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Defense and aerospace operator General Dynamics Corp. (GD - Analyst Report) announced second-quarter 2013 operating earnings of $1.81 per share, surpassing the Zacks Consensus Estimate of $1.63 by 11.0%. Earnings were also ahead of the year-ago figure by 4 cents, backed by robust aerospace activity.

Total Revenue

General Dynamics generated total revenue of $7,911.0 million in the reported quarter versus $7,922.0 million in the year-ago quarter, reflecting a nominal decline of 0.1%. Reported figure was, however, higher than the Zacks Consensus Estimate of $7,704.0 million.

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

Segment Performance

The Aerospace segment reported revenue of $2,052.0 million, up 29% from the prior-year period. Operating income from this segment was $389.0 million, reflecting a solid jump of 51.4% from $257.0 million a year ago.

Combat Systems reported revenue of $1,549.0 million, down 27.9% year over year. Operating income from this segment was $218.0 million, down 32.3% from $322.0 million in the prior-year period.

Marine Systems reported revenue of $17,759.0 million, up 6.4% from the year-earlier period. Operating income from this segment was $178.0 million, down 2.7% from $183.0 million in the prior-year period.

Information Systems and Technology reported revenue of $2,550 million, reflecting growth of 0.9% from the previous year. Operating income from this segment was $198.0 million versus $226.0 million in the prior-year period.

Highlights of the Quarter

General Dynamics continued with its cost reduction initiatives, which benefited the margins of the company. Operating margins in the second quarter 2013 were 11.8%, at par with the year-ago level.

We noticed a sequential increase and a year-over-year decline in total backlog. General Dynamics ended the second quarter with a total backlog of $49.43 billion, up 2.0% sequentially but down 5.6% year over year. Backlog of orders was down in all segments sequentially except for Marine Systems and Information Systems and Technology Aerospace divisions.

During the quarter, the company repurchased 6.6 million shares during the quarter.

Financial Condition

Cash and cash equivalents as of Jun 31, 2013, were $3,757.0 million versus $3,296.0 million as of Dec 31, 2012.

Outstanding long-term debts, as of Jun 31, 2013, were $3,908.0 million, almost in line with the 2012 end level. Debt-to-equity at the end of the second quarter 2013 was 33.2% versus 28.8% at the end of second quarter 2012.

Cash flow from operating activities during the quarter was $579.0 million versus $789.0 million in the comparable year-ago period.

At the Peers

Raytheon Company (RTN - Analyst Report) is expected to release its second quarter results on Jun 25, 2013. The Zacks Consensus Estimate for the quarter is $1.30.

L-3 Communications Holdings Inc. (LLL - Analyst Report) is expected to release its second quarter results on Jun 25, 2013. The Zacks Consensus Estimate for the quarter is $1.94.

Meanwhile, the world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT - Analyst Report), posted second quarter 2013 earnings of $2.64 per share, comfortably surpassing the Zacks Consensus Estimate of $2.21 by 19.5%.

Zacks Rank

General Dynamics’ revenue exposure is spread over a broad portfolio of products and services that keeps the overall growth momentum intact. With back-to-back Department of Defense contracts, the company seems to be well positioned to generate a steady revenue stream.

Jet sales at the Gulfstream business are continuing to see traction even in the slowing defense sales scenario. Gulfstream is expected to contribute more significantly to General Dynamics’ earnings going forward. However, the brunt of defense budget cuts cannot be ignored weighing on future operating results. General Dynamics currently retains a Zacks Rank #3 (Hold).

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