Optimism at General Dynamics

Defense Firm's Profit Dips 3.6% but Still Beats Expectations

General Dynamics reported a slight decline in second-quarter earnings Wednesday, but the results surpassed Wall Street expectations and the company said it saw signs of improvement in the market for its business jets.

The Falls Church defense contractor said profit for the period ended July 5 fell 3.6 percent, to $618 million, from $641 million a year earlier. Revenue for the quarter was up nearly 11 percent, to $8.1 billion. Analysts expected earnings of $1.57 a share on revenue of $8.13 billion.

On a per-share basis, earnings were unchanged at $1.60 because of a company effort to repurchase 10 million shares. The results in the second quarter of 2008 were boosted by a one-time gain from a tax benefit, according to company executives.

General Dynamics has weathered the recession better than most of its peers because the bulk of its business -- providing tanks, submarines, armored vehicles and services to the government -- has been considered essential, analysts said.

Each of the company's four divisions posted higher revenue for the quarter, with its combat systems unit, which makes armored vehicles and machine guns, gaining 19.4 percent, to $2.4 billion. Revenue in its marine systems business was up 16.6 percent, and sales at its aerospace and information technology units were up 6.5 percent and 3.5 percent, respectively.

General Dynamics' aerospace division, which manufactures business jets under the Gulfstream brand, has been hit as corporate customers have cut back on nonessential expenses. But Peter Arment, a managing director at Broadpoint AmTech, said General Dynamics has fared better than its peers with only a 4 percent drop in its backlog for the quarter.

"We're going to see continuing pressure because the business-jet environment is not great, so you'll continue to eat into your backlog," he said, noting that the business-jet market can lag as much as eight months behind corporate profits. "Corporate profits are still in the midst of a downturn, so you won't see orders [for corporate jets] pick up until we have sustained economic recovery."

General Dynamics chief executive Jay L. Johnson, who took the reins this month from Nicholas D. Chabraja, said Wednesday that the jet business appeared to be improving.

"There continue to be several encouraging signs that the business-jet market is stabilizing," he said in a conference call with analysts. They include increased flying hours at the Gulfstream jet division, a drop in defaults from customers and more interest in new orders.

James McIlree, director of research at Collins Stewart in New York, said General Dynamics has targeted $60 million in cost reductions this year for its Gulfstream business, which will help the company. The cuts include the elimination of 1,200 jobs.

"They've managed through the downturn with cost-cutting measures, and they have very strong brand," he said. But he said the company could see "continued softness through 2010" in its Gulfstream business. He said the company reported $15 million in liquidated damages, or settlements it made with Gulfstream customers who canceled or postponed their orders.

Shares of General Dynamics rose 81 cents, or 1.51 percent, to $54.55.