Despite lower operating earnings and sales, General Dynamics [GD] yesterday managed a 1 percent increase in its net income in the second quarter due to lower net interest expense and higher non-operating income.
GD’s segment operating earnings slipped nearly 4 percent to due to a double-digit decline at the business aviation segment and 4 percent declines at Information Systems and Technology (IS&T), and the Marine Systems segments, respectively. The company’s earnings were also impaired by a larger loss related to discontinued operations.
Still, overall earnings were up nearly a percent to $653 million, $1.76 earnings per share (EPS), from $648 million ($1.67 EPS), due to the decline in interest expense and a $40 million (three cents EPS) pre-tax gain related to the sale of the company’s Armament and Technical Products group this year. EPS growth of 5 percent outstripped overall earnings growth as GD’s aggressive share repurchase program reduced the overall share count.
Excluding discontinued operations, which posted a $13 million (3 cents EPS) loss, earnings from continuing operations increased 2 percent to $666 million ($1.79 EPS). The earnings results easily topped consensus estimates by seven cents EPS.
Overall, operating margins slid 20 basis points to 12 percent.
Sales were down nearly 3 percent to $7.9 billion from $8.1 billion a year ago. Jay Johnson, GD’s chairman and CEO, said that defense sales have suffered in part from the lingering effects of the continuing resolution used to fund the federal budget through the first half of the government’s fiscal year.
Combat Systems is GD’s only segment that managed to post increases in sales and operating earnings in the quarter, and slight at that. Sales were up half a percent to $2.1 billion and operating earnings over a percent to $299 million, as margins increased on a portfolio tilted toward production programs as well as “business optimization” efforts, Johnson said.
Sales at Combat Systems were up on international vehicle business, Johnson said.
While sales and earnings were down at IS&T, margins in the business edged up due to efforts to remain competitive, Johnson said. These include initiatives such as facilities consolidation and staffing adjustments, he said.
At the Aerospace segment, profits tumbled 10 percent to $209 million despite sales being only off less than a percent to $1.4 billion due to continued troubles at its Jet Aviation business that provides aircraft services and completions work as well as research and development spending on new aircraft at the Gulfstream business jet unit. Aircraft completions work is the source of the troubles as throughput fell behind and performance also suffered in some instances, Johnson said. As a result, the business is being restructured and management changes have been made, he said.
Johnson said it will take “several quarters” to work through the challenges at Jet Aviation.
Based on the share repurchases, the sale of the Armaments and Technical Products business, changes in guidance to certain segments and higher interest expenses, GD raised its earnings guidance for 2011 to $7.15 to $7.20 EPS versus $7 to $7.10 previously.
Free cash flow in the quarter was $658 million and total backlog was $57.1 billion, down $5.4 billion from a year ago.