UPDATE 1-General Dynamics raises outlook as profit beats Street

Wed Jul 24, 2013 12:01pm EDT

* Company committed to share buybacks, dividends

* Raises full-year earnings guidance

* Aerospace division profit up 51 pct

By Andrea Shalal-Esa

WASHINGTON, July 24 (Reuters) - General Dynamics Corp reported higher-than-expected second-quarter earnings on Wednesday, with strength in its Gulfstream jet division offsetting declines in a defense business feeling the heat of Pentagon budget cuts.

The company also raised its guidance for full-year earnings, sending its shares up sharply in morning trading to a new 52-week high of $86.39.

Chief Executive Phebe Novakovic said the quarterly results were ahead of the company's plans, but she remained focused on improving performance further - especially given the difficult Pentagon budget climate - and making shareholders happy through stock buybacks and dividends.

"The best antidote to a budget cut is performance," Novakovic told analysts on a conference call. "I would note that bears eat the sick and the young first, so we are very focused on maintaining our good execution on each of our programs, because without that execution, you become more vulnerable."

She said General Dynamics expects to deploy almost all, if not all, of its free cash flow to share buybacks and dividends, with no big acquisition targets on her radar screen. Going forward, she said the company was focused on maintaining a strong balance sheet to seize opportunities if they appear.

General Dynamics, which makes tanks, ships and Gulfstream jets, reported net earnings of $640 million, or $1.81 per share, up from $634 million, or $1.77 per share, a year earlier.

Revenue was little changed at $7.91 billion.

Analysts polled by Thomson Reuters I/B/E/S had forecast earnings per share of $1.62 on revenue of $7.73 billion.

The company raised its full-year earnings guidance to a range of $6.85 to $6.95 per share, up from an earlier forecast of $6.60 to $6.70.

Novakovic said she would revise the guidance again if mandatory Pentagon budget cuts under a process known as "sequestration" hit harder in the 2013 second half.

The company's backlog was $49.4 billion at the end of the second quarter, down 5.6 percent from a year earlier.

Novakovic said the aerospace business, which includes Gulfstream business jets, reported the highest revenue, operating earnings and margins in the last six quarters.

The division's operating earnings were up 51.4 percent and its margin jumped to 18.9 percent from 16 percent.

Novakovic described the division's results as "a clear manifestation of jet aviation's return to profitability and the performance improvement at Gulfstream."

She said the division expected a less stellar performance in the third quarter due to cost increases on several key supplier contracts, lower production rates, and a shift in the mix of production models toward lower-margin airplanes.

But she said the fourth quarter would see a return to second-quarter production levels and other improvements.

In the combat systems division, revenue dropped 28 percent in the second quarter and operating earnings fell 32 percent. Novakovic said the division was hurt by a delay in large international orders, which are now expected in the second half.

She forecast higher operating margins for the division going forward.

Revenue was up 6.4 percent in the marine systems division, but earnings were down 2.7 percent.

The information systems and technology division had largely flat revenue, which earnings fell 12.4 percent.

Margins were lower in all three defense businesses.

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