By Calvin Biesecker
General Dynamics [GD] yesterday posted strong fourth quarter results driven by operating gains at each of its segments.
Net income rose nearly 19 percent to $729 million, $1.91 earnings per share (EPS), from $614 million ($1.57 EPS) a year ago, topping consensus estimates by six cents. GD’s operating margins improved 50 basis points to 12.5 percent. Operating earnings overall were $1.1 billion, a quarterly record. Sales increased 9 percent to $8.6 billion from $7.9 billion a year ago.
The company benefited from earnings and sales gains across its operating segments as well as a lower tax rate due to congressional approval of an extension to the federal research and development tax credit, retroactive for all of 2010.
As with the third quarter, GD’s big earnings driver was its Aerospace segment, which saw operating earnings jump 26 percent to $210 million on a 7 percent gain in sales to $1.3 billion. Segment margins were 16.6 percent, up 250 basis points due to price hikes on large cabin business jets.
Aerospace sales were up on completions for new Gulfstream business jets and higher service volume, Jay Johnson, GD’s chairman and CEO, said on yesterday’s analyst call.
The outlook at Aerospace continues to brighten as orders outpaced deliveries by 50 percent in the quarter, Johnson said. In 2011, Johnson sees Aerospace expanding another 15 to 16 percent in sales with margins in the mid to upper 15 percent range.
Results in the defense businesses were also robust, with two segments, Marine Systems and Information Systems and Technology (IS&T), posting double-digit gains in operating earnings and the third, Combat Systems, up 9 percent.
Marine earnings rose 14 percent to $177 million on a 10 percent increase in sales to $1.7 billion. Johnson attributed the sales growth to work on Virginia-class submarines and nuclear submarine replacement design work, with the Virginia submarine program and commercial ships driving margin improvements.
At IS&T, operating earnings and sales were up 10 percent to $311 million and $2.9 billion, respectively, on higher volume for IT modernization programs for various government programs and better earnings in all the segment’s business groups.
Combat Systems posted $400 million in operating earnings on an 8 percent increase in sales to $2.7 billion, with each group within the segment boosting its top and bottom lines.
Johnson gave initial earnings guidance for 2011 with EPS expected in the range of $7 to $7.10. He didn’t provide sales guidance but did provide an idea of what to expect in some of the segments, with Aerospace leading the way.
Johnson believes that defense budgets will remain flat for the next five years, which means GD will have to focus on execution and cost controls and possibly some portfolio reshaping. He said that the company’s entrenchment in Army and Navy force structure programs will help it as the Pentagon puts resources into existing programs as fewer new efforts begin.
In the defense businesses, Johnson expects Combat Systems to reach about $9 billion in sales, a slight gain from the $8.9 billion in 2010, with operating margins around 14 percent. Marine Systems sales are expected to remain relatively flat this year at around $6.7 billion with margins in the low 9 percent range, which would amount to about a 1 percent dip from 2010.
At IS&T sales are expected to grow 3 to 5 percent in 2010 from $11.6 billion last year with margins in the 10 to 10.5 percent range, similar to 2010.
Backlog at the end of 2010 was $59.6 billion, down about $600 million from 2009. Funded backlog was $43.4 billion, down $2.5 billion from 2009. Free cash flow was a strong $1.3 billion in the quarter and the company repurchased 7.8 million shares of its stock. Johnson said that acquisitions remain a part of the company’s growth strategy going forward.
Overall in 2010, GD’s net income increased 10 percent to $2.6 billion ($6.81 EPS) from $2.4 billion ($6.17 EPS) as sales grew nearly 2 percent to $32.5 billion from $32 billion.