GD Beats, Outlook Cautious

Defense and aerospace operator General Dynamics Corporation ( GD - Analyst Report ) announced second-quarter 2012 operating earnings of $1.77 per share, which surpassed the Zacks Consensus Estimate of $1.74. However, earnings missed the year-ago figure by 2 cents.

General Dynamic’s GAAP earnings during the second quarter were $1.77 per share versus $1.76 per share reported in the year-ago quarter.

Total Revenue

General Dynamics generated total revenue of $7.92 billion in the reported quarter versus $7.87 billion in the year-ago quarter, reflecting growth of 0.5%. The year-over-year growth in revenue was primarily attributable to positive contribution from its Aerospace, Marine Systems and Combat System segments, partly offset by decline in the Information Systems and Technology Aerospace segments.

Reported quarter revenue was marginally ahead of the Zacks Consensus Estimate of $7.91 billion by $7 million.

Segment Performance

The Aerospace segment reported revenue of $1.59 billion, up 15.7% from the prior-year period. Operating income from this segment was $257 million versus $209 million a year ago.

Combat Systems reported revenue of $2.14 billion, up 1.3% year over year. Operating income from this segment was $322 million versus $299 million in the prior-year period. One of the significant orders received during the quarter was a $270 million deal from the U.S. Army for the production of Hydra-70 rockets.

Marine Systems reported revenue of $1.65 billion, up 4.9% from the year-earlier period. Operating income from this segment was $183 million versus $161 million in the prior-year period.

Information Systems and Technology reported revenue of $2.52 billion reflecting a decline of 9.9% from the previous year. Operating income from this segment was $226 million versus $299 million in the prior-year period.

Financial Condition

Cash and cash equivalents as of July 1, 2012, were $2.54 billion versus $2.64 billion as of December 31, 2011.

Capital expenditure in the first six months of 2012 increased by $24 million to $176 million from $152 million in the comparable period in 2011.

Outstanding long-term debts, as of July 1, 2012, were $2.9 billion, a decline from $3.9 billion as of December 31, 2012. Debt-to-equity at the end of second quarter 2012 was 28.8% versus 22.8% at the end of second quarter 2011.

Cash flow from operating activities in the first six months of 2012 was $1.2 billion versus $1.07 billion in the comparable year-ago period.

During the quarter the board of directors has officially approved the buyback of 10 million shares from the open market.

Peer Update

Lockheed Martin Corporation ( LMT - Analyst Report ) , which competes with General Dynamics, reported strong second quarter 2012 earnings of $2.38 per share, surpassing both the Zacks Consensus Estimate of $1.92 and year-ago earnings of $2.16 per share.

Lockheed Martin reported quarterly net sales of $11.9 billion, beating the Zacks Consensus Estimate of $11.3 billion and the year-ago revenue of $11.5 billion. The company ended the quarter with a backlog of $75.5 billion.

Guidance

General Dynamics showed caution while providing the 2012 earnings per share guidance. Since there is a possibility of award delay in the Information Systems and Technology’s tactical communications business, the company has lowered its earnings guidance range for 2012 to $7.00–$7.10 per share from $7.10–$7.20 per share earlier.

The total backlog of the company at the end of the second quarter was $52.4 billion, down from the first quarter 2012 backlog of $55.3 billion and the year-ago backlog of $57.1 billion.

Our View

General Dynamics posted convincing results on the back of strong performance from its different business segments, with a minor drag from Information & Technology. We appreciate the initiatives taken by the company to increase shareholder value through buyback of shares and payment of regular dividends.

However, like all defense majors, the future prospects of the company is tied to the U.S. defense budget. With the possibility of a cut in the defense budget, we presently retain a Neutral outlook on the company.

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 #3 Rank, which translates into a short-term Hold rating.