Bolstered by higher profits in each of its operating segments, General Dynamics [GD] on Wednesday posted strong financial results in the first quarter with top and bottom line increases to begin the year.
Net income jumped 20 percent to $716 million, $2.14 earnings per share (EPS), from $595 million ($1.71 EPS) a year ago, whooping consensus estimates by 22 cents per share. The bottom line results improved due to better operating margins, which were up 120 basis points to 13.2 percent, as well as a lower tax rate.
Sales increased 7 percent to $7.8 billion from $7.3 billion a year ago. The company’s revenue from defense business was up a handsome 10 percent.
The strengthening value of the United States dollar versus other international currencies combined with GD’s growing international revenue base negatively impacted sales and operating earnings in the quarter, Jason Aiken, the company’s chief financial officer, said on an analyst call. Foreign currency translations lowered sales by $120 million and operating earnings by $20 million, he said.
Nonetheless, the overall results demonstrated a “compelling” performance versus a year ago and were also ahead of GD’s operational plans but, as usual, the company won’t update its guidance until the mid-point of the year, Phebe Novakovic, GD’s chairman and CEO, said on an analyst call.
GD’s Combat Systems segment led the way to improved profits, increasing operating profit 47 percent to $204 million on strong operating performance. A year ago the segment was hit by a $29 million charge related to restructuring in its European Land Systems business that wasn’t repeated in the latest quarter, Novakovic said. Sales were up 8 percent to $1.4 billion across a number of product lines as the company works off its strong backlog.
Another bright performer was the Information Systems and Technology segment, with operating profit up 19 percent to $217 million and sales up 4 percent to $2.4 billion, producing a “big upside surprise” for the company, Novakovic said. Sales activity picked up across the segment, in part due to a lower cost and more competitive structure at the Mission Systems division resulting from a consolidation of businesses and the information technology business won most of their bids, she said.
At the end of its 2014 fiscal year, GD projected that IS&T would see a nearly 6 percent decline in sales this year but Novakovic said the segment got off to a better than expected start and she doesn’t “have a sense” now of where the segment will end up in 2015. She added that it had good order intake that will position it for growth.
The Marine Systems shipbuilding and repair business also did well, turning a 13 percent profit increase to $188 million on a 21 percent increase in sales to $1.9 billion. Novakovic pointed to “particularly good performance” at the Electric Boat and NASSCO shipyards, and said the better sales were due to commercial work at NASSCO, Block IV work on the Virginia-class submarine program at Electric Boat, and engineering and design work on the Ohio-class nuclear missile submarine program at Electric Boat.
GD’s Aerospace segment that builds business jets and services aircraft posted flattish sales, down nearly a percent to $2.1 billion, but a 7 percent gain in profit to $431 million due to a favorable service mix, tax credits and a supplier settlement, Novakovic said. She said profit margins for the year in the segment will be better than the original guidance but it isn’t clear yet by how much.
Activity levels for potential business jet sales are “careful” overall, Novakovic said, adding that that the revenue “growth story” here isn’t strong for the next two years but will improve once new aircraft designs enter into service and production takes off.
Free cash flow was $647 million, about 90 percent of net income, and company officials indicated that cash flow for the year would lag net earnings results. Novakovic said that GD will continue to return cash to shareholders through a combination of share repurchases and dividend payments. Acquisitions aren’t on her “radar screen,” she said.
“I’m not thinking about M&A (mergers and acquisitions) because I’m not seeing anything,” she said.
Novakovic also said that GD will not be bidding on programs where it can’t make a “good” and “fair” return. The company was originally eyeing the Air Force’s next-generation T-X jet trainer when there was interest in an off shelf design but once the requirements began changing, it was no longer attractive to GD, she said.
Total backlog at the end of the quarter stood at $70.5 billion versus $55.9 billion a year ago, while funded backlog stood at $56 billion versus $48.2 billion a year ago.