General Dynamics [GD] on Wednesday reported strong sales growth to open its fiscal year with all four operating segments posting gains although net income remained relatively flat.
Sales in the first quarter increased 7 percent to $9.4 billion from $8.7 billion a year ago, driven by double-digit increases in the Aerospace and Marine Systems segments, followed by Combat Systems and Technologies.
Net income was $708 million, $2.48 earnings per share (EPS), essentially level versus $706 million ($2.43 EPS) a year ago, but still whooping consensus estimates by 18 cents EPS. Income at the operating level was also flat, $938 million versus $934 million and operating margin fell 70 basis points to 10 percent.
At the operating level, higher sales in the defense businesses were driven by construction work on the Virginia-class Block V attack and Columbia-class ballistic missile submarines, oilers and expeditionary sea base ships, broad strength across the Combat Systems segment in the U.S. and internationally, with sales of 8×8 wheeled combat vehicles to Switzerland and Spain, and 6×6 Eagle vehicles, and new programs at the Information Technology (IT) business within the Technologies segment, Phebe Novakovic, GD’s chairman and CEO, said on the company’s earnings call.
She said that the IT business has more than $30 billion in proposals awaiting decisions by customers, adding that most of the bids are for new opportunities.
Higher sales at the Aerospace segment were driven by increased deliveries of large-cabin business jets and Novakovic said that aircraft orders began to accelerate in mid-February and has continued into the second quarter.
The operating profit increase was driven by Marine Systems and Combat Systems, followed by Technologies, and was partially offset by a decline at Aerospace. Novakovic said income at Aerospace was lower due to accounting adjustments related to certain aircraft used in testing, adding that absence the charge, “performance in the quarter was superb.”
Free cash flow a $131 million outflow, still better than the typical outflow in the first quarter, and the forecast this to convert 95 to 100 percent of net income to free cash flow remains intact, Jason Aiken, GD’s chief financial officer, said on the call.
Novakovic said that GD will update its 2021 guidance during the second quarter earnings call. She also believes the company’s overall prospects are well aligned to the Biden administration’s strategic priorities, particularly with Navy ship and submarine needs in the Pacific to confront growing challenges from China and combat systems in Europe to counter Russia’s activities.
Asked by one analyst about potential acquisitions, Novakovic replied that the company’s focus is on execution. Investments the past few years have been aimed at GD’s “large lines of business,” where the focus is now on execution, she said.
The company is always looking out for “potential niche” acquisitions but there isn’t “anything on the horizon here of any significant opportunities that would entice us,” Novakovic said.
Orders in the quarter matched sales and backlog stood at $89.6 billion, up $100 million from the end of 2020 and nearly 5 percent higher than a year ago.