Defense and aerospace operator General Dynamics Corporation (GD) reported mixed numbers in the second quarter of 2011. In the reported quarter performance of the company was affected by receding revenues across business segments. This was partially salvaged by lower costs.
As a result earnings from continuing operations came in at $1.79 per share, surpassing the Zacks Consensus Estimate of $1.73. Results also comfortably beat earnings of $1.68 in the year-ago quarter. On a reported basis earnings per share came in at $1.76 versus $1.67.
Operational Performance
General Dynamics generated total revenue of $7.88 billion in the quarter under review, down 2.8% year over year. Weak performance across all the segments, barring Combat Systems led to the overall decrease. Results also lagged the Zacks Consensus Estimate of $8.26 billion.
Operating margins fell 20 basis points to 12.0% from 12.2% in the year-ago quarter. Operating margins for Combat Systems and Information Systems and Technology grew when compared to the year-ago period, and Marine Systems margins remained steady.
Only Aerospace margins shrunk year over year. General Dynamics reported quarterly earnings from continuing operations of $666 million compared with $651 million in the year-ago period. Net earnings were $653 million, compared to $648 million in the second quarter of 2010.
Segment Performance
Aerospace segment reported revenue of $1.38 billion, down 0.5% year over year. Operating earnings also fell 10.3% to $209 million versus $233 million in the year-ago period. Operating margin shrunk by 160 basis points to 15.2%.
Combat Systems revenue increased 0.5% year over year to gross $2.12 billion in the quarter. Operating earnings rose 1.4% to $299 million. Operating margin rose by 10 basis points to 14.1%.
Marine Systems revenue fell 3.7% to $1.58 billion. Operating earnings fell 3.6% to $161 million. Operating margin remained flat year over year at 10.2%.
Revenues at Information Systems and Technology fell 5.6% to $2.81 billion. Operating earnings fell 4.2% to $299 million. Operating margin rose by 20 basis points to $10.7%.
Financial Performance
General Dynamics ended the reported quarter with cash and cash equivalents of $2.16 billion, up from $2.61 billion at 2010 end. Long-term debt declined to $2.41 billion versus $2.43 at 2010 end. In the first six months of 2011, General Dynamics generated cash from operating activities of $1.08 billion compared with $687 million in the year-ago period.
Outlook
General Dynamics’ funded backlog increased to $44.3 billion at the end of second-quarter 2011. The company's total backlog at the end of the second-quarter 2011 was $57.1 billion. In recent times the company has witnessed strong demand for Gulfstream aircraft and aircraft services, leading to an increase in the Aerospace backlog.
Combat Systems, Marine Systems and Information Systems and Technology also received key orders, including the U.S. Army contract for Hydra-70 rockets, U.S. Navy's Mobile Landing Platform program, IT infrastructure for the relocation of the Department of Homeland Security's headquarters and U.S. Army contract for production of Rifleman and Manpack radios.
General Dynamics expects 2011 earnings from continuing operations to be in the range $7.15 – $7.20.
General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010, after The Boeing Company (BA), Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC). The company’s revenue exposure is spread over a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems, technologies and services.
We expect strong performance across the segments, aided by continued contract wins as well as strong financial position will help General Dynamics to post solid results going forward.
Thus we maintain our Neutral’ recommendation on General Dynamics. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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