GD Tops Earnings, Lags Sales

Zacks

Defense and aerospace operator General Dynamics Corporation (GD) announced first-quarter 2013 operating earnings of $1.62 per share, surpassing the Zacks Consensus Estimate of $1.51 by 7.3%. Earnings were ahead of the year-ago figure by 5 cents.

Total Revenue

General Dynamics generated total revenue of $7.4 billion in the reported quarter versus $7.57 billion in the year-ago quarter, reflecting a decline of 2.3%.

The year-over-year decline in revenue was primarily attributable to lower contribution from its Combat System segment. Improved sales from Aerospace, Marine Systems and  Information Systems and Technology Aerospace marginally offset the negative impact.

Reported quarter revenue was marginally lower than the Zacks Consensus Estimate of $7.51 billion.

Segment Performance

The Aerospace segment reported revenue of $1.78 billion, up 9.6% from the prior-year period. Operating income from this segment was $310 million versus $271 million a year ago.

Combat Systems reported revenue of $1.55 billion, down 18.7% year over year. Operating income from this segment was $215 million, up 5.3% from $203 million in the prior-year period.

Marine Systems reported revenue of $1.62 billion, up 1.3% from the year-earlier period. Operating income from this segment was $159 million, down 14.1% from $185 million in the prior-year period.

Information Systems and Technology reported revenue of $2.44 billion, reflecting growth of 0.3% from the previous year. Operating income from this segment was $185 million versus $218 million in the prior-year period. During the quarter this segment received significant new orders which added up to $850 million.

Highlights of the Quarter

General Dynamics continued with its cost reduction initiatives, which benefited the margins of the company. Operating margins in the first quarter 2013 were 11.4%, improving 10 basis points from the year-ago quarter.

We noticed a sequential as well as year-over-year decline in total backlog. General Dynamics ended the first quarter with a total backlog of $48.45 billion, down 5.5% sequentially and 12.3% year over year. Backlog of orders was down in all segments except for the Information Systems and Technology Aerospace division.

During the quarter the board of directors approved a 9.8% increase in the quarterly dividend rate to 56 cents per share. The company also repurchased 1 million shares during the quarter.

Financial Condition

Cash and cash equivalents as of Mar 31, 2013, were $3.74 billion versus $3.29 billion as of Dec 31, 2012.

Outstanding long-term debts, as of March 31, 2013, were $3.9 billion, in line with the 2012 end level. Debt-to-equity at the end of first quarter 2013 was 33.8% versus 28.2% at the end of first quarter 2012.

Cash flow from operating activities in the first quarter of 2012 was $0.5 billion versus $0.4 billion in the comparable year-ago period.

Other Company Releases

Raytheon Company (RTN) is expected to release its first quarter results on Apr 25, 2013. The Zacks Consensus Estimate for the quarter is $1.28.

L-3 Communications Holdings Inc. (LLL) is expected to release its first quarter results on Apr 25, 2013. The Zacks Consensus Estimate for the quarter is $1.93.

FLIR Systems, Inc. (FLIR) is expected to release its first quarter results before the market open on Apr 26, 2013. The Zacks Consensus Estimate for the quarter is 34 cents.

Our View

General Dynamics registered a mixed performance in the quarter with its top line falling short of our expectation. We remain concerned about the decline in order backlog, given the threat of U.S. defense budget cuts. Like all defense majors the future prospects of the company is tied to the U.S. defense budget.

We appreciate the initiatives taken by the company to increase shareholder value through share  buybacks and payment of regular dividends.

Based in Falls Church, Virginia, General Dynamics along with its units operates in business aviation, land and expeditionary combat systems, armaments and munitions, shipbuilding and marine systems as well as information systems and technologies. General Dynamics currently retains a Zacks Rank #4 (Sell).

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