Similar to its first quarter, General Dynamics [GD] yesterday posted a slender increase in its second quarter earnings, driven by lower interest expenses and a lower share count as its sales remained level.
Net income inched up a percent to $640 million, $1.81 earnings per share (EPS), from $634 million ($1.77 EPS) a year ago, cruising well past consensus estimates of $1.62 EPS. Per share earnings rose a little more than 2 percent as GD’s stock repurchase program lowered the share count. Operating margins at the segment level were off 10 basis points to 12.1 percent, still strong.
Operating earnings were driven by a 51 percent gain to $389 million at the Aerospace segment on an increase in large and mid-size business jet deliveries. GD’s other operating segments, Combat Systems, Marine Systems, and Information Systems and Technology (IS&T), all posted lower operating earnings that offset the gains at Aerospace.
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| Gulfstream G650 Business Jet. Photo by General Dynamics |
Combat Systems suffered an $18 million charge in the quarter stemming from restructuring actions taken at its European Land Systems component, which is expected to return to profitability in the second half of the year, Phebe Novakovic, GD’s chairman and CEO, said on yesterday’s earnings call.
In the second half of the year there will be margin compression at the Aerospace segment due to increases in the costs of supply contracts on some of the Gulfstream division’s business jets due to rising costs of materials and labor, Novakovic said. Over time, Gulfstream will win back those margins with productivity improvements, she said.
Sales were flat in the quarter at $7.9 billion. Aerospace enjoyed strong double-digit gains, up 29 percent to $2.1 billion on the higher jet deliveries, while Marine Systems and IS&T were also up. However, a 28 percent drop at Combat Systems to $1.5 billion wiped out the increases at GD’s other segments.
A number of international orders in Combat Systems continue to be delayed but these are expected to appear in the second half, Novakovic said.
So far this year, GD’s net income has increased more than a percent to $1.2 billion ($3.43 EPS) on sales that are down over a percent to $15.3 billion. Novakovic raised GD’s earnings guidance for the year by 25 cents to between $6.85 and $6.95 EPS, saying congressional passage of a federal spending bill in March “went a long way toward stabilizing our program funding and mitigating some of the uncertainty for 2013.”
Novakovic said the low end of the earnings guidance assumes impacts from the budget sequester as well as the federal government operating under a continuing budget resolution for the last quarter of 2013. The high end of the guidance assumes that the impact of federal civilian employees on contract execution will be mitigated as the year progresses.
Free cash flow in the quarter was $486 million, 76 percent of net income. For the year, Novakovic said that free cash would approximate 90 percent of net income.
Backlog at the end of the second quarter stood at $49.4 billion, down $3 billion from a year ago due to declines at Aerospace and Combat Systems.
Novakovic said there continue to be no acquisitions on her radar as she remains focused on operations, although given the company’s strong balance sheet she will be opportunistic if the occasion arises.