General Dynamics [GD] on Wednesday reported a solid gain in sales in its third quarter due to strength across its defense segments but net income fell on lower operating earnings.
Net income in the quarter was down 7 percent to $836 million, $3.04 earnings per share (EPS), from $902 million ($3.26 EPS) a year ago, still topping consensus estimates by 13 cents per share. Sales increased 6 percent to $10.6 billion from $10 billion a year ago.
At the operating level, all three defense segments contributed to the top-line gains led by Combat Systems, which posted a 24 percent increase in revenue, largely due to growth at the Ordnance and Tactical Systems unit—up in part on contracts to increase artillery production capacity and actual increases in production–and European Land Systems, which had strong sales of vehicles to international customers. Combat Systems also benefited from a ramp up in the Army M10 armored vehicle program.
Work to increase artillery production capacity will depress margins initially but improve over time as production increases, Jason Aiken, GD’s chief financial officer, said during the company’s earnings call. Artillery production has already “accelerated…faster than planned,” he said.
U.S. support for Ukraine in that country’s war against Russia has been the key driver in expanding artillery production and Aiken said that Israel’s war against Hamas will further boost demand.
The sales forecast at Combat Systems this year was flat to down but so far, the business is up 15 percent versus the first nine months of 2022 and “we don’t see that demand signal slowing down,” Aiken said.
The Marine and Technologies segments reported 8 percent higher revenue with the shipbuilding business led by construction and engineering work on the Navy’s Columbia-class nuclear ballistic missile submarine program and increases at all the Information Technology (IT) and Mission Systems business units within Technologies. Construction of the first Columbia-class submarine is more than 40 percent complete, Aiken said.
The defense and federal civilian portfolios at GDIT were up in the quarter, he said, as “our technology accelerator investments in capabilities like zero trust, artificial intelligence, digital engineering, and 5G are really resonating with customers and driving increased demand.”
Mission Systems gained on work in cyber and naval platforms although the supply chain remains fragile, which for now is “the new normal,” Aiken said. This will aid in making future results more “predictable,” he said.
Operating earnings were higher at the defense segments driven by low double-digit percentage increases at Combat Systems and Technologies, more than offsetting a decline at Marine Systems. A year ago, the shipbuilding business benefitted from favorable adjustments, making the quarter over quarter comparison more challenging, Aiken said.
The Electric Boat business unit continues to suffer from late deliveries from suppliers, leading to “out of station work and internal scheduling disruptions,” Aiken said. The unit is improving productivity and “throughput but not fast enough to offset the costs of late material,” he said. Margins in the business should improve steadily over time, he added.
Sales at the Aerospace segment fell 13 percent on fewer business jet deliveries due to supply chain constraints, partially offset by higher service revenue. Operating profit in the segment was also down on the revenue decline.
Overall, GD’s segment operating margin dipped a percent to 10 percent in the quarter.
The outlook for earnings in 2023 is unchanged at $12.65 EPS, Aiken said.
Backlog at the end of the quarter stood at a record $95.6 billion, up 5 percent from the end of 2022, driven by strong orders that were 1.4 times sales. Free cash flow was a stout $1.1 billion and the company still expects free cash flow to exceed net income for the year.