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GD to Merge Combat Systems Units

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Defense contractor General Dynamics Corp. (GD - Free Report) plans to consolidate its Combat Systems business group − General Dynamics Armament and Technical Products − into General Dynamics Ordnance and Tactical Systems. Although the company highlighted that this move would result in significant savings for the company, it refused to provide any financial estimates.

Given the varying demand in some markets and increasing competition, the consolidation aims at boosting both efficiency and profitability. The decision was taken following a broad review of its Combat Systems business group. The company will thus close its armament and technical-products headquarters in Charlotte, N.C., by the end of this year.

The Armament and Technical Products division engages in the designing, development and production of weapon, armament and vehicle-survivability systems for the U.S. military and its associates, as well as composite structures for the commercial, aerospace and defense markets. The business unit also manufactures a wide range of components for commercial trucks, military vehicles and industrial machines. Both units employ about 6,000 workers in the U.S., Canada and in other locations.

The performance of defense operators primarily depends on the orders coming from the national and international defense establishments. U.S. defense budget cuts due to the ongoing sequester is a major cause of concern going forward.

The recent news from the Pentagon regarding plans to slash hundreds of weapons programs and lay off civilian workers make us more apprehensive. The cuts can also lessen spending on procurement and research and development by up to 20%.

Like General Dynamics, other companies are also repositioning themselves in order to trim operating expenses and streamline their operations. These initiatives will help the defense companies to offset the ongoing headwinds.

The company presently retains a short-term Zacks Rank #3 (Hold). However, stocks well placed in the industry are Embraer SA (ERJ - Free Report) , The Boeing Company (BA - Free Report) and Northrop Grumman Corp. (NOC - Free Report) . While Boeing carries a Zacks Rank #1 (Strong Buy), Embraer and Northrop Grumman hold a Zacks Rank #2 (Buy).

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