General Dynamics' Gulfstream business delivered 37 percent fewer "outfitted" business jets to customers in the third quarter, and the funded backlog of the division now is sitting at its lowest level since 2007.
The funded backlog is considered a reliable indicator of future earnings for the aircraft since it reflects orders the company has for definitive purchase contracts and deposits from actual customers.
"Deliveries in the business jet market are down, including somewhat at Gulfstream," General Dynamics Chairman and CEO Phebe Novakovic said during the company's third-quarter earnings call Wednesday. It follows comments last week by Honeywell International's CFO Tom Szlosek, who said that "softness in the business jet market is impacting the aftermarket."
Indeed, Gulfstream has been facing ongoing challenges due to used inventory available of its most advanced business jet, the G650. Novakovic said there were "about 19 to 20" of the G650 business-class jets for sale on the used market but said an analysis of those shows "maybe 12 to 14 serious sellers," and she maintained that the number was "well within the 10 percent" of the overall fleet in service.
Still, the number of pre-owned G650s on the used market has been an issue plaguing the Falls Church, Virginia–based aerospace and defense company for most of this year. However, the number of available used G650 — a flagship twin-engine aircraft that is part of the General Dynamics' Aerospace segment — is still down from the high of 26 in the spring.
During the third quarter ended Oct. 2, Gulfstream delivered 27 total "outfitted" aircraft, down from 43 in the year-ago quarter. That meant the number of aircraft delivered was down 37 percent in the third quarter from a year ago, while in the second quarter the delivery decline was just 17 percent compared with the year-ago period.
According to Novakovic, the Gulfstream order sales pipeline and order activity trends are looking up. In fact, she said third-quarter orders were the strongest in five years for the company and added "both our fourth-quarter activity today and a pipeline are good."
The Aerospace segment's funded backlog stood at $11.41 billion in the third quarter, down from $13.45 billion a year ago and the lowest level since September 2007 when it stood at $10.24 billion.
The General Dynamics CEO also maintained that Gulfstream is taking share in the business jet market. Moreover, she said "we are far less dependent on the BRIC countries," a reference to Brazil, Russia, India and China.
General Dynamics has been making a transition from its older model business jets to the G650, and to the newer G500 and G600 aircraft programs.
Novakovic said the test programs for both the G500 and G600 airplanes were "going very well."
The Gulfstream G500 jet is replacing the company's G450, which was first delivered back in 2005. Novakovic said she expects the G500 "will most certainly" make a financial contribution in 2017 and she sees it as having "a significant one in 2018." As for the G600, she said it should make a contribution in 2018 and expects a more meaningful one in 2019.
Meantime, Novakovic said the company has a goal of "double-digit growth" in earnings but indicated "it's too soon for me to tell how 2017 plays out."
For the third quarter of 2016, General Dynamics reported earnings from continuing operations were $2.48 per share, up nearly 9 percent from $2.28 a year ago and ahead of Street consensus of $2.38 per share, according to Thomson Reuters. Revenues fell 3 percent to $7.73 billion.
Finally, General Dynamics lifted its full-year 2016 guidance Wednesday from $9.70 per share to $9.75 a share. Analysts currently have the company's full-year 2016 EPS at $9.73 per share, or for 7 percent growth from the prior year.
Elsewhere, competing defense contractor Northrop Grumman on Wednesday also lifted its current year EPS guidance range to between $11.55 and $11.75 per share, up from its previous range guidance issued in July for EPS of between $10.75 and $11 a share. The upward revision in EPS guidance compares with the average Street estimate for EPS of $11.05 per share.
For the third quarter, Northrop's reported earnings from continuing operations are up 17 percent to $3.35 per share, up from $2.75 a share a year ago and above analysts' consensus. Revenues were up 3% to $6.2 billion.
During Northrop's earnings call, Chairman and CEO Wesley Bush spoke about the global threat environment today and said defense budgets have "not grown as fast as the threat." He also said defense customers "do need to see more affordability from the industrial base."
His comments follow the release this week of the full report about why the U.S. Government Accountability Office in February defended the Air Force's controversial decision to grant Northrop the $80 billion long range strike bomber contract. In February, the GAO denied Boeing's protest of the contract, although more details about its decision were not known until this week's report.
According to the GAO, cost was the reason for the award going to Northrop. "Significant structural advantages in Northrop's proposal — specifically, its labor rate advantage and decision to absorb significant company investment — also strongly impacted the outcome of this essentially low-price, technically acceptable procurement," the GAO said in the new report.
Northrop's CEO commented on the GAO report when asked about it by an analyst. He said the report "makes it clear that the GAO did perform a very rigorous and deliberate review of the work that the Air Force did and its very thorough selection process."
The CEO added, "You'll see in that report the continuing discipline that we bring to the bidding process and that we've been demonstrating time and again over the years."
In trading Wednesday, Northrop stock reached an all-time high during the day of $229.45 a share. The stock last traded up 4 percent on more than double its average daily volume.
General Dynamics shows more turbulence in Gulfstream business as deliveries fall
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