General Dynamics Corporation (GD)
Q1 2010 Earnings Conference Call
April 28, 2010 11:30 AM ET
Amy Gilliland - Staff VP, IR
Jay Johnson - President and CEO
Hugh Redd - SVP and CFO
Robert Spingarn – Credit Suisse
Robert Stallard – Macquarie
Cai von Rumohr – Cowen & Co.
Richard Safran – Buckingham Research Group
Peter Arment – Broadpoint Gleacher
Sam Pearlstein – Wells Fargo Securities
Joseph Nadol – JP Morgan
Ron Epstein – Merrill Lynch
Heidi Wood – Morgan Stanley
Troy Lahr – Stifel Nicolas
Howard Rubel – Jeffries & Company
Noah Poponak – Goldman Sachs
Previous Statements by GD
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Good day, ladies and gentlemen, and welcome to the First Quarter 2010 General Dynamics Earnings Conference call. My name is (Shamika), and I will be your operator for today. (Operator Instructions).
I would now like to turn the presentation over to your host for today’s call, Ms. Amy Gilliland, Staff Vice President of Investor Relations. Please proceed.
Thank you (Shamika) and good morning, everyone. Welcome to the General Dynamics’s first quarter conference call. As always, any forward-looking statements made today represent our best 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.
And with that, I would like to turn the call over to our President and Chief Executive Officer, Jay Johnson.
Thank you Amy and good morning everyone. General Dynamics delivered a good first quarter marked by strong operating performance across our businesses. Revenues in the quarter were $7.8 billion down from the first quarter of 2009. You may recall that in last year’s first quarter revenues were unusually high. In fact it was the company’s single largest revenue quarter ever.
Unlike last year’s experience we expect sales to continue to increase as the year progresses more consistent with our historical pattern. Operating earnings were $918 million in the quarter, up slightly from last year’s first quarter resulting in an 11.8% operating margin. A favorable program mix and disciplined execution contributed to the 80 basis point year-over-year margin improvement with particularly strong performance at aerospace and combat systems.
Earnings from continuing operations were $599 million, up slightly from last year’s first quarter. This drove 7.7% return on sales 50 basis points better than last year. Earnings per share from continuing operations were $1.54 on a fully diluted basis flat when compared with first quarter 2009. Free cash flow after capital expenditures totaled $150 million somewhat light but better than last year’s first quarter. In the quarter, we experienced some growth in operating working capital at our IS&T in general and at C4 Systems in particular.
This is largely a timing issue that will reverse itself as the year progresses. We should be around 100% net earnings to free cash conversion again this year. First quarter orders totaled $7.2 billion, significantly higher than last year with robust award activity across our business portfolio. Backlog totaled $63.9 billion at the end of the quarter, down modestly from year end. Funded backlog however was up 3% at $47 billion. Total potential contract value which includes backlog, unexercised option in indefinite delivery and definite quantity contracts reached nearly $81 billion.
Now I’d like to focus on the performance of each of our business segments starting with our three defense groups and I’ll begin with the Combat Systems. Sales were $2 billion, down $400 million or approximately 17% from last year’s first quarter. The volume decline resulted from several factors. A significant decrease in MRAP volume when compared with the first quarter of 2009, the absence of deliveries of weapon systems that protects soldiers from roadside explosive threats, lower small-caliber ammunition volume, and last year’s cancellation of the Future Combat Systems program.
Higher volume on Abrams, Stryker and several European vehicle programs somewhat offset these decline. Our Combat Systems businesses delivered $269 million of operating earnings in the first quarter. Down just $10 million from last year on significantly less volume. Consequently, the groups operating margin was 13.4%, 180 basis points higher than last year. This performance was the result of a favorable program mix and strong execution on several vehicle and ammunition programs.
Combat Systems backlog declined modestly from year-end to $12.9 billion, despite the decline in backlog award activity was healthy in the quarter. We received new orders on our core programs and also on several new opportunities. These new opportunities include an additional 250 RG-31 MRAP vehicles and MRAP (inaudible) awards beyond the retrofit work we had expected this year.
The MRAP deliveries are scheduled largely in the second half of the year. In March we were selected as the preferred vehicle provider for the United Kingdom FRESH program. This opportunity includes both the Scout variant and the Common Base Platform for up to 580 specialist vehicles. The FRESH program also anticipates several other blocks of vehicles for which we will provide the common base platform. We are working with the United Kingdom on the initial FRESH contract and we expect to add it to backlog later this year.
The FRESH program provides good upside to Combat’s outlook over the next five years. There are several other opportunities that could generate additional awards this year, including the Canadian lab upgrade program for which we expect to receive a contract in the second quarter and the Spanish eight by eight vehicle competition which we expect to be awarded in the second half. Other potential 2010 awards include the ground combat vehicle competition, the next phase of the Saudi Tank program, additional Iraqi tank options and the opportunity to enhance Stryker Combat vehicle protection.