Shares dip even as lower taxes lift General Dynamics’ profit

Defense contractor General Dynamics Corp. (GD) posted upbeat first-quarter earnings as an increase in revenue from defense businesses offset a 12% dip in Aerospace revenue. Higher costs and expenses hurt operating earnings, but favorable tax treatment helped in earnings growth. Following the report, the company’s stock opened lower on Wednesday and is now down 4.21%.

With revenue rising 1.3% to $7.54 billion, the company saw a 4.7% increase in net earnings to $799 million. The lower provision for income tax aided in the growth of earnings. Operating earnings tumbled by 3.6% due to higher costs and expenses. Earnings per share grew 6.9% to $2.65. A decline in diluted weighted average shares outstanding too drove EPS higher.

Segment-wise, revenue from Aerospace tumbled by 12% as General Dynamics received lower contract awards during the first quarter of 2018. Combat Systems revenue grew 11.9% driven by higher contract awards from U.S. Army.

Revenue from Information Systems and Technology rose 4.2% helped by more Army and Air Force contracts. Marine Systems revenue increased 5.2% on higher Naval contracts for submarines.

At the end of first-quarter 2018, the company’s total backlog was $62.1 billion, up from $60.4 billion last year. Backlog at Aerospace fell by 4.2% from last year, due to lower-funded backlogs in the segment. Meanwhile, rest of the segments showed an increase in backlogs.

General Dynamics is using 55% of debt to finance its assets relative to the value of shareholders’ equity during the first quarter of 2018. The company is a suitable investment after taking into consideration the debt-to-capital of 35.5%. The company had taken bank loans that are due within one year as seen from an increase in short-term debt and current portion of long-term debt.

The company was able to raise more capital through proceeds from commercial paper during the first quarter compared to last year’s paid-out capital. It incurred wider losses from investments as can be seen from broader cash used by investing activities. General Dynamics spent cash on ongoing and regular business activities after seeing cash used in operating activities of $496 million. Helped by proceeds from commercial paper, cash surged by 99.8%.

The company repurchased 1.2 million of its outstanding shares in the first quarter. Also, in March, the board of directors raised its quarterly dividend to $0.93 per share, representing the 21st consecutive annual dividend increase.