By Calvin Biesecker
General Dynamics [GD] yesterday posted a slight increase in first quarter earnings due to higher operating margins even though its sales fell in its business jet unit and most of its defense businesses.
Net income increased 1 percent to $597 million, $1.55 earnings per share (EPS), versus $590 million ($1.53 EPS) a year ago, driven by margin expansion at its Aerospace and Combat Systems segments. Earnings from continuing operations were also up a percent to $599 million ($1.54 EPS), topping consensus estimates by two pennies.
Sales fell 6 percent to $7.8 billion versus $8.3 billion a year ago, the highest ever for GD in a quarter. Backlog was $63.9 billion, off $1.6 billion since the end of 2009.
Growth in earnings was led by the Aerospace segment, which includes Gulfstream business jets and a services business. While sales here declined, operating earnings increased by 9 percent on a 2.4 percent boost in margins as the company reaped the benefits of cost cutting actions a year ago.
Performance improved at Gulfstream and the Jet Aviation services, administrative costs were lower, and there were not charges related to used aircraft, all of which boosted Aerospace profits, Jay Johnson, GD’s president and CEO, said during yesterday’s earnings call.
Aerospace sales did improve relative to the fourth quarter of 2009 and the business jet and related services markets are turning around and are expected to gradually improve throughout 2010, Johnson said. The services business will grow in the low to mid-single digits for the year, he said, noting that the quarter was the best since 2008 for business jet orders.
Despite a drop in operating profits at the Combat Systems, margins actually grew, helping to stem the impact of a decline in sales. Johnson attributed the decline in sales to less volume on the Mine Resistant Ambush Protected vehicle program, lower counter-improvised explosive device equipment sales, less volume on small caliber ammunition and the termination last year of the Army’s Future Combat System project.
On the other hand, margins were up on a mix in sales that favored higher margin products and “strong execution” on some vehicle and ammunition programs, Johnson said.
Combat Systems is expected to grow throughout the year, although this is dependent on international vehicle programs that are currently on track but difficult to precisely time, Johnson said. He listed the timing of awards at Combat Systems and a “relapse” in the overall economy as his biggest concerns going forward. Nonetheless, Johnson said the business plan is “solid” and there is a chance to “beat” it.
Johnson disclosed that GD made a small acquisition in the quarter. The company acquired Ascend Intelligence, LLC, a provider of software for military mission planning and execution whose products include the Tactical Ground Reporting software system The company has 40 employees and is based in Northern Virginia.
Johnson didn’t provide any update on guidance for the year.
Free cash flow for the quarter was $150 million, well below net income. However, for the year, GD expects free cash flow to equal net income, Johnson said.