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General Dynamics (GD)

Q2 2012 Earnings Call

July 25, 2012 9:00 am ET


Amy Gilliland - Staff Vice President of Investor Relations

Jay L. Johnson - Chairman and Chief Executive Officer

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


Myles A. Walton - Deutsche Bank AG, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Richard Tobie Safran - The Buckingham Research Group Incorporated

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

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

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

Robert Spingarn - Crédit Suisse AG, Research Division

Jonathan Raviv

Heidi Rolande Wood - Morgan Stanley, Research Division

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

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division



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Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 General Dynamics Earnings Conference Call. My name is Jeff, and I'll 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 conference over to your host for today, Ms. Amy Gilliland, Staff Vice President, Investor Relations. And you have the floor, ma'am.

Amy Gilliland

Thank you, Jeff, and good morning, everyone. Welcome to General Dynamics second 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 companies 10-K and 10-Q filings.

And with that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Jay L. Johnson

Thank you, Amy. Good morning, everyone. General Dynamics' second quarter delivered $7.9 billion in sales and $970 million in operating earnings at a 12.2% operating margin, improvement from last year's second quarter and this year's first quarter.

Earnings per share totaled $1.77 on a fully diluted basis, $0.20 ahead of last quarter.

Second quarter free cash flow, after capital expenditures, totaled $703 million or 111% of earnings from continuing operations. This result was particularly strong, considering that it includes approximately $100 million in pension funds contribution, 2 quarterly federal tax payments and continued investment in Gulfstream's Savannah campus. We plan to contribute about $500 million in total to our pension plans this year with most of the remainder in the third quarter.

Year-to-date, free cash flow is $1 billion or 86% of earnings from continuing operations.

On the capital's deployment front, we took advantage of our healthy balance sheet and top market conditions to repurchase 7.8 million shares of common stock this quarter. Through the first half, we have repurchased 9.1 million shares.

Additionally, we had announced the acquisition of IPWireless, an excellent bolt-on addition for our IS&T business. IPWireless further expands our technical communications portfolio into the public safety first responder market with advanced broadband technology that improves first responders' effectiveness and safety by providing them with greater access to information.

Orders this quarter were approximately $5.2 billion, reflecting continued sluggishness in defense award activity and some slower-than-anticipated order timing in Aerospace. I do anticipate improved second-half orders, particularly in Aerospace.

At the end of the quarter, funded backlog was $43.9 billion while total backlog stood at $52.4 billion. Total estimated contract value, which includes opportunities to provide products and services under IDIQ contracts and options, was $78.6 billion.

Before I turn to the results and outlook for each of our groups, I want to comment on what we are seeing in this dynamic aerospace and defense business environment. In our U.S. defense market, visibility remains somewhat limited by 3 principal factors: the upcoming elections, a likely 2013 continuing resolution and the sequestration trigger.

The uncertainty and anxiety spawned by these second half events continues to impede Department of Defense and federal government acquisition program execution. As was the case last quarter, our shorter-cycle IS&T business is experiencing the most pressure, due primarily to award delays on several of our key tactical communications contracts. In most cases, these are funded programs of record. While there are -- excuse me, while there was improvement in activity from first to second quarter, this order activity did not meet our expectations.

As anticipated, we are witnessing increased rhetoric as the summer progresses and the political process prepares to navigate the final months of the campaign trail.

As we steam towards the sequestration fogbank, many members of Congress had begun talking more seriously about sequestration and its potential impacts. We remain hopeful that a bipartisan solution can be brokered. However, as a practical matter, it seems increasingly unlikely that we will see additional detail on implementation or resolution before the November elections.

We are focused on what we can control. Specifically, we're executing on our backlog, working with our customers to jump-start the expenditure of previously appropriated funds, talking with our suppliers, analyzing our contract terms and conditions and judiciously husbanding our capital resources. Nevertheless, forecasting our customer's behavior has become increasingly difficult.

Given this uncertainty, we have adjusted our expectations somewhat for the year. Our outlook does assume the obligation of previously appropriated funds on several of our programs where delays have been prominent. With that said, the 2013 defense budget request is proceeding through the congressional approval process. We've been pleased with the support our programs have received to date. In the likely event that the 2013 Pentagon budget is funded, at least for some period of time, through a continuing resolution, our programs would reflect relatively healthy 2012 funding levels.

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