By Calvin Biesecker
General Dynamics [GD] yesterday posted strong third quarter results led by its Aerospace segment that makes and services business jets.
Overall, GD’s operating performance was strong as it increased operating margins 80 basis points to 12.1 percent as net income rose 14 percent to $650 million, $1.70 earnings per share (EPS), while sales increased 4 percent to $8 billion. Per share earnings beat analysts’ expectations by five cents.
A year ago GD earned $572 million ($1.47 EPS) on $7.7 billion in sales. Per share earnings were actually up 16 percent as stock repurchases drove down the number of outstanding shares.
Based on the strong quarter and a tax rate for the year that will be at the low end of the guidance range, GD boosted its earnings guidance from continuing operations a dime to between $6.70 and $6.75 EPS. Looking forward, GD’s Aerospace segment will be the company’s “growth engine” in the near and mid-term, Jay Johnson, GD’s chairman and CEO, said during yesterday’s analyst call.
Aerospace, the company’s leading segment in the quarter, turned in a stellar performance. Operating earnings soared to $199 million, up 59 percent, on a 15 percent increase in sales to $1.3 billion. Operating margins increased over 3 percent to 15.2 percent. Sales were up on higher business jet deliveries and services volume.
The business jet market continues to recover as orders were the highest since the economy began struggling in mid-2008, Johnson said. The pipeline of opportunities remains strong, including from international customers, particularly in emerging markets in the Asia Pacific region and Latin America, he said.
GD’s Marine Systems and Information Systems and Technology (IS&T) segments also contributed to the strong results, with both segments posting income and sales gains. At Marine Systems, sales were up on work on the Navy’s Virginia-class submarine and replacement design efforts on nuclear ballistic missile submarines.
Johnson said the latest Virginia-class sub was delivered five months faster than any of the previous vessels in the class and 8 percent under target costs.
Combat Systems was GD’s lone segment posting lower sales and income, stemming from delays in international orders for combat vehicles and less work for the U.S. military, particularly related to the cancellation of the Army’s Future Combat System last year and declining work on the Mine Resistant Ambush Protected vehicle program, Johnson said. International vehicle programs remain in the mix of expected business but economic difficulties have slowed these efforts, he said.
While the outlook for defense spending is cloudy and expected to slow, Johnson indicated the outlook for GD’s defense prospects are at least steady.
At the Marine segment, the Navy continues to need Virginia submarines and surface combatants, Johnson said. At Combat Systems, which Johnson sees as a “steady business,” some international orders that slipped from 2010 will appear in 2011 and a lot of the work is visible as programs of record next year as well, he said. Moreover, the size of the Army’s force structure and the threat also indicates the demand needs, he added.
Johnson also provided a lengthy overview of the IS&T segment, which he said could deliver “steady growth” over the next few years. None of the contracts in the segment account for more than 2 percent of its revenues and it relies on thousands of contracts in three key areas, information technology and mission services, tactical communications and battle space management, and information, surveillance and reconnaissance systems, for its growth. On top of that is cyber security, which is a core capability that is embedded into each of the key areas, he said.
“I’m being realistic in terms of how I think of defense,” Johnson said. “It’s not going to grow like it has been, very obviously, but we do believe that there may be some modest growth opportunity in there and what I cited in the fast currents in IS&T are a classic example of that.”
GD’s backlog at the end of the third quarter was $61.8 billion, down from $66.2 billion a year ago. Free cash flow was $784 million.
So far this year, GD has returned to shareholders through dividends and stock repurchases about 90 percent of the cash it is generating, Johnson said.