General Dynamics Corporation ( GD - Analyst Report ) has entered into an agreement to acquire the Ship Repair and Coatings Division of Earl Industries. The value of the cash transaction, which General Dynamics expects to be accretive to earnings in 2013, has not been disclosed. General Dynamics expects to close the transaction this summer.

Privately held Earl Industries is a leading East Coast ship repair company that supports the U.S. Navy fleet in Norfolk, Virginia and Mayport, Florida. The Ship Repair and Coatings Division employs approximately 575 workers in the Norfolk and Mayport areas. Earl Industries has been conducting U.S. Navy ship repair and conversions since 1985. It is a prime contractor for nuclear aircraft carrier multi-ship, multi-option (“MSMO”) contracts. MSMO contracts provide for maintenance, modernization and repair of all ships of a class in specific homeport areas. The company also provides maintenance and repair services to frigates and other classes of naval ships.

The acquisition of the Ship Repair and Coatings Division of Earl Industries will extend the reach of General Dynamics’ ship maintenance and repair operations in two key East Coast naval ports.

This move enhances General Dynamics' ability to deliver cost-effective maintenance and repair services to the U.S. Navy, maximizing the life of in-service ships for the betterment of the entire U.S. fleet.

The Ship Repair and Coatings Division of Earl Industries will become part of the shipbuilding, maintenance and repair operations of San Diego-based General Dynamics NASSCO, a leading provider of ships to the Navy and a major producer of Jones Act commercial vessels.

Looking forward, key drivers include the improving business jet market, its stable business of U.S. military vehicles, a backlog (though declining) of over $55 billion, an ongoing share repurchase program and strong cash flow generation. However, the company is largely tied to the U.S. defense budget, where the threat of budget cut is looming. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.

Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems, and Aerospace.

General Dynamics was the third largest U.S. defense contractor in terms of revenue in fiscal 2011, after The Boeing Company ( BA - Analyst Report ) and Lockheed Martin Corporation ( LMT - Analyst Report ) . The company is one of two contractors equipped to build nuclear-powered submarines in the U.S.

For the future, the company’s focus will be on the revival of the business jet market (Gulfstream) along with programs such as the Warfighter Information Network Tactical program and Joint Tactical Radio System in the IS&T division.

Similarly, the Combat Systems and Marine Systems segments will receive a boost from higher volumes in the U.S. military vehicle business (Stryker combat vehicles and Abrams tanks) and ship programs like DDG-51, Virginia class submarines and the Mobile Landing Platform program.

General Dynamics’ total order backlog steadily decreased to $55.2 billion at the end of the first quarter of 2012 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, keeping risks of further cutbacks in future defense budgets at a high level. Our apprehension is fueled by $15 trillion of national debt and an unemployment rate hovering around 8.2% which would lead to the Budget Control Act’s dictum of automatic cutbacks across the board going forward.

Going by the pulse of the economy and the pros and cons, we prefer to maintain our long-term Neutral recommendation on the stock. Moreover, General Dynamics holds a Zacks #3 Rank that translates into a short-term Hold rating.