General Dynamics [GD] yesterday posted a small rise in first quarter earnings due to improved operating margins, lower interest expense and taxes despite a slight drop in sales as work for its military customers slowed.
Net income rose a percent to $571 million, $1.62 earnings per share (EPS), from $564 million ($1.57 EPS) a year ago, beating consensus estimates by 12 cents EPS. Operating margins increased 10 basis points to 11.4 percent. Per share earnings were up over 3 percent due to stock repurchases that lowered the overall share count.
Sales declined 2 percent to $7.4 billion from $7.6 billion due to a drop in revenues at the Combat Systems segment, which more than offset solid gains in the Aerospace segment and scant increases at Marine Systems, and Information Systems and Technology.
Several international orders that Combat Systems had expected to book late in 2012 but slipped, also slid out of the first quarter but are still expected to be finalized, likely in the second quarter, Phebe Novakovic, GD’s chairman and CEO, said on yesterday’s earnings call. She expects sales in the segment to be a “touch lighter” than expected for the year due to the impact of sequestration.
However, despite some top line pressure from sequestration, Novakovic maintained GD’s earnings guidance for 2013 at between $6.60 to $6.70 EPS because margins at Combat Systems are expected to increase. She also said that most of the company’s sales for this year are contained in the backlog, “so [fiscal year] 13 is looking solid and I don’t see much of a risk to that at all.”
Beyond 2013, Novakovic said the FY ’14 defense budget request supports GD’s key programs but also said that impacts from sequestration can’t be estimated.
Novakovic described two types of programs that are typically most impacted in a constrained defense budget environment, programs in trouble and developmental programs. She said all of GD’s programs are “green,” which means they not stressed by poor performance. She also said the company is “comfortable” with its programs that are moving from development to production.
Backlog at the end of the quarter stood at $48.5 billion, down from $55.2 billion a year ago. Free cash flow was $429 million.