Despite strong operating results in three of its four business segments, General Dynamics [GD] yesterday reported weaker second quarter net income while sales edged up less than a percent.
Net income fell 3 percent to $634 million, $1.77 earnings per share (EPS), from $653 million ($1.79 EPS) a year ago. Profits a year ago were aided by a $38 million (7 cents EPS) gain related to the sale of the company’s former Detection Systems business.
The income results still topped consensus estimates by three cents. Segment operating margins increased 20 basis points to 12.2 percent.
Sales were just above $7.9 billion versus just below $7.9 billion a year ago. The weak growth was driven by a combination of gains at the Aerospace, Marine Systems and Combat Systems segments that were was almost completely wiped out by a drop at the Information Systems and Technology (IS&T) segment.
The IS&T business is experiencing worse than expected award delays on key tactical communications contracts, including a continued slow transition to the Common Hardware Systems-4 program, encryption products, and a slow ramp of several program moving from development to production such as the Joint Tactical Radio System, Warfighter Information Network-Tactical, and Rifleman Radio programs, Johnson said.
Johnson expects encryption orders to pick up in the third quarter and noted that on CHS-4 and the communications programs demand remains high but orders and the obligation of funds for purchases is lagging.
Operating earnings at IS&T fell more than 24 percent on the sales decline and a shift in sales toward lower margin service work.
GD lowered its 2012 earnings guidance by a dime to between $7 and $7.10 EPS due to the first half award delays in IS&T and the likelihood of additional delays the rest of the year.
Aerospace was the top performing segment overall, posting double-digit increases in both sales and operating profits. Sales were up mainly on more deliveries of green G650 business jets while profits gained due to excellent performance at the Gulfstream business jet division and improved results at the Jet Aviation services division.
The Marine Systems segment led GD’s government-focused businesses, also posting a double-digit profit increase amid a 5 percent sales gain. Johnson said sales improved due to work on ships, submarines and the acquisition of the Virginia-based ship repair company Metro Machine.
The Combat Systems segment managed to boost sales more than a percent due to international demand, work on the Army’s new Ground Combat Vehicle, and the acquisition last year of armored vehicle maker Force Protection. Operating earnings rose nearly 8 percent due to strong performance on mature production programs, Johnson said.
Free cash flow in the quarter was a robust $703 million, exceeding earnings from continuing operations. Going forward, GD expects to maintain a balanced cash deployment strategy but Johnson cautioned that given the uncertainty ahead with the threat of budget sequestration and a likely continuing budget resolution going into October, “I would suggest that capital deployment would be dealt with very cautiously.” He added that it makes sense to keep as much cash in the “quiver” as possible and that any acquisitions would likely be smaller deals in line with recent transactions.
Total backlog declined 8 percent from a year ago to $52.4 billion while funded backlog was down a percent to $43.9 billion.