General Dynamics’ [GD] yesterday reported that its fourth quarter earnings fell 17 percent stemming from a hefty charge at its business that provides custom interiors to business jets.

After a management change at the Switzerland-based Jet Aviation business in mid-2011 due to lingering production issues, closer scrutiny of the division led to a greater understanding of the challenges there, which resulted in the charge, Jay Johnson, GD’s chairman and CEO, said on yesterday’s earnings call.

The $189 million charge, which included $111 million in non-cash impairment of an intangible asset and $78 million in contract losses, led to the overall drop in quarterly net income to $603 million, 168 earnings per share (EPS), from $789 million ($1.91 EPS) a year ago. Analysts had projected $1.99 EPS. Free cash flow was $1.8 billion.

Johnson said the rest of GD’s business jet services business is doing well with the service business up 15 percent overall for 2011.

Despite the charge and lower than expected earnings, analysts said the quarter was otherwise solid. The company’s “core operations remain strong,” Bank of America’s aerospace and defense analyst Ronald Epstein wrote in a note to clients before yesterday’s earnings call.

The other component to GD’s Aerospace segment, business jet maker Gulfstream, had a strong quarter as it began deliveries of the first 12 G650 production aircraft to the final manufacturing phase, which drove segment revenues up 47 percent to $1.9 billion. However, the performance at Gulfstream wasn’t enough to offset Jet Aviation’s troubles as Aerospace operating income tumbled over 65 percent to $73 million.

Orders remain strong at Gulfstream, dominated by demand for large cabin aircraft, with international customers accounting for 55 percent of the book in the quarter and customers in North America the remainder, Johnson said.

Operating earnings were also down 3 percent to $388 million at GD’s Combat Systems business while Marine Systems posted a 7 percent gain to $190 million and Information Systems and Technology (IS&T) a 1 percent increase to $315 million. Operating margins increased at each of the defense segments.

GD’s fourth quarter sales were up 6 percent to $9.1 billion from $8.6 billion a year ago, driven mainly by Aerospace and a 3 percent gain at the Marine Systems segment. Sales at the Combat Systems segment were down 3 percent to $388 million while growth at IS&T was basically flat at $2.9 billion.

Johnson attributed the sales and earnings declines at Combat Systems in part to the timing of several new engineering and development programs, including the Ground Combat Vehicle, being delayed. He noted that orders in the quarter were the largest in two years.

Overall, for the year, GD’s net income slipped 4 percent to $2.5 billion ($6.89 EPS) from $2.6 billion ($6.88 EPS). The increase in EPS was due to a lower share count from GD’s stock buyback program.

Sales edged down nearly a percent to $32.7 billion form $32.5 billion.

The earnings outlook for 2012 is between $7.10 and $7.20 EPS. The Aerospace segment is expected to grow about 15 percent, with Combat Systems slipping to about $8.5 billion in sales versus $8.8 billion in 2011. The Marine Systems segment is forecast to be down slightly in sales with IS&T flat.

The Aerospace segment will be the primary growth driver for the company over the next few years, Johnson said. He expects organic sales in the defense businesses to be down 1 to 2 percent in 2012.