Top brass at defense contractor General Dynamics, owner of New England subsidiaries Bath Iron Works, and Electric Boat, say they are buoyed by the anticipated reduction in their company’s effective tax rate under the sweeping “Tax Cuts and Jobs Act” pushed into law last month by Republican members of Congress and Pres. Donald Trump.
On an earnings call earlier this week, Chief Financial Officer Jason W. Aiken told analysts the company, based in Falls Church, Virg., will likely see its 2017 full year rate of 28.6 percent drop to 19 percent in 2018.
According to a transcript of the call available online, Chief Executive Officer Phebe N. Novakovic characterized the passage of the tax overhaul as “a happy event.”
“We are in a period right now of growth that needs to be supported by investments and happily and officiously we’ve a tax bill that gives us more free cash flow,” Novakovic told shareholders. “So a happy event.”
Presently, the company’s Maine shipyard, Bath Iron Works, is seeking a multi-year deal that would allow the company to net $60-million in tax credits over 20 years.
General Dynamics’ submarine division, Electric Boat, is simultaneously seeking a $150-million tax package from the state of Connecticut to subsidize infrastructure improvements and employee training to meet demand expected from the U.S. Navy’s plan to build an entirely new fleet of nuclear-armed ballistic missile submarines at a cost of up to $104-billion to taxpayers.
During the earnings call, held Wednesday, Novakovic highlighted an ongoing “public-private partnership” in Connecticut and Rhode Island to subsidize by millions of dollars worker training programs.
Novakovic’s “happy event” comment in reference to the controversial tax overhaul came in response to an analyst’s question regarding how tax changes might alter the company’s capital deployment strategies on share buybacks, and dividends.
“You obviously ended the year with a very strong balance sheet and cash flow?” Robert Stallard, of Vertical Research Partners, said.
Novakovic called the company’s stock repurchases “tactical” and added, “I don’t see a particular change in the strategy.”
Aiken, the company’s top accountant, said General Dynamics spent $1.5-billion dollars to buyback $7.8-million shares in 2017. The defense firm has now spent more than $10.1-billion buying back its own stock since 2014. Share repurchases have accelerated since Novakovic became CEO in 2013.
Critics of share repurchasing say the approach benefits executives and seasoned traders at the expense of workers and average shareholders.
According to Aiken, the company contributed 7.5 times less to its employees’ retirement funds in 2017 than it spent on stock buybacks.
“Moving on to our pension plans,” Aiken said, “we contributed about $200-million.”
Aiken said the company will examine increasing its pension contribution beyond the expected minimum of $300-million in 2018 “in light of the opportunity provided by the recent tax reform.”
Novakovic said revenue for 2017 was up $412-million, or 1.3 percent, when compared to 2016. But, she said, “the most important story” is probably the company’s cash position in the final quarter of 2017.
“Free cash flow from operations was $1.84-billion,” she said. “For the year, we had free cash flow of $3.45-billion.”
General Dynamics’ Marine Systems Group, which includes Bath Iron Works, and Electric Boat, took in $2.1-billion in revenue for the fourth quarter, up $163-million, or 8.6 percent, from the same time a year ago.
Revenues in Combat Systems, Aerospace, and Information Systems and Technology were all up by more than five percent over the 2016 fourth quarter.
“So, all in all,” Novakovic said, “a solid quarter with good performance all-around.”
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