Federal tax cuts enacted into law this year propelled General Dynamics [GD] to higher net income in the first quarter despite a dip in operating earnings, the company reported on Wednesday.

Net income rose 5 percent to $799 million, $2.65 earnings per share (EPS), from $763 million ($2.48 EPS) a year ago, topping consensus estimates by 17 cents per share. Sales increased a percent to $7.5 billion from $7.4 billion a year ago.

At the operating level, income was down due to a big drop in profit at the Aerospace segment, which makes business jets and provides aircraft services. Gulfstream, GD’s division within Aerospace that makes business jets, delivered fewer aircraft in the first quarter.

Operating income at GD’s other segments that serve the defense and federal civilian markets was higher, led by shipbuilding operations, followed by combat vehicle and weapons businesses, and then information technology.

General Dynamics Chairman and CEO Phebe Novakovic. Photo: General Dynamics
General Dynamics Chairman and CEO Phebe Novakovic. Photo: General Dynamics

The combined operating margin across GD’s business segments was 13.4 percent, down 70 basis points from a year ago.

Sales gains at the government businesses were also higher, more than offsetting a decline at Aerospace. Higher government sales were driven by the Combat Systems segment, followed by Marine Systems and then Information Systems and Technology (IS&T).

The quarter marks the last time for IS&T to report as a segment. Following the acquisition of the former CSRA, Inc., in early April, IS&T is being split into two segments, GD Information Technology and Mission Systems.

If the new operating segment format had been in place at the start of the year, both GDIT and Mission Systems would have generated sales of $1.1 billion, with $99 million of operating income at GDIT and $134 million at Mission Systems, Phebe Novakovic, GD’s chairman and CEO, said on the company’s earnings call.

Excluding the impact of CSRA’s results, which is being integrated into GDIT, GDIT’s sales this year are forecast to be around $4.5 billion and Mission Systems between $4.8 billion and $4.9 billion, Jason Aiken, GD’s chief financial officer, said on the call. Margins at Mission Systems will be between 13 and 14 percent and around 8 percent at GDIT.

CSRA is expected to add $3.6 billion to GD’s sales this year, Aiken said. GD will record a one-time charge of about $80 million in the second quarter related to the cost to complete the acquisition, he said. Beginning in the third quarter, GD expects CSRA’s impact to per share earnings will be “break even to slightly accretive,” he added.

GD is in the process of divesting a small amount of CSRA’s business to avoid organizational conflicts of interest, Aiken also said.

Aerospace sales were down due to delays in the deliveries of two aircraft at the request of customers, Novakovic said on the company’s earning’s call. One, a special mission G550, will be delivered in May and the other, a G280, has been delivered, she said. The Aerospace segment remains on track to meet its sales targets this year, she said.

Order activity for business jets remains healthy with “evidence of strong interest in North America,” aided by companies’ with improving cash flows stemming from the federal tax cuts, “and a growing opportunity set in Europe,” Novakovic said.

Novakovic also said that despite the threat of potential Chinese tariffs on business jets, discussions around potential aircraft deals with customers in that country continue.

“In fact, it may have stimulated some near-term activity,” she said. “The Chinese customers believe the question of tariffs will be resolved.”

GD doesn’t update guidance at the end of its first quarter, but Novakovic said the company is “a bit ahead of the operating plan” that underpinned the outlook provided in January.

Total backlog at the end of the quarter stood at $62.1 billion with $54.1 billion of that funded. A year ago, total backlog stood at $60.4 billion, $53.3 billion of which was funded. Free cash flow in the quarter was a negative outflow of $600 million.