By Calvin Biesecker
Strong profit margin improvements at General Dynamics‘ [GD] business aircraft and Combat Systems segments and record operating profits at its information technology business helped drive an increase in second quarter earnings at General Dynamics [GD] despite flat sales.
The improved earnings in the quarter combined with a “clearer view” of the second half of 2010 led GD to boost its earnings guidance for the year, said Jay Johnson, GD’s chairman and CEO.
Net income increased 5 percent to $648 million, $1.67 earnings per share (EPS), from $618 million ($1.60 EPS). Excluding discontinued operations, earnings were $1.68 EPS, topping analysts’ expectations by 7 cents. Margins increased 50 basis points to 12.2 percent.
Sales remained level at $8.1 billion.
GD’s operating earnings in the quarter were a record $985 million, driven by gains in the Aerospace and Information Systems and Technology (IS&T) segments and strong margin improvement at Combat Systems, despite a 12 percent decline in revenues at that segment.
Margins were also up at Aerospace on operating performance as sales in the segment were also off slightly. Margins improved due to expanded margins on service work at the Gulfstream business jet division, improved performance at the Jet Aviation services division, lower administrative and research and development costs, Johnson, said on yesterday’s earnings call.
Sales at Aerospace were down 2 percent on fewer used aircraft sales and less completed work on business jet interiors at Jet Aviation, Johnson said.
Johnson said the outlook for the business jet market is improving. The flying hours of Gulfstream jets are increasing, he said, and order activity, while softer in the quarter, is still outpacing defaults by three to one. Moreover, the pipeline of activity is “healthy” and Johnson expects this to translate into orders as the economy continues to recover.
Combat Systems sales fell due to lower volume on Mine Resistant Ambush Protected program, timing on Stryker combat wheeled vehicle deliveries, and the cancellation last year of the Army’s Future Combat Systems program. Nonetheless, margins improved 1.5 percent on a higher volume in mature programs, which typically carry higher margins, and improved performance, Johnson said.
Johnson has been expecting more help for Combat Systems growth from its international markets but debt crises in Europe, delays in negotiating a light armored vehicle contract with Canada and a foreign military sale with another country, combined with a decrease in the value of the Euro, have pushed some revenues to the right. However, while the debt crisis has created some uncertainty for GD in Europe, no programs have been eliminated, he said.
IS&T posted record sales and operating profits in the quarter, with growth driven by work on tactical communications systems, ruggedized mobile computers, intelligence and information technology support work, Johnson said. While operating earnings increased 10 percent to $312 million, margins declined 20 basis points.
GD’s Marine Systems business basically held its sales and earnings level, as increased work on the Navy’s DDG-1000 destroyer and Virginia class submarine programs was offset by lower volume producing commercial tankers.
In the near-term, Johnson believes that with the Defense Department leaving its force structure intact pressure on defense budgets will be minimal. Longer term this pressure will increase, which is driving a number of efficiency initiatives underway at the Pentagon, he said.
“The specifics of the Pentagon’s efficiency initiatives are not yet evident, but what is clear is that the environment is changing and that all stakeholders will have a role to play,” Johnson said. “I am personally involved with other CEOs in a cooperative dialogue to develop procedures that will achieve needed results while protecting the viability of the defense industrial base. I am encouraged that the Pentagon has engaged industry as it embarks on shaping these measures.”
Johnson described GD as being “already a very lean and efficient operator.”
GD’s total backlog at the end of the quarter was $62.5 billion, down $5.1 billion from a year ago. Free cash flow in the quarter was $414 million and Johnson is sticking to the year-end target of free cash equaling net income.
As for the earnings guidance, GD expects per share earnings between $6.60 and $6.65, up from $6.40 to $6.50 stated at the beginning of the year.