General Dynamics Resilient

Earlier today, General Dynamics Corporation (GD - Analyst Report) swept past the Zacks Consensus Estimate EPS of $1.40 by 8 cents in the third quarter of fiscal 2009. However, it fell 11 cents short of the year-ago figure of $1.59 in the third quarter of fiscal 2008.

In the reported quarter, the company witnessed weak demand for its Gulfstream business jets. However, showing resilience, the company was able to beat market expectations through strong demand from defense-related products.

On the revenue front, the company witnessed 8.1% growth year-over-year to $7.7 billion. During the quarter, General Dynamics witnessed a rapid escalation in the top line of its Combat Systems (year-over-year growth of 26.9%), Information Systems & Technology (8.8%) and Marine Systems (8.1%). However, Aerospace fell 18.4% year-over-year.

The growth failed to trickle down due to dismal results at the Aerospace segment, where operating earnings shrunk 55.5% year-over-year to $125 million. Margins in the Aerospace segment nosedived to 11.2% from 20.5% in the year-ago quarter.

Operating earnings in Aerospace was bogged down by lower deliveries. Mid-Size Aircraft was the worst hit, with only three deliveries in the quarter compared to the year-ago number of 16, while Large Aircraft delivery fell from 23 in the year-ago period to 14. This was partially offset by Combat Systems (20.6% rise in operating earnings), Marine Systems (10.7%) and Information Systems and Technology (9.6%) segments. Overall, in the reported quarter compared with the year-ago quarter, the company’s overall margin reduced by 180 basis points.

General Dynamics reported $1.3 billion in cash from operating activities at the end of the reported quarter, compared to $2.3 billion reported at the end of the year-ago quarter. Cash and cash equivalents at the end of the reported quarter reached $1.4 billion, while long-term debt stood at $3.2 billion.

General Dynamics maintained its brisk pace in order booking, taking the total backlog at the end of the quarter to $66.2 billion, compared to the $60.5 billion figure in the year-ago quarter. Buoyed by this, the company raised its EPS guidance for fiscal 2009 to $6.15 - $6.20 from the earlier guidance range of $6.05 - $6.15. We maintain our market Neutral recommendation on the shares.