General Dynamics on Wednesday posted lower earnings and sales in its second quarter on continued weakness in its Aerospace segment and an overall decline in its government and defense businesses due to impacts from the COVID-19 pandemic.
Net income fell 23% to $625 million, $2.18 earnings per share (EPS), from $806 million ($2.77 EPS), three pennies above consensus expectations. Segment operating margin slid to 9.1% from 11.4%.
Sales dipped 3% to $9.3 billion from $9.6 billion.
Through the first half of the year, GD said impacts from COVID have gouged $1.2 billion out of the company’s expected sales and $451 million ($1.25 EPS) in operating income, with most of the hits to the Aerospace segment followed by the Information Technology (IT) segment.
There have been direct costs associated with GD’s response to COVID-19 and about $127 million in programmatic costs during the first half of the year, Phebe Novakovic, GD’s chairman and CEO, said at the outset of the company’s earnings call.
GD’s Aerospace segment drove the earnings decline in the second quarter as profits dropped more than 50% on charges at its Jet Aviation services and Gulfstream business jet divisions. Sales at Aerospace were down nearly 8% due to continued uncertainties around the economy related to COVID and the inability to deliver some aircraft, Novakovic said.
In GD’s government and defense businesses, the GDIT segment registered top and bottom-line declines as sales were down nearly 13% and operating profit fell 46%. The IT segment suffered from a $40 million charge in a legacy program in Europe, Novakovic said, adding “We can’t get our people from here to there to do the work required by this contract. This is the most painful programmatic impact from COVID-19 we have experienced.”
Novakovic said the company will “aggressively seek contract relief as we move forward” on the contract in Europe. She also said that GDIT’s “highest margin programs have come to a hard stop because of COVID-19.”
Marine Systems was the only segment to increase sales and earnings, with revenue up 6% and operating profit nearly 2% higher. The modest uptick in earnings were hindered by product mix at the company’s National Steel and Shipbuilding Co. operations in California and a strike at its Bath Iron Works facility in Maine, Novakovic said.
The strike at BIW was “immaterial to our results,” she said, pointing out that the business is the company’s smallest shipyard and generates less than 2% of profit.
General Dynamics Electric Boat is the Navy’s prime contractor for production of the Columbia-class ballistic missile submarines. The Navy expects to pay about $110 billion for 12 boats, the first of which is scheduled to begin patrol in the 2030s.
General Dynamics’ Mission Systems segment eked out a 1% increase in earnings on good performance despite an 8% drop in sales, which was due in part to the recent divestment of a ground-based satellite antenna business. The divestiture will account for $150 million less in sales this year.
Overall sales this year are expected to be around $38.4 billion, down about $750 million to $850 million from the prior outlook mainly to lower revenue from GDIT, followed by Marine and Aerospace and the divestiture of the antenna business, Novakovic said. Operating income is expected to be around $4.2 billion, with per share earnings between $11 and $11.10 – $0.30 EPS lower than the forecast three months ago, she said.
GD’s total backlog at the end of the second quarter stood at $82.7 billion, down nearly 4% from $85.8 billion at the end of the first quarter but up 22% from $67.7 billion a year ago.
Funded backlog at the end of the quarter stood at $61.2 billion, down 4% from $63.8 billion at the end of the first quarter but up 12% from $54.4 billion a year ago. Free cash flow in the quarter was a strong $622 million.
Free cash flow for the year is still expected to be between 80% and 85% of net income, Jason Aiken, GD’s chief financial officer, said on the call.
This story first appeared in Nuclear Security & Deterrence Monitor affiliate publication Defense Daily.
