quarter were robust, coming in at $11.9 billion, a book-to-bill ratio of 1.2 times sales and led by Combat Systems and Aerospace. Backlog rose to a record $91.4 billion, up 4 percent from $87.6 billion a year ago. Free cash flow in the quarter was $519 million.
For the year, GD left its earnings guidance intact at between $12. 60 and $12.65 EPS. Overall operating income will be lower than expected but share repurchases and non-operating benefits will offset the decline, leaving the outlook intact. Operating margin is pegged to be $10.5 percent, 40 basis points lower than the previous forecast.
Sales are now forecast to be around $42.5 billion, up about $1.2 billion from the prior outlook of between $41.2 billion and $41.3 billion, driven largely by Marine Systems followed by Combat Systems and Technologies. Revenue at Aerospace will be lower than projected due to fewer than expected aircraft deliveries.
Novakovic said the $900 million to $1 billion increase in Marine Systems’ sales outlook is due to accelerating work across the shipyards and is a “leading indicator of improving efficiency.”