Despite a strong performance from its business jet operations and profit growth in its shipbuilding business, General Dynamics [GD] yesterday posted lower net income and sales in the first quarter as declines in defense and government work weighed on results.
The overall performance is inline with the company’s outlook for the year as earnings expectations remain unchanged for 2012. Jay Johnson, GD’s chairman and CEO, had said in January on the company’s 2011 results call that the Aerospace would be its growth driver the next few years and that organic sales in the defense business would decline 1 to 2 percent in 2012 (Defense Daily, Jan. 26).
“We are continuing to see slower than anticipated award activity, particularly relating to our IS&T (Information Systems and Technology) programs with validated requirements and approved funding,” Johnson said in a statement yesterday.
Johnson currently believes earnings will come in at the low end of guidance, which is between $7.10 to $7.20 EPS, although he suggested that could improve if award activity at IS&T picks up. He expects the federal government to be operating on a continuing resolution later this year.
Results in the quarter were negatively impacted by a $67 million, 13 cents earnings per share (EPS), non-cash charge in the Combat Systems segment stemming from accounting errors in prior years at the European Land Systems business. The charge, which was unexpected, is also a drag on the 2012 outlook. The charge is not performance related.
In the quarter, net income slid 9 percent to $564 million ($1.57 EPS), from $618 million ($1.64 EPS), while sales slipped 3 percent to $7.6 billion from $7.8 billion a year ago. Analysts had predicted EPS of $1.69 for GD, although they did not foresee the accounting charge.
GD’s Aerospace segment continues to benefit from improvements in the global economy as operating income increased 18 percent to $271 million on a 20 percent gain in sales to $1.6 billion due to an increase in large cabin business jets and growth in service demand.
Johnson said that order activity remains good for business jets, with interest strong for the larger cabin aircraft, and that customers from North American made up 60 percent of the orders in the quarter.
On the defense side of the business, Johnson said that the “bad trends” in the IS&T segment that challenged the company last year “persisted” in the first quarter, saying that sales decreased on lower volume in tactical communications projects while operating income fell on a change in product mix and the lower sales. IS&T sales were down 13 percent and operating income tumbled 21 percent. For the year, Johnson expects the segment’s sales to be about 5 percent lower than he originally forecasted while margins will also be lower than expected.
Marine Systems was the only defense segment to turn a profit, up 11 percent to $185 million despite a 4 percent drop in sales to $1.6 billion. Sales were down on lower volume for the Navy’s Littoral Combat Ship and T-AKE dry cargo/ammunition ship programs, Johnson said.
Operating income at Combat Systems dropped 27 percent to $203 million mainly on the accounting charge while sales fell 2 percent to $1.9 billion but also due to a decline in vehicle and ammunition sales in the United States and Europe and the sale of the company’s detection business.
Overall segment operating margins fell 60 basis points to 11.3 percent.
GD’s backlog at the end of the quarter stood at $55.2 billion, down $2.3 billion from a year ago. Free cash flow in the quarter was $267 million.