General Dynamics [GD] on Wednesday posted a strong finish to its fiscal year, delivering big gains in earnings and sales in the fourth quarter, aided in part by lower taxes and an acquisition last year.
The company also introduced guidance for 2019 that forecasts top and bottom line growth.
Net income in the quarter soared 43 percent to $909 million, $3.07 earnings per share (EPS), from $636 million ($2.10 EPS), topping consensus estimates by nine cents a share. A charge in the fourth quarter a year ago related to federal tax reform dinged the company’s earnings then but, absent a similar charge this year, a lower tax rate accounted for nearly half of the increase in income.
GD Chairman and CEO Phebe Novakovic said on the company’s earnings call that the per share earnings were higher than analysts’ estimates due to lower than expected taxes and a lower share count.
Operating profit at the company’s five segments was up 16 percent, driven mainly by gains at the Information Technology, Marine Systems and Aerospace segments, helping to further lift net income in the quarter.
Sales increased 25 percent in the quarter to $10.4 billion from $8.3 billion a year ago, driven in large part by the contribution from CSRA, as well as handsome growth in the business jet and aircraft services segment on higher deliveries and favorable product mix, revenue increases at all of the company’s Navy shipbuilding businesses, and legacy growth within the information technology segment.
For all of 2018, sales increased 17 percent to $36.2 billion from $31 billion in 2017 and net income rose 15 percent to $3.3 billion ($11.18 EPS) from $2.9 billion ($9.5 EPS). Operating margin fell 140 basis points to 12.3 percent.
For 2019, sales are expected to be about $38.5 billon, a 6 percent increase over 2017, operating margins of about 11.7 percent, and per share earnings between $11.60 and $11.70, Novakovic said. To beat the forecast, she said the company will have to outperform the operating plan, enjoy a lower than expected tax rate, and reduce the share count.
The company’s priority for deploying capital is paying off its debt it has the flexibility to “respond to changing market conditions,” Jason Aiken, GD’s chief financial officer, said on the call.
Growth this year is expected in all of the company’s segments except GDIT and will be driven by higher business jet deliveries, more shipbuilding work, increased domestic work for military vehicles and munitions, and maritime, cyber security and space-related business in the Mission Systems segment. Gains from the CSRA acquisition, which is part of GDIT, and legacy improvements in the segment will be offset by the loss of about $1 billion in sales from business that was divested last year.
Novakovic said demand is solid for business jets in North America and Western Europe while emerging markets are more cautious.
Total backlog at the end of 2018 stood at $67.9 billion, 7 percent higher than the $63.2 billion at the end of 2017, and funded backlog at year-end stood at $55.8 billion, also 7 percent higher than a year ago when it stood at $52 billion. Foreign currency exchange decreased backlog by $840 million, Aiken said.
Free cash flow in the quarter was $1.8 billion and $2.5 billion for 2018, lighter than GD expected due to delays in receipts from the Canadian organization that contracts with GD for light armored vehicles (LAVs) that are in turn supplied to Saudi Arabia, as well as ongoing strains in Canada’s relationship with the Kingdom. A GD business unit in Canada builds the LAVs.
Aiken said that discussions between Canada “and their customer” on the vehicles has led to payment delays that “significantly impacted the free cash flow we expected last year.” He said it’s a “timing issue” and that GD expects to receive the payments this year.