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22 Jan 03. Defense contractor General Dynamics Corp. (NYSE:GD – News) said on Wednesday that rising demand for its military vehicles, warships and naval weapons systems boosted the company’s quarterly profit.

But the results missed Wall Street expectations as a poor performance from its aerospace unit, which makes the Gulfstream business jet, dragged on the company’s bottom line. The unit’s profit fell by two-thirds to $53m from $163m a year ago.

The company did not give a specific forecast for 2003, but Chief Executive Nicholas Chabraja said in a statement he expected “solid performance” from its defense businesses. General Dynamics would keep a close watch on its business jet unit in the weak market, he said.

“Our defense businesses were bolstered by many new contract awards,” Chabraja said. “Marine Systems won almost a half billion dollars in contracts for the U.S. Navy’s SSGN submarine conversion program, and $409m for another DDG 51 class destroyer. Our Information Systems and Technology group won a $450m award from the U.K. for a digital battlefield management system, and $611m from the U.S. Coast Guard to modernize the national distress and response system. Our Spanish subsidiary, General Dynamics Santa Barbara Sistemas, has a $544m agreement with the Spanish Army for the Pizarro Advanced Infantry Fighting Vehicle program. The U.S. Department of Defense confirmed its support for six brigades of Stryker combat vehicles, and we expect that our planned acquisition of our partner on that $4bn program – General Motors Defense – will close within the next two months.

“Aerospace looks like they had a pretty big miss on the income side,” said Eric Hugel, defense analyst with Stephens Inc. “The surprise there was pretty substantial.”

The company said fourth-quarter profit rose to $269m, or $1.33 per share, (2002: $246m, or $1.22). Sales rose to $3.94bn from $3.48bn.

Including a charge from exiting its undersea fiber optic cable-laying business, the company said it earned $157m, or 78 cents per share. Wall Street analysts were expecting the company to post earnings per share between $1.40 and $1.51, with an average estimate of $1.44, according to research firm Thomson First Call.

The robust performance of the company’s military business, which makes tanks, nuclear submarines and destroyers, has offset a poor result from its business jet unit in the past year.

Chabraja has said the company’s combat systems unit, which reported a jump in sales to $956m from $717m a year earlier, will be a big earnings driver in 2003. The unit is building the Stryker armored vehicle for the Army. General Dynamics said its backlog stood around $30bn as of Dec. 31, up 8 percent from a year ago.

Sales in the company’s marine systems business in the quarter rose to $1.01bn from $891m. Sales in the aerospace unit fell to $907m from $950m.

The aerospace unit was the only one of the company’s operating segments to report a drop in profit and sales. Cuts in corporate spending on travel in the weak economy have taken a huge bite out of the unit’s performance.The company did not provide much detail about its profit margins in its earnings statement, said Stephens’ Hugel, who has an outperform rating on the company’s stock. The company did not explain why it missed the Wall Street forecasts, he said.

Comment: With the GM Business integrating later in the year and exciting opportunities for FCS in the US, BOWMAN and possibly FRES in the Uk and the allied business wins in Spain, will GD keep the Gulfstream business whose main business is buisjets, a declining market? The ASTOR project highlighted the use of military buisjets for military use but since that time Bombardier has yet to announce a significant order for the Global Express and Raytheon has made no further headway with the export of ASTOR.

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