General Dynamics [GD] yesterday posted lower earnings amid a thin increase in sales in its third quarter driven by lower operating profits in its information technology (IT) and Combat Systems divisions.
Net income fell 8 percent to $600 million, $1.70 earnings per share (EPS), from $652 million ($1.80 EPS), missing consensus estimates by eight cents. Operating margins were 11.4 percent versus 12.7 percent a year ago. Sales edged up a percent to just over $7.9 billion from just under $7.9 billion a year ago.
“The same uncertainty regarding the defense budget adjustments that has challenged our industry for the past year continued to impact our customers’ behavior in the third quarter, particularly in our shorter cycle businesses where bids awaiting awards are at record levels and de-scoping actions are becoming much more common practice,” Jay Johnson, GD’s chairman and CEO, said on yesterday’s earnings call. “We are likely to see more of this in the fourth quarter. “
GD’s Information Systems and Technology (IS&T) division was the primary driver in the income decline, reporting a 35 percent drop in operating profit to $201 million. IS&T suffered in part from a $25 million charge related to a revaluation of a portion of its ruggedized-computer inventory.
Johnson said that GD is exiting the ruggedized computer business to focus less on volatile lower margin business that has a lot of large competitors in favor of “cutting edge solutions that better align with our core customers’ current and emerging priorities.”
At Combat Systems, profits fell on lower sales and profitability issues in its European Land Systems business stemming from delays in international contracts and lower revenues.
GD’s Aerospace segment was the company’s high flying segment in the quarter, with sales up 30 percent and profits 20 percent on deliveries of G650 business jets. Backlog in the segment is down from a year ago but Johnson demand for business jets has been picking up all year in North America and that in the coming months the company is expecting several multi-aircraft awards from international customers that have been delayed.
The Marine Systems segment also posted higher sales and operating profits, due in part to acquisitions and strong performance on the T-AKE cargo ship program for the Navy.
Johnson said that GD will remain cautious on its capital deployments until it has more clarity on the outlook for defense spending, particularly with regard to the potential for budget sequestration to begin in January. Although GD had free cash flow in the quarter of $594 million, nearly level with net income, Johnson said the company didn’t repurchase any of its stock in the quarter and may not acquire any more until there is more clarity as 2013 gets underway.
However, the company did close on four bolt-on acquisitions over the summer for $261 million to enhance its defense businesses. Johnson justified the acquisitions saying they were priced right and that they will provide the company with “significant opportunity” over the long-term. Still, he said he is nursing GD’s cash to leave his successor with as much as possible. Johnson will be stepping down from the CEO role next year.
Johnson didn’t provide any changes to the company’s overall outlook for 2012.
Backlog at the end of the quarter was $51.5 billion versus $58.5 billion a year ago.