January 25, 2012 / 8:11 PM / 7 years ago

General Dynamics sees higher earnings in 2012

WASHINGTON (Reuters) - Defense contractor General Dynamics Corp (GD.N) reported a 17 percent drop in quarterly profit on Wednesday, with $189 million in charges taken by its Switzerland-based Jet Aviation unit and blemishing an otherwise solid quarter and year.

Earnings for the full 2011 year also declined slightly, falling 3 percent to $2.55 billion from $2.63 billion in 2010.

Chief Executive Jay Johnson forecast that earnings per share would increase to $7.10 to $7.20 in 2012, buoyed by strong demand for its Gulfstream aircraft and solid orders in its defense business. Earnings per share were $6.94 in 2011, compared with $6.82 in 2010.

Johnson said the Falls Church, Virginia-based company had put in new management to address lingering performance issues at Jet Aviation, an aircraft completions unit acquired in 2008.

He said the unit was hit by lower volumes in operations and maintenance of business jets, and penalties for delays in narrow- and wide-body aircraft nearing delivery. But the new management was restructuring operations to lower overhead and headcount, and strengthening control of its supply chain.

Jet Aviation’s charges included $111 million in non-cash impairment of an intangible asset and $78 million in contract losses, which Johnson described as “very disappointing” and not in line with the company’s operational track record.

He said General Dynamics’ aerospace segment continued to do very well, and Jet Aviation would be growing increasingly important to General Dynamics as the base of installed business jets increased internationally.

The charges masked an otherwise solid fourth-quarter performance that was marked by delivery of the first 12 Gulfstream G650 production aircraft to the final phase of manufacturing and strong margins in the company’s defense business, Johnson said.

The maker of ships, tanks and Gulfstream jets said net earnings fell 17 percent to $603 million, or $1.68 per share for the fourth quarter, compared with $729 million, or $1.91 a share, a year earlier. The company had posted increasing earnings for the past three quarters.

CORE OPERATIONS SEEN SOLID

Analysts, on average, were expecting a profit of $1.99 per share, according to Thomson Reuters I/B/E/S, but some had predicted even higher earnings given strong orders in its defense business and demand for Gulfstream jets.

Adjusted for the one-time charge, General Dynamics’ earnings per share were $2.02 and its core operations remained solid, said Bank of America/Merrill Lynch analyst Robert Epstein.

Johnson said aerospace revenue was expected to rise 15 percent in 2012, after expanding 13 percent in 2011 to $6 billion. Margins would be around 15 percent, driven by improvement at Jet Aviation, he said.

General Dynamics reported a backlog was $57.4 billion at the end of the year, and orders were particularly strong in the fourth quarter for combat vehicle production and updates.

Gulfstream also saw strong demand in the quarter and for the full year, recording the highest number of orders for new aircraft since the introduction of the G650 in 2008.

General Dynamics posted revenue of $9.1 billion in the fourth quarter, and $32.7 billion for the full year.

Johnson said there was no doubt that U.S. defense spending would decline, but the company’s incumbent position on many big programs, would protect it against significant surprises.

“We are doing everything in our control to position our defense businesses for the declining budget headwind, including continuous improvement initiatives, restructuring, divesting non-core businesses, and headcount reductions,” Johnson said, noting that such actions had already helped the company maintain defense earnings in 2011 despite declining sales.

Sales in combat systems would likely drop to around $8.5 billion in 2012 from $8.8 billion in 2011, with international orders likely to offset the decline in U.S. orders, he said.

Sales in marine systems would also be slightly lower, while revenue in information systems would likely be flat, he said.

Johnson noted that declining defense spending was expected to drive down prices for possible acquisitions in the sector, and the company’s strong cash position would allow it make acquisitions to “shore up our outlook.”

The company also remained committed to paying dividends, but would decide the level at a March board meeting, he said.

General Dynamics shares were trading nearly unchanged at $71.30 on the New York Stock Exchange in mid-afternoon after falling as low as $69.47 on the dip in earnings.

Reporting By Andrea Shalal-Esa; Editing by Maureen Bavdek

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