By Calvin Biesecker
General Dynamics [GD] topped a strong year with record quarterly income, sales and free cash flow, driven by exceptional results in both its military vehicle and business jet segments, the company reported yesterday.
The strength in Combat Systems was widespread, including domestic and international military vehicle programs, ammunition, ordnance and advanced technology products, Nicholas Chabraja, GD’s chairman and CEO, said during yesterday’s earnings call.
Combat Systems’ operating profits were up 67 percent to $323 million in the fourth quarter on a 47 percent sales spike to $2.6 billion, with margins up 1.5 percent to 12.2 percent. In 2008 GD expects the segment to increase sales another 9 to 10 percent while improving margins 30 to 50 basis points.
Growth in Combat Systems this year again is expected to be across the board. Chabraja said the Mine Resistant Ambush Protected vehicle program, which boasted about $500 million in sales last year and is expected to garner about $800 million for the company this year, is planned to bring in no sales in 2009. If so, he said Combat Systems growth will continue to be made up by gains across the board, including international sales, particularly of the Light Armored Vehicle to Saudi Arabia beginning in 2009. Chabraja predicted 4 percent growth for the segment in 2009.
GD’s Aerospace segment, which produces Gulfstream business jets, also posted a strong quarter and expects a rosy 2008. Operating profits soared 26 percent to $212 million, driven by a combination of price increases and productivity gains, while sales jumped 17 percent to $1.2 billion.
Chabraja expects Aerospace sales to climb another 13 to 15 percent this year with continued increases in profits due largely to price increases for aircraft. He said the learning curve at Gulfstream, which has been helping to drive quarter after quarter gains in profits, will begin to flatten. He suggested that any upside to guidance here would likely come from used aircraft sales and service work while still holding out the possibility for business process improvements.
Despite concerns of a slowing U.S. and global economy, Chabraja said none of the company’s Gulfstream customers has canceled an order or asked to delay one.
The shipbuilding segment, which Chabraja said will soon be the company’s growth engine, posted a 20 percent increase in profits to $101 million on a scant 3 percent rise in sales to $1.2 billion. Profits rose on a 120 basis point improvement in margins to 8.3 percent.
In 2008 Marine sales are expected to rise 3 to 4 percent with margins improving 10 to 20 basis points. Chabraja said that beginning in 2009 and continuing through 2011 Marine is expected to be the strongest growing segment for GD, with over 9 percent growth forecast for next year. Growth will be driven by the commercial tanker business, with the first new vessel to be delivered early next year, submarines and Navy T-AKE supply ships.
In 2007 Marine had $5 billion in sales and is expected to grow above $6.5 billion in 2010 and reach nearly $7.5 billion in 2011, Chabraja said.
The Information Systems and Technology (IS&T) segment, GD’s largest, trailed the other operating groups by quite a distance in the quarter, as profits declined 5 percent to $254 million and sales dipped 2 percent to $2.4 billion. Sales fell due in large part to the fall off in revenues on the United Kingdom’s Bowman defense communications system. For the year IS&T topped $1 billion in profits, the first time ever one of GD’s segments broke that mark. Chabraja said that Combat Systems should also top $1 billion in profits this year with Aerospace not far behind.
In 2008 Chabraja expects IS&T to achieve 5 to 6 percent organic growth, which is slightly below total growth in the segment in 2007. He expects continued pressure on margins with operating earnings increasing 3 to 5 percent. Growth will be led by the C4 Systems sector and IT services, which is a relatively low margin business.
Overall net income in the fourth quarter was $579 million, $1.42 earnings per share (EPS), compared to $408 million ($1.01 EPS) a year ago, a 42 percent increase. Results nipped consensus expectations by a penny. Last year’s results were hindered by charges related to the sale of GD’s former coal mining business, which cut $55 million from profits. Sales in the fourth quarter were up 15 percent to $7.5 billion compared to $6.5 billion a year ago. Free cash flow was $891 million.
For 2007 GD posted a 12 percent increase in net income to $2.1 billion ($5.08 EPS) from $1.9 billion ($4.56 EPS) on a 13 percent increase in sales to $27.2 billion versus $24.1 billion a year ago. Free cash flow was $2.5 billion for the year and backlog at year end was $46.8 billion.
For 2008 earnings are expected to be between $5.55 and $5.65 EPS.