GD Beats on Bottom Line - Analyst Blog

Defense and aerospace operator General Dynamics Corporation (GD) announced its fourth-quarter 2010 earnings from continuing operations of $1.91 per share, surpassing the Zacks Consensus Estimate of $1.85. Results comfortably beat earnings of $1.58 in the year-ago quarter. Earnings were $729 million, up 18% from $618 million in the fourth quarter of 2009.

Full year 2010 earnings from continuing operations came in at $6.82, surpassing the Zacks Consensus Estimate of $6.76 as well as the year-ago result of $6.20. Earnings were $2.63 billion, up 9% from $2.41 billion in 2009.

For full year 2010, the company reported net income of $2.6 billion or $6.81 per share, higher than $2.4 billion or $6.17 per share in 2009.

Operational Performance

General Dynamics generated total revenue of $8.6 billion in the quarter under review, up 8.9% year over year. Strong performance across all the segments led to the overall increase. Results, however, lagged the Zacks Consensus Estimate of $8.9 billion.

Full year 2010 total revenue grossed $32.5 billion, up 1.5% year over year; though fell behind the Zacks Consensus Estimate of $32.8 billion.

Operating costs and expenses increased 8% year over year to gross $7.5 billion in the fourth quarter of 2010. Full year 2010 operating costs and expenses increased to $28.5 billion from $28.3 billon in 2009.

Operating earnings were $1.1 billion in the quarter, up 13.1% year over year. Operating margin increased to 12.5% from 12% in the year ago period driven by margin improvement in the Aerospace, Marine Systems and Information Systems & Technology segment.

Full-year operating earnings totaled $3.9 billion or 12.2% of sales, compared with $3.7 billion or 11.5% of sales in 2009.

Segment Performance

Marine Systems posted the highest revenue in the quarter, with revenue increasing 9.7% year over year to $1.7 billion.  Operating earnings in the quarter increased 13.5% year over year to $177 billion.

For 2010, segment revenue was $6.7 billion, up 2.5% from $5.2 billion in 2009. Operating earnings were $674 million, up from $642 million in 2009.

Revenues at Information Systems and Technology recorded the second highest growth of 9.6%. Revenue at the segment totaled $2.9 billion in the quarter.  The segment reported a 10.3% year over year growth in operating earnings.

Full year 2010 revenues were $11.6 billion, up 7.5% year over year. Operating earnings improved 5.9% year over year to $1.2 billion.

Combat Systems revenue increased 8.4% year over year to gross $2.7 billion in the quarter. Operating earnings were $400 million, up 9% year over year.

Full year 2010 revenue declined 8% year over year to $8.9 billion. Operating earnings increased 1% year over year to $1.3 billion.

Aerospace segment reported revenue of $1.3 billion, up 7.4% year over year. The segment reported the highest growth in operating earnings. It increased 25.7% year over year to $210 million in the fourth quarter.

Full year 2010 revenue increased 2.5% year over year to $5.3 billion. Operating earnings increased 21.6% from 2009 level to $860 million in 2010.

Backlog

General Dynamics ended the fourth quarter 2010 with a total backlog of $59.6 billion, down from $65.5 billion in the year ago quarter. Marine Systems had the highest backlog of $20.1 billion followed by $17.8 billion in the Aerospace segment.

Financial Performance

General Dynamics ended 2010 with cash and cash equivalents of $2.6 billion, up from $2.3 billion at 2009 end.

Long-term debt declined substantially to $2.4 billion at 2010 end from $3.2 billion at 2009 end.

In 2010, General Dynamics generated cash form operating activities of $2.99 billion compared with $2.86 billion in 2009.

Capital expenditure incurred by the company totaled $370 million in 2010, lower than $385 million incurred in 2009.

Free cash flow for 2010 totaled $2.6 billion, higher than $2.5 billion in 2009.

Guidance

General Dynamics expects earnings from continuing operations to be between $7.00 to $7.10 per share in 2011.

Peer Comparison

Textron Inc. (TXT">TXT), which competes with General Dynamics, also reported fourth quarter 2010 operating earnings of 33 cents per share, surpassing the Zacks Consensus Estimate by 8 cents. Results improved 120% over the prior year quarter due to increased demand in its industrial business and strong performance at Bell.

The quarter witnessed a pick-up in business jet and commercial helicopter demand. Fiscal 2010 operating earnings came in at 81 cents per share, way above the Zacks Consensus Estimate of 41 cents and year-ago earnings of 59 cents.

Another competitor of the company, The Boeing Co. (BA">BA), reported earnings of $1.11 per share in the fourth quarter of 2010. Result excludes a favorable tax settlement of 50 cents per share and a special one-time contribution to Boeing's charitable trust of 5 cents per share.

Our Take

We expect strong performance across the segments, aided by continued contract wins as well as strong financial position will help General Dynamics to post solid results going forward. However, the company is experiencing a fall in order backlog.

We maintain our ‘Neutral' recommendation on General Dynamics. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

 
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