Defense and aerospace operator General Dynamics Corporation (GD) announced fourth quarter and fiscal 2011 operating earnings. The company reported fourth quarter earnings of $2.20 per share, which surpassed the Zacks Consensus Estimate of $2.00. The results of the company were 29 cents ahead of the year-ago figure of $1.91 per share. Including charges of 52 cents per share ($189 million) related to the company’s Switzerland-based aircraft-completions business, the company’s GAAP EPS was $1.68 per share as compared to $1.91 in the year-ago period.
The results were driven by tremendous cash generation, delivery of the first 12 Gulfstream G650 production aircraft to the final phase of manufacturing, and strong margins in defense businesses. However, these positives were partially offset by charges taken at the company’s Switzerland-based aircraft-completions business.
Pro forma earnings per share for the fiscal year 2011 were $7.46, up from the Zacks Consensus Estimate of $7.12. It also easily surpassed the year-ago figure of $6.82.
Total Revenue
General Dynamics generated total revenue of $9.1 billion in the reported quarter versus $8.6 billion in the year-ago quarter, reflecting an increase of 6.3%. The year-over-year increase in revenue was primarily attributable to higher contribution from Aerospace and Marine Systems partially offset by lower contribution from Combat Systems and Information Systems and Technology segments. Reported quarter revenue however failed to meet the Zacks Consensus Estimate by $206 million.
In fiscal year 2011, the company clocked revenue of $32.7 billion, marginally up by 0.64% year over year. The top line failed to meet the Zacks Consensus Estimate of $33.8 billion.
In the reported quarter, operating income was $950 million compared with $1.0 billion in the year-ago period. The company reported operating income of $3.8 billion in fiscal 2011, down $119 million year over year.
At the end of fourth quarter 2011, the company’s total backlog was $57.4 billion compared with $59.6 billion at the end of fourth quarter 2010. Total potential contract value at the end of fiscal 2011 was $85.4 billion versus $81.3 billion at the end of fiscal 2010.
Segment Performance
The Aerospace segment reported revenue of $1.9 billion in the fourth quarter, up 46% from the prior-year period. The upsurge was driven by the Gulfstream business that experienced a healthy demand across its product portfolio and recorded the highest number of orders for new aircraft in fiscal 2011 since the introduction of G650 in 2008.
Combat Systems reported quarterly revenue of $2.6 billion, down 3.2% year over year. Domestic and international orders were particularly strong for combat vehicle production and improvements. Among the significant orders received during the quarter was a deal from the Canadian government to modernize 550 LAV III combat vehicles and a contract from the U.S. Army for the production of 277 Stryker vehicles and contractor logistics support.
Marine Systems reported revenue of $1.76 billion, up 3.4% from the year-earlier period. During the quarter, the segment received a contract worth $280 million from the U.S. Navy for the conversion of nuclear submarines to moored training ship platforms and associated support yard services.
Information Systems and Technology reported revenue of $2.92 billion reflecting a marginal decline of 0.5% from the previous year. During the quarter, the segment received various new orders which included a $95 million contract for production and support of U.S. and U.K. Trident II submarine weapons systems. The contract has a maximum value of $225 if all options are exercised.
Financial Condition
Cash and cash equivalents as of December 31, 2011, were approximately flat at $2.6 billion year over year. Long-term debts of the company increased in fiscal 2011 to $3.9 billion compared with $2.4 billion as of December 31, 2010.
In fiscal 2011, capital expenditure increased significantly by $1.3 billion to $1.6 billion. Net cash provided by operating activities was $3.2 billion in the current fiscal year, up by $252 million year over year.
Peer Comparison
One of its peers, Textron Inc. (TXT) also released its fourth quarter and fiscal year 2011 earnings. Textron’s pro forma EPS of 49 cents easily surpassed the Zacks Consensus Estimate of 34 cents. Textron’s fourth quarter revenue of $3.2 billion also exceeded the Zacks Consensus Estimate by $18 million.
Our Take
We note that despite the dip in total backlog, the potential contract value of the company increased. We believe this along with the company’s ability to garner consistent contracts will boost the top line going forward. Moreover, General Dynamics’ revenue exposure is spread over a broad portfolio of products and services which will keep the overall growth momentum steady. Along with Gulfstream, we also expect the company to focus on programs such as the Warfighter Information Network – Tactical (WIN-T) program and Common Hardware/Software III (CHS-3) in the Information Systems and Technology division.
However, the company is largely tied to the U.S. defense budget, where the threat of budget cuts is looming high. Also, we have turned slightly cautious about the ongoing macro weakness. General Dynamics currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term Neutral recommendation on the stock.
Headquartered in Falls Church, Virginia, General Dynamics Corporation engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation.
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