General Dynamics Earnings: Beating Estimates and the Potential for Growth

What: On Wednesday, General Dynamics (NYSE: GD  ) reported its 2013 fourth-quarter results, beating estimates on earnings and revenue. Starting from the top, revenues for the fourth quarter totaled $8.1 billion. On the bottom, General Dynamics' earnings from continuing operations totaled $624 million, or $1.76 per share on a fully diluted basis -- ahead of Thomson Reuter's estimates of $1.75 per share.

For the full year, 2013 revenues totaled $31.2 billion and earnings from continuing operations totaled $2.5 billion, or $7.03 per share.

What you need to know: Net earnings for the fourth quarter came in at $495 million, or $1.40 per share fully diluted, due to a $129 million loss in discontinued operations related to the A-12 litigation settlement. When that's included into the full-year report, net earnings for 2013 dropped to $2.4 billion, or $6.67 per share fully diluted.

For full-year 2013, company margins checked in at 11.8%, increasing over 2012 margins of 2.6% (a low mark due to General Dynamics' information systems and technology segment). Two strong points of improvement are its aerospace and combat systems segments, which improved from 12.4% and 8.3% to 17.4% and 14.8%, respectively, from 2012 to 2013.

Another good sign for General Dynamics is that its total backlog of orders was at $46 billion at the end of 2013. Here's where it can get a little tricky because the government works with "indefinite delivery, indefinite quantity", or IDIQ, contracts, which essentially means that the government can only guarantee a minimum purchase order, yet often the value of the entire contract exceeds that guaranteed minimum amount. When you consider management's estimation of its potential value including IDIQ contracts, the sum of all backlog components soars to $73.6 billion at the end of last year. That's more than double the amount of revenue generated in 2013.

"General Dynamics performed well in 2013, reflecting our continued focus on operations, cost management, cash generation and our commitment to meeting our customers' requirements," said Phebe N. Novakovic, chairman and CEO, in a press release. "As promised, we managed our company prudently, adjusting our business to reflect the realities of the current defense spending environment and retiring risk throughout the organization."

What to watch: The biggest thing to watch will be if General Dynamics' growth in its aerospace segment, which includes a full lineup of business jets, can offset the potential losses in combat and marine systems as the Department of Defense cuts budget spending by nearly $1 trillion until 2021. Last year's results give investors reason to believe that the company can do so, considering that operating earnings in the aerospace segment surged 65%. Also, the company owns almost 30% of the ex-light-jet market, and growth in this part of the aerospace segment will likely come from its two recent product introductions: the G280 and G650.

Ultimately, General Dynamics' products play an important role for the U.S. military, a fact that should help lessen the blow from inevitable defense budget cuts, and its continuing growth in aerospace should be more than enough to keep the company on a more profitable path. 

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