General Dynamics Q3 2010 Earnings Call Transcript

General Dynamics Q3 2010 Earnings Call Transcript
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General Dynamics (GD)

Q3 2010 Earnings Call

October 27, 2010 11:30 am ET


Jay Johnson - Chairman, Chief Executive Officer and President

Amy Gilliland -

L. Redd - Chief Financial Officer and Senior Vice President


Cai Von Rumohr - Cowen and Company, LLC

Jason Gursky - Citigroup

Howard Rubel - Jefferies & Company, Inc.

Joseph Nadol - JP Morgan Chase & Co

Ronald Epstein - BofA Merrill Lynch

Heidi Wood - Morgan Stanley

Robert Spingarn - Crédit Suisse AG

Samuel Pearlstein - Wells Fargo Securities, LLC

Robert Stallard - Banc of America

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank



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Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 General Dynamics Earnings Conference Call. My name is Derek and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Amy Gilliland, Staff Vice President of Investor Relations. Please proceed.

Amy Gilliland

Thank you, Derek, and good morning, everyone. Welcome to the General Dynamics Third 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. With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Jay Johnson

Thank you, Amy, and good morning, everyone. General Dynamics delivered another solid operating performance in the third quarter with sales of $8 billion nearly 4% better than the same quarter a year ago. Operating earnings of $966 million were up 10.5% over the year-ago quarter. Company margins improved 80 basis points to 12.1%. Earnings per share were $1.70 on a fully diluted basis, $0.22 better than last year's third quarter.

Third quarter free cash flow, after capital expenditures, was $784 million, 121% of earnings from continuing operations. This includes a voluntary payment of $270 million to our pension plan. In terms of capital deployment, we used $700 million in the quarter to retire our 4.5% fixed rate notes. We also purchased 2.7 million shares of General Dynamics' stock in the open market for $163 million. Year-to-date, we have spent $726 million to repurchase 11.2 million shares. Through share repurchases and dividends, we have returned almost 90% of year-to-date free cash flow to shareholders.

Third quarter orders were the strongest we've seen this year. Aerospace and IS&T's book to bill exceeded 1:1 while Combat's book to bill was nearly 1:1. At the end of the quarter, total backlog stood at a robust $61.8 billion.

Now let me turn to the results and outlook for each of our groups, starting with the largest of our four businesses, IS&T. IS&T enjoyed strong orders, sales, earnings and margins in the third quarter. Sales were nearly $3 billion for the second consecutive quarter, an 8% increase over last year's third quarter. This is healthy growth in light of the fact that last year's third quarter was the group's highest sales quarter in 2009. Year-to-date, sales are up 7%. The group's third quarter earnings were $306 million up 3.4% year-over-year. Operating margins were 10.4% in the quarter, essentially in line with my 10.5% full year guidance.

The group's book to bill exceeded 1x for the third consecutive quarter causing backlog to increase by $230 million. If the group maintains this win rate, as I expect, 2010 will stand as the 12th year that book-to-bill has been at or above 1x, an excellent track record for a business of this size and diversity.

Award activity in the quarter was particularly strong at our tactical communications and IT services businesses. Several of these contracts are detailed in today's earnings press release. Total estimated contract value, which adds the potential value of IDIQ contracts to total backlog, stood at $24.9 billion at quarter-end. This represents well over 2x expected 2011 sales and a 5% increase above the year-ago value.

Fourth quarter sales and margins will be essentially in line with the third quarter. For the full year, I expect group sales to increase approximately 8% to 8.5% over last year driven by double-digit sales growth in our Tactical Communications and Information Technology Services businesses. Margins for the year will remain around 10.5%.

As we look to the future, IS&T is particularly well positioned. I want to spend a few minutes this morning giving you a sense for why. First, a few facts that highlight the group's diverse business base. Group sales are derived from thousands of contracts at any given time with no single contract totaling more than 2% of company sales. Approximately 40% of sales come from civil agencies, restricted, commercial and international customers. Product and systems integration dominate the group's efforts, representing over 50% of sales. The remaining sales consist of approximately 25% high-end engineering services and 20% pure IT service work. Nearly half of sales result from fixed price contracts while approximately 38% are cost plus and the remainder, time and materials.

Over the past decade, we have evolved the group's products and services offerings into a balanced portfolio that remains at the forefront of Defense and Federal spending priorities. Let me briefly review the three key pieces of this business.

First, Tactical Communications and Battle Space Management. This segment represents approximately only 45% of the group's sales and comprises a U.S. and a smaller U.K.-based business. The group's products and services provide critical command and control capability and enables secure, continuous communications all the way to the dismounted soldier. Programs include the Army's battlefield network, known as WIN-T and the new handheld software defined Joint Tactical Radio System unknown as JTRS HMS. We have dramatically diversified our overseas C4 business from a purely U.K.-based avionics house to a provider of vehicles, force protection, security, avionics and C4I products to a global clientele.

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