Led by its aerospace business, General Dynamics [GD] on Wednesday reported strong fourth quarter earnings on solid sales and expects continued growth in 2020 and the company signaled an improved outlook in cash collections that will improve financial flexibility.
Net income in the quarter increased 12 percent to $1 billion, $3.51 earnings per share (EPS), from $909 million ($3.07 EPS) a year ago, topping consensus estimates by seven cents a share. Sales increased 4 percent to $10.8 billion from $10.4 billion a year ago and segment operating margin increased 50 basis points to 12.3 percent, largely on the back of the company’s commercial aviation business.
GD’s Aerospace segment, which makes Gulfstream business jets and provides business aviation services, reported a handsome 26 percent increase in operating earnings on an 8 percent increase in sales to $2.9 billion due to higher aircraft deliveries. The segment’s operating margin was up 230 basis points to 16.4 percent.
Jason Aiken, GD’s chief financial officer, said on the company’s earnings call that the road ahead for free cash flow is clearing up, largely due to a rebaselining of a light armored vehicle program for Saudi Arabia that is being built by the company’s business unit in Canada. Even though GD has been delivering the vehicles, Saudi payments to the Canadian government had been held up due to a dispute between the two governments. Earlier this month, GD received a $500 million progress payment on the program and will receive another $500 million later this year with regular payments beginning in 2021 and beyond, he said.
In 2020, GD expects to convert between 85 and 90 percent of its net income into free cash flow, up from 57 percent–$2 billion—in 2019, Aiken said. In 2021, free cash flow is expected to exceed net income, in part due to the flow of payments from the Saudi vehicle program but also as capital investments in the Marine Systems segments begin to decline after peaking in 2020 to meet the Navy’s demands for new submarines and other ships and in the Aerospace segment as the company completes preparations for the production of new business jet models.
“With our strong balance sheet and increased certainty around our international cash forecast, we now have a level of financial flexibility that we did not enjoy last year,” Aiken said.
GD Chairman and CEO Phebe Novakovic said that priorities with the improved cash position are dealing with short-term debt and then buying back the company’s stock.
“We intend to utilize it to create value for our shareholders,” Novakovic said. She declined to comment on potential acquisition opportunities in response to an analyst’s question.
In addition to Aerospace, income drivers at the operating level included the Combat Systems and Mission Systems segments. At the top line, Combat Systems and Marine Systems also provided double-digit boosts to bolster sales.
Total backlog increased 28 percent to a record $87 billion versus $67.9 billion a year ago, driven mainly by a $22.2 billion Navy order in December for the Block V Virginia-class submarine program.
For the year, GD reported a 9 percent increase in sales to $39.4 billion from $36.2 billion in 2018, and net income increased 4 percent to $3.5 billion ($11.98 EPS) from $3.3 billion ($11.18 EPS) a year ago. Operating margin declined 50 basis points to 11.8 percent.
In 2020, GD expects sales of just over $40.7 billion, a 4 percent rise from 2019, and earnings between $12.55 and $12.60 EPS. Operating margin is expected to be 11.9 percent.
The revenue forecast excludes sales of pre-owned aircraft, which contributed $292 million to the top line in 2019. GD will only report bottom line impacts from pre-owned aircraft sales, which historically result in break-even profits.