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Defense and aerospace operator General Dynamics Corporation (GD - Analyst Report) announced third-quarter 2012 operating earnings of $1.70 per share, falling short of the Zacks Consensus Estimate by 7 cents. It also missed the year-ago figure by 7.1%.

Operational Performance

General Dynamics generated total revenue of $7.93 billion in the reported quarter versus $7.85 billion in the year-ago quarter, reflecting a paltry growth of 1%. The year-over-year growth in revenue was primarily attributable to positive contribution from its Aerospace and Marine Systems segments, partly offset by decline in the Combat Systems and Information Systems and Technology Aerospace segments.

The reported quarter’s revenue failed to meet the Zacks Consensus Estimate of $8.05 billion.

Operating costs and expenses increased 2.5% year over year to $7.1 billion in the quarter.

Backlog at the quarter end was $51.5 billion.

Segment Performance

The Aerospace segment reported revenue of $1.84 billion, up 30% from the prior-year period. Operating income from this segment was $261 million, up 20.3% year over year.

Combat Systems reported revenue of $1.96 billion, down 8.6% year over year. Operating income from this segment was $274 million, declining 14.1% year over year.

Marine Systems reported revenue of $1.67 billion, up 3.0% from the year-earlier period. Operating income from this segment was $186 million, up 7.5% year over year.

Information Systems and Technology reported revenue of $2.47 billion, reflecting a decline of 7.8% from the previous year. Operating income from this segment was $201 million, plunging 35% year over year.

Financial Condition

Cash and cash equivalents as of September 30, 2012, were $2.87 billion versus $2.65 billion as of December 31, 2011.

Long-term debts at quarter end totaled $2.9 billion, a decline from $3.9 billion as of December 31, 2012. Debt-to-equity at the end of third quarter 2012 was 27.5% versus 30.3% at the end of third quarter 2011.

General Dynamics generated cash flow from operating activities of $704 million in the quarter, surging from $137 million in the year-ago quarter.

Capital expenditure incurred were $110 million, lower than $121 million in the year-ago quarter.

Free cash flow totaled $594 million, a huge improvement from $16 million in the year-ago quarter.

Peer Update

Lockheed Martin Corporation (LMT - Analyst Report), which competes with General Dynamics, reported strong third quarter 2012 earnings of $2.26 per share, surpassing both the Zacks Consensus Estimate of $1.85 and year-ago earnings of $2.06 per share.

On the revenue front, Lockheed Martin reported quarterly net sales of $11.9 billion, beating the Zacks Consensus Estimate of $11.1 billion by $698 million. However, the figure fell below the year-ago quarterly revenue of $12.1 billion.

Our View

Though General Dynamics failed to meet the expectations, we remain upbeat due to improving business jet market, its stable business of U.S. military vehicles, a backlog of over $51 billion and strong cash flow generation.

However, like all defense majors, the future prospects of the company are 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. It currently holds Zacks #3 Rank, translating into a short-term Hold rating.

(Note: We are revising this article to correct an error. The original article, published yesterday, Oct. 24, 2012, is not to be relied upon.)

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