General Dynamics (GD)

Q3 2011 Earnings Call

October 26, 2011 9:00 am ET


L. Hugh Redd - Chief Financial Officer and Senior Vice President

Jay L. Johnson - Chairman and Chief Executive Officer

Nicole Shelton -


George D. Shapiro - Access 3:42, LLC

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Carter Copeland - Barclays Capital, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division



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Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 General Dynamics Earnings Conference Call. My name is Gina, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Nicole Shelton, Manager of Investor Relations. Please go ahead.

Nicole Shelton

Thank you, Gina, and good morning, everyone. Welcome to the General Dynamics Third Quarter Conference Call. As always, any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings.

With that, I would like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Jay L. Johnson

Thank you, Nicole. Good morning, everyone. General Dynamics delivered another solid operating performance in the third quarter, with sales of $7.9 billion and operating earnings of $998 million. Company margins improved 60 basis points from last year's third quarter and 70 basis points from last quarter to 12.7%. Earnings per share from continuing operations were $1.83 on a fully-diluted basis, $0.13 better than last year's third quarter.

Third quarter free cash flow after capital expenditures was $15 million. This result was largely a timing reality caused by working capital growth and inventory at Gulfstream, associated with preparations for initial G650 green deliveries. We expect significant G650 cash payments in the fourth quarter in conjunction with the plane certification which will substantively reverse this trend.

In our Defense businesses, I expect them to deliver their largest cash quarter of the year in the fourth quarter as we progress toward our annual goal of a 1:1 conversion. In terms of capital deployment, we repurchased 5.8 million shares of GD common stock this quarter. Year-to-date, we spent $1.4 billion to repurchase 20 million shares. Through share repurchases and dividends, we have returned over 200% of year-to-date free cash flow to shareholders. In addition to share repurchase and dividend payments in the quarter, we also deployed capital to pay down $750 million in notes that came due in July and to further enhance our IS&T product portfolio through several accretive acquisitions totaling $1.1 billion, which I will describe in more detail later in my remarks. All together, these actions clearly reflect our balanced approach to capital deployment.

Backlog increased $1.4 billion in the third quarter to $58.5 billion, as 3 of the 4 operating groups exceeded 1:1 book to bill. At the end of the quarter, total estimated contract value, which includes backlog and the value of unexercised options in IDIQ contracts, stood at $85.8 billion, up over 9.5% from last quarter.

Now let me turn to the results and outlook for each of our groups beginning with Combat Systems. Combat Systems sales and earnings improved again when compared with both last quarter and the year-ago quarter. Sales totaled $2.14 billion, reflecting growing Foreign Military Light Armored Vehicle Sales, increased axle work and somewhat lower U.S. vehicle and engineering volume. Earnings were $319 million, resulting in a 14.9% operating margin, reflecting sound execution across the group's portfolio of mature, fixed price production programs. In addition to good operating performance, profitability continues to be enhanced by the group's efforts to cut costs and prepare for the realities of a reduced defense budget environment.

Total backlog for Combat Systems was $10.4 billion at the end of the quarter, including $2 billion of orders received throughout the period. Notable orders in the quarter included $315 million for 115 Stryker Double-Vs and vehicle support services, $440 million for the Army's Ground Combat Vehicle development program, $200 million for MRAP upgrade and $195 million for Canadian, U.S. and nonstandard ammunition programs.

International orders included $44 million to procure long lead materials for 102 FMS tank upgrades and $50 million for FMS lab training and field service support.

We expect good award activity again in the fourth quarter, particularly from our international customers. We just announced the award to upgrade 550 Canadian lab vehicles, a contract valued at $1 billion. Other key foreign orders should include funding to upgrade 60 FMS tanks, 73 FMS labs and another 125 Egyptian tank kits. Domestically, we've just finalized an order for another 177 Stryker Double-V hull vehicles and are working with the Army customer on an order for 100 Stryker nuclear, biological and chemical reconnaissance variants. We also anticipate several hundred million dollars in funding for other Stryker upgrades and logistic support services.

Looking ahead, sales in the fourth quarter will be this year's strongest, with most of the businesses contributing their largest volume of the year. For the full year, the group remains on track to deliver around $9 billion in sales at 14% margins.

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