Snapshot of a defense giant
General Dynamics isn’t the biggest of the big defense conglomerates, but it represents a fair cross-section of today’s defense game. We hear a lot of talk in Washington these days about the potentially apocalyptic effects of DoD budget cuts, but judging from GD’s earnings report Wednesday, the game is still going pretty well.
The report obviously depicts General Dynamics’ past performance, not the future that everyone is worried about, but company officials said in their announcement they expect the company to continue to do well even amid the big crunch. One key to its performance will be its information systems business, given the enduring importance of government IT and cyber-security, the company says. Another is its ownership of private jet maker Gulfstream, which has given the company a revenue stream less dependent on government contracts. (We’ve heard before about the value of diversification for defense companies.)
Forthwith, the details from GD — as you’ll see, playing in several different sports is a lucrative strategy for the company:
General Dynamics today reported third-quarter 2011 earnings from continuing operations of $665 million, or $1.83 per share on a fully diluted basis, compared to 2010 third-quarter earnings from continuing operations of $649 million, or $1.70 per share fully diluted. Revenues in the quarter were $7.9 billion. Operating earnings were $998 million, an increase of 3.3 percent over third-quarter 2010 …
The Aerospace group’s funded backlog increased $358 million in the third quarter on the strength of continued international demand for Gulfstream’s portfolio of aircraft. The $1.3 billion increase in funded defense-related backlog was supported by several significant orders in the quarter, including a $1.8 billion award to Marine Systems for two DDG-1000 Zumwalt-class destroyers, as well as a $565 million contract for construction of a DDG-51 Arleigh Burke-class destroyer which includes an option for an additional ship.
Similarly, Combat Systems was awarded a $250 million order to produce 115 Stryker vehicles with the new double-V-hull configuration, and a $205 million order from the U.S. Marine Corps for upgrade kits for mine-resistant, ambush-protected vehicles. In addition to the total backlog, the company’s estimated potential contract value grew by 28.7 percent over the end of the second quarter, largely on the strength of a $5.7 billion increase in the Information Systems and Technology group. Estimated potential contract value is management’s estimate of the ultimate value of unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options.
Net cash provided by operating activities in the third quarter totaled $136 million, and $1.2 billion year-to-date. Third-quarter free cash flow from operations, defined as net cash provided by operating activities less capital expenditures, was $15 million. Cash performance in the quarter was impacted by inventory growth in the Aerospace group in preparation for ultra-large-cabin G650 green aircraft deliveries in the fourth quarter.
“General Dynamics continued to execute effectively in the third quarter,” said Jay L. Johnson, chairman and chief executive officer. “This solid operating performance reflects our ongoing focus on increasing efficiency, improving productivity and driving cost out of our businesses. Importantly, order activity in the quarter underscored the enduring nature of customer demand for our products and services.”
The big question is — how much demand, and for how long?