By Calvin Biesecker
Shrugging off weakness in the business jet market, General Dynamics [GD] yesterday posted higher earnings and sales in the first quarter driven by its defense businesses.
In March, citing worsening demand, GD reduced its planned production levels for business jets for the rest of this year, which led to the company lowering its earnings guidance for the year (Defense Daily, March 6). The good news is the new plan appears to be holding, Nicholas Chabraja, GD’s chairman and CEO, said on yesterday’s analyst call.
While overall conditions are by “no means good,” Chabraja said that since February when the business jet outlook worsened, there has been increased interest from customers in new orders, increased flying hours, and a pick-up of activity in the pre-owned market.
Each of GD’s defense segments posted double-digit sales gains, led by Marine Systems. The company’s shipbuilding business also recorded strong operating results, boosting earnings 34 percent to $163 million due to work on all if its programs. Marine is GD’s only business segment that boosted operating margins in the quarter.
Chabraja said that if Defense Secretary Gates’ proposal holds to build three DDG-1000 destroyers–which would be produced by GD–then that would provide a stable workload at the Bath Iron Works shipyard in Maine for “years to come.” He also said that the design on the ship is the “most mature” the company has ever been asked to build, which gives confidence in cost estimates and possibly going forward with a fixed-price production contract on the last two vessels if that’s the contract vehicle the Defense Department selects.
Net income increased 3 percent to $590 million, $1.53 earnings per share (EPS), from $572 million ($1.43 EPS) a year ago, topping consensus estimates by seven cents. Earnings were weighed down by the Aerospace segment, which tumbled 15 percent to $200 million on fewer aircraft deliveries and a loss related to pre-owned aircraft inventory.
Free cash flow was $73 million in the quarter although by year-end Chabraja expects cash flow to be similar to net income.
Sales increased 18 percent to $8.3 billion from $17 billion. Aerospace sales also grew by double-digits due to the acquisition last year of business jet service provider Jet Aviation, more than offsetting a nearly 9 percent decline in sales at Gulfstream, GD’s business that makes business jets.
The company is “off to a strong start with what promises to be another good year,” Chabraja said.
In addition to Marine Systems, Combat Systems also produced strong results, with sales nearly up 21 percent and operating earnings growing almost 8 percent. About half of the growth was attributable to the M-1 Abrams tank and Stryker wheeled vehicle programs, Chabraja said. About one-third of the increase was due to the acquisition of AxleTech earlier in the quarter.
The Information Systems and Technology (IS&T) segment also did well, with the segment posting double-digit organic growth. Chabraja said the segment is “executing across all businesses.” Asked by one analyst about the company’s positioning in the growing cyber security market, Chabraja said the GD doesn’t “crow” about its work here but said its business in the general areas of encryption and network intrusion prevention runs about $1 billion annually, most if it in classified programs.
Chabraja left the revised earnings guidance intact, which stands at between $6 and $6.10 EPS for the year, but said it has upside. Potential improvements to earnings throughout the year could come from improved performance at Jet Aviation, which has some execution issues, sustained strong growth at Marine Systems and IS&T, and more growth in Europe and improved margin performance at Combat Systems, he said.
GD’s total backlog at the end of the quarter was $71.1 billion, a 43 percent increase from a year ago. Funded backlog stood at $49.2 billion, up 23 percent from a year ago.