Led by its Aerospace segment, General Dynamics [GD] on Wednesday posted a solid first quarter financial results with a modest increase in net income despite a slight decline in sales.
Net income increased 4 percent to $595 million, $1.71 earnings per share (EPS), from $571 million ($1.62 EPS), topping analysts’ expectations by seven cents. Earnings benefited from a lower tax rate and higher margins, which increased 50 basis points to 11.9 percent due to reduced lower operating expenses.
“This is very strong operating leverage,” Phebe Novakovic, GD’s chairman and CEO, said on the company’s earnings call.
Per share earnings were up nearly 6 percent, driven higher operating earnings, the lower tax rate and a reduced share count as GD repurchased over 14 million of its shares in the opening quarter.
GD’s Aerospace segment, which includes the Gulfstream business jet and the Jet Aviation business-aviation services divisions, drove the higher earnings, posting a 30 percent gain to $404 million. Novakovic credited product mix and aircraft completions at Gulfstream along with continued profitability improvements at Jet Aviation for the gain. The company’s Marine Systems segment also reported a profit, up over 4 percent to $166 million, with all of the company’s shipyards performing well, she said.
The profit gains at Aerospace and Marine Systems were partially offset by declines at Combat Systems, which was hit by a $29 billion charge related to a consolidation of operations in Europe, and to a lesser degree Information Systems and Technology. Combat Systems’ profit fell 37 percent to $136 million while IS&T profit dipped a percent to $183 million.
Novakovic pointed out that the “big story” in Combat Systems was the company’s $10 billion award from the Canadian government to provide military and commercial vehicles and related support with the potential for another $3 billion for more vehicles and support to an international customer. She said all the businesses within Combat System grew backlog, adding that sales, margins and earnings in the segment should improve throughout the year.
GD’s sales in the quarter dipped a percent to $7.3 billion from $7.4 billion.
Sales at the Aerospace segment were strong, up nearly 20 percent to $2.1 billion on higher business jet deliveries and gains in its aviation services, but not enough to overcome declines at the other segments. Combat Systems’ sales fell 15 percent to $1.3 billion while IS&T was down 7 percent to $2.3 billion and Marine slipped almost 2 percent to $1.6 billion.
Based on the company’s strong operating performance in the quarter and the reduced share count, GD raised its EPS guidance for the year by a quarter to between $7.05 and $7.10. Novakovic said it’s too early to provide clarity on the various puts and takes by segment but plans to during the second quarter earnings call.
The company’s funded backlog at the end of the quarter stood at $48.3 billion, the highest level in the past three years, with total backlog at $56 billion, a 20 percent increase from December. Free cash flow was $341 million and Novakovic said the company’s plan is to continue to deploy most, if not all, if its free cash throughout the year to shareholders through share repurchases and dividends.