Despite a small drop in year-over-year revenues and operating earnings, Savannah-based Gulfstream Aerospace posted a strong second-quarter performance, pushing margins significantly past analysts’ expectations for the second quarter and setting the scene for a “very strong” third-quarter performance, parent company General Dynamics said Wednesday.
General Dynamics (NYSE: GD) reported 2014 second quarter earnings from continuing operations of $646 million, or $1.88 per share on a diluted basis compared to earnings of $640 million and $1.81 in the same quarter last year.
Second quarter revenues were $7.5 billion.
The company’s aerospace revenues were down 2.8 percent to $1.9 billion in the second quarter 2014, compared to $2 billion in the same quarter 2013. Operating earnings were $384 million, 1.3 percent lower than the same quarter a year ago.
However, operating margins went from 18.9 percent in 2Q last year to 19.2 percent in 2Q 2014.
An operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production – wages, materials, etc. A healthy operating margin allows the company to pay for such fixed costs as interest on debt.
Orders in the aerospace group — which includes the company’s Gulfstream business-jet unit – were strong in the quarter, with particular interest in the flagship G650.
“General Dynamics’ strong second quarter performance reflects our continued focus on program execution and operational improvements,” said Phebe N. Novakovic, chairman and chief executive officer.
“We have a solid building block for the future with an increased defense backlog and robust order activity across the portfolio of Gulfstream business jets.”
“All in all, aerospace had a superb first half of 2014, with particularly strong interest in the G550,” she said, adding that the smaller G450 and G550 comprise 70 percent of Gulfstream’s total order book.
In an analysts’ conference call, the company forecast full-year profits from continued operations of $7.40 to $7.45 per share, compared with the Wall Street estimate of $7.33.
“General Dynamics recorded solid second quarter results, topping the consensus earnings-per-share estimates by 11 cents and our estimate by 7 cents,” said Sterne Agee analyst Peter Arment. Strong margins performance at Gulfstream was driven by the G650, he said.
“The impressive margin execution at Gulfstream demonstrates the leverage General Dynamics can employ as the G650 ramps up.”
In a report to clients last month, Sterne Agee noted the market for the G450/G550 has averaged 135 aircraft a year since 2000 but suggested the market for $40 million-plus business aircraft — exclusive of the G650 — will grow to more than 170 a year in the next five years as new products come into the market.
In a buy recommendation, the privately owned brokerage house estimated Gulfstream’s backlog could grow by several billion dollars before the end of the year, another indication that a new product is on the horizon.
Gulfstream Aerospace employs 9,900 people at its corporate headquarters in Savannah and a total of 10,100 statewide.
Headquartered in Falls Church, Va., General Dynamics employs approximately 89,600 people worldwide. The company is a market leader in business aviation; combat vehicles, weapons systems and munitions; shipbuilding; and communication and information technology.
GULFSTREAM BY THE NUMBERS
2Q 2013 2Q 2014 Variance
Revenues $2 billion $1.9 billion down 2.8 percent
Operating earnings $389 million $384 million down 1.3 percent
Operating margins 18.9 percent 19.2 percent