General Dynamics [GD] on Wednesday posted lower net income in the second quarter due to a charge related to the planned sale of an axle business it acquired in 2009.
Excluding the charge related to AxleTech, GD’s earnings from continuing operations were up nearly a percent to $646 million, $1.88 earnings per share (EPS), beating analysts’ expectations by 11 cents EPS. The results were driven by lower taxes while per share earnings benefited from a lower stock count due to share repurchases, which totaled $1.2 billion in the quarter.
At the segment level, operating income fell a percent to $949 million on declines at the Information Systems & Technology (IS&T), Marine Systems, and Aerospace Segments. Despite the decline of segment profits, segment operating margins ticked up 40 basis points to 12.7 percent on improved performance.
Including the axle business, which is being reported as a discontinued operation, net income fell 15 percent to $541 million ($1.58 EPS) from $640 million ($1.81 EPS). Free cash flow was $791 million.
Sales in the quarter slipped 5 percent to $7.5 billion from $7.8 billion a year ago, driven down by a double-digit decline at IS&T, and also by lower revenue in the Aerospace and Combat Systems segments.
Sales at the AxleTech business, which provides axles and other parts to heavy tactical vehicles, declined “precipitously” in the past year after making the company “a lot of money” in previous years, Phebe Novakovic, GD’s chairman and CEO, said on an earnings call Wednesday. She also said demand at the business unit has shifted away from defense in favor of commercial customers and no longer fits in the company’s portfolio. GD expects to divest the business by year-end.
GD raised its earnings guidance for the year to between $7.40 and $7.45 EPS due to a slightly improved margin outlook, lower taxes, and a lower share count, Novakovic. Previous earnings guidance was between $7.05 and $7.10 EPS. Sales are expected to be around $30.2 billion, which is in line with the $30 billion forecast at the start of the year.
At the segment level, the improved earnings outlook is being generated by each of the company’s segments.
Novakovic said that the company’s backlog, which is as it its highest in four years, underpins the outlook, adding that if Congress can’t agree on a defense budget this fall and the federal government is funded by a continuing resolution, the guidance remains solid.
The company’s total backlog at the end of the second quarter stood at $71.1 billion, with $50.7 billion funded, a 27 percent improvement from the end of the first quarter. The increase in backlog was bolstered by a number of significant orders, including a $17.8 billion contract with the Navy for the construction of 10
Virginia-class submarines.
The backlog is a “bedrock of growth” for the company, Novakovic said.