Defense and aerospace operator General Dynamics Corp. (GD) announced fourth-quarter 2013 operating earnings of $1.76 per share, in line with the Zacks Consensus Estimate. Earnings were ahead of the year-ago figure of $1.39.

General Dynamics during its third quarter release projected earnings per share for 2013 in the range of $6.90 to $7.00. General Dynamics’ operating earnings for the year at $7.03 per share exceeded the high end of the guidance. The better–than-expected performance was driven by its Aerospace segment. The bottom line was a cent ahead of the Zacks Consensus Estimate and 8.5% higher than the year-ago figure of $6.48 per share.

GAAP earnings per share in 2013 were $6.67 versus a loss of 94 cents in 2012. The difference between operating and GAAP earnings was due to the 36 cent loss from discontinued operations related to the pending settlement of the long-standing A-12 litigation.

Total Revenue

General Dynamics announced fourth-quarter 2013 total revenue of $8.1 billion, ahead of the Zacks Consensus Estimate of $8.00 billion. Revenue was 0.4% higher than the year-ago figure of $8.07 billion.

The year-over-year growth was driven by the Aerospace and Information Systems and Technology segments, partly offset by lower contribution from Combat Systems and Marine Systems.

General Dynamics announced 2013 total revenue of $31.2 billion, ahead of the Zacks Consensus Estimate of $31.1 billion. Revenue was 0.9% lower than the year-ago figure of $31.5 billion.

The year-over-year decline in total revenue was due to softer performance from its Combats Systems division.

Annual Segment Performance

The Aerospace segment reported 2013 revenue of $8.1 billion, up 17.4% from the prior year. Operating income from this segment was $1.41 billion, reflecting a solid jump of 65.0% from $0.85 billion a year ago.

Combat Systems reported revenue of $6.1 billion, down 23.4% year over year. Operating income from this segment was $0.9 billion, up 36.3% from $0.7 billion in the prior year.

Marine Systems reported revenue of $6.7 billion, up 1.8% year over year. Operating income from this segment was $0.7 billion, down 11.2% from $0.75 billion in the prior year.

Information Systems and Technology reported revenue of $10.3 billion, reflecting growth of 2.5% from the previous year. Operating income from this segment was $0.8 billion, up 158.1% year over year.

Operational Highlights

Operating costs and expenses during the year declined 10.2% year over year to $27.5 billion, thereby expanding operating income by 342.4% to $3.7 billion.

Interest expense in 2013 was $86 million which reflected a decline of 44.9% from the previous year.

Total backlog at the end of the fourth quarter was $46 billion, which declined 4% sequentially and 10.3% year over year. In the reported quarter, orders were strong in the Aerospace group; however, delivery and lower order booking for the other segments lowered the overall backlog of the company.

Financial Condition

Cash and cash equivalents as of Dec 31, 2013, were $5.3 billion versus $3.3 billion as of Dec 31, 2012. Long-term debt as of Dec 31, 2013 was $3.9 billion, in line with the 2012 end level.

Cash flow from operating activities in 2013 was $2.68 billion versus $3.1 billion in 2012. Free cash flow in 2013 was $2.7 billion versus $2.23 billion in 2012.

During the year the company repurchased shares worth $740 million and disbursed $591 million as dividends.

Other Releases

Rockwell Collins Inc. (COL) reported first quarter fiscal 2014 earnings per share of 96 cents, beating the Zacks Consensus Estimate by a penny. Earnings were also up by 2 cents year over year.

Textron Inc. (TXT) reported fourth quarter 2013 earnings from continuing operation of 60 cents per share, in line with the Zacks Consensus Estimate.

Our View

General Dynamics was able to meet fourth quarter and exceed 2013 consensus estimates. Margins also improved year over year, thanks to its cost control efforts.

Despite the risk of defense budget cuts, we believe its varied product offerings will provide General Dynamics with a cushion against any loss in contracts.

General Dynamics currently has a Zacks Rank #2 (Buy). Another heavyweight in the industry, The Boeing Co. (BA), shares the same Zacks Rank as General Dynamics and is scheduled to release its earnings on Jan 29.

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