Defense and aerospace operator General Dynamics Corporation (GD) was awarded a $60 million U.S. Navy contract modification focused on design changes to make the Virginia-class submarines more affordable. Work on the contract will be done by General Dynamics’ wholly owned subsidiary General Dynamics Electric Boat.
General Dynamics was initially awarded the contract known as Block III in 2008. The contract, potentially valued at $14 billion, stipulated delivery of eight submarines. The last Block III submarine is scheduled for delivery in 2019.
Per the new contract modification, General Dynamics will continue to develop and implement cost-reduction design changes. This work will enable the Virginia-class program to reduce acquisition costs by 20% for the submarines scheduled for delivery in 2012.
The most significant design change implemented is the modification of the submarine’s bow, replacing the sonar sphere with a large aperture bow array and the 12 vertical-launch missile tubes with two Virginia Payload Tubes, each carrying six missiles. This redesign will save more than $40 million per ship, beginning with the submarine North Dakota.
General Dynamics Corporation engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation.
The company is also the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010. Prime competitors of the company include The Boeing Company (BA), Lockheed Martin Corporation (LMT), and Textron Inc. (TXT).
We expect strong performance across the segments, aided by continued contract wins. A strong financial position will also help General Dynamics to post solid results going forward.
However, the company is experiencing a fall in order backlog. General Dynamics ended the fourth quarter 2010 with a total backlog of $59.6 billion, down from $65.5 billion in the year ago quarter. Marine Systems had the highest backlog of $20.1 billion followed by $17.8 billion in the Aerospace segment.
We maintain our Neutral recommendation on General Dynamics. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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