By Calvin Biesecker
General Dynamics [GD] yesterday reported a modest rise in net income in the first quarter amid a scant increase in sales as three of its four segments boosted operating profits.
Net income increased nearly 4 percent to $618 million, $1.64 earnings per share (EPS), compared to $597 million ($1.53 EPS) a year ago as operating profits rose at the Aerospace, Combat Systems and Marine Systems segments. Operating margins increased 10 basis points to 11.9 percent. EPS results topped consensus estimates by 3 cents. Free cash flow was $266 million.
Sales grew less than a percent to $7.8 billion, driven by slight increases at Information Systems and Technology (IS&T), and the Marine Systems segments, which more than offset declines at Aerospace and Combat Systems.
Backlog declined $2 billion to $57.6 billion since the end of 2010, with most of the decline in the Marine Systems segment due to timing issues. GD still expects contracts for several ships to be awarded during the year.
GD’s Aerospace segment, which makes and services business jets, led the company’s earnings gain with a 6 percent boost in operating profits to $230 million, driven by a 90 basis point improvement in margins to 17 percent. Sales were basically flat at $1.4 billion, as growth in demand for aircraft services offset declines in pre-owed aircraft and lower completions work at the Jet Aviation division.
Jay Johnson, GD’s chairman and CEO, said that margins improved due to productivity improvements at the Gulfstream business jet division and liquidated damages obtained through canceled aircraft options by a customer.
Johnson said the outlook for business aviation continues to improve with interest in new orders, fewer used aircraft and “robust aftermarket demand.” He added that flight hours for Gulfstream aircraft are approaching 2008 levels, which is when the global economy began to suffer.
International customers are fueling order intake, with over 70 percent of Gulfstream orders from overseas, driven by demand in the Asia Pacific region, Johnson said. He noted that activity in China for business jets is increasing.
Johnson also said that Gulfstream still expects to deliver about 12 green G650 aircraft later this year despite the crash of a flight-test aircraft earlier this month that killed four people.
At Combat Systems, operating profits grew 3 percent to $277 million on an 80 basis point improvement in margins to 14.2 percent, which benefited from cost savings and performance improvement initiatives as well as a favorable business mix that included less vehicle development work, Johnson said. Sales dipped 2 percent to $2 billion due to a decline in revenues for development of the Expeditionary Fighting Vehicle and less work on upgrades for M1AI Abrams tanks.
Marine Systems boosted margins 20 basis points to 10 percent, driving a 4 percent rise in operating profits to $167 million due to work on the T-AKE auxiliary ships for the Navy. Marine sales increased 2 percent to $1.7 billion on Virginia class and nuclear missile submarine works, repair volume and T-AKE work.
IS&T, the lone segment to post lower operating profits, saw sales rise on higher IT service volume, which is typically low margin work. Johnson was pleased with the 2 percent gain in sales to $7.8 billion given the lengthy budget resolution during the first half of the federal government’s FY ’11.
GD left its guidance unchanged for the year with EPS forecast between $7 and $7.10. Johnson said “uncertainty” remains about the defense environment going forward. He expects the Defense Department’s budget to slowly decline with new development programs at risk while incumbent projects benefit through upgrades.
That said, he also added the “world remains a dangerous place,” which will likely mean only “modest” adjustments to the nation’s force structure.