General Dynamics Corporation (GD) announced its first quarter 2012 earnings before the opening bell today. In first quarter of 2012, the company clocked pro forma earnings of $1.70 per share, which was above the year-ago figure of $1.64. The earnings beat the Zacks Consensus Estimate by a penny.

The difference between GAAP and pro forma was due to a non-cash out-of-period accounting adjustments in European operations of 13 cents. Including this charge, the company reported GAAP EPS of $1.57. However, GAAP EPS in the first quarter of 2011 was same as pro forma.

The results were driven by uninterrupted growth at the Aerospace segment, the company’s long-term efforts directed toward efficiently carrying out its programs and its ability to make optimum use of opportunities.

Revenue

General Dynamics generated total revenue of $7.68 billion in the reported quarter versus $7.80 billion in the year-ago quarter, reflecting a decline of 2.8%. Reported quarter revenue also failed to meet the Zacks Consensus Estimate by $353 million.

The top-line results reflect the current dynamic U.S. federal procurement environment, partially offset by growth in the Aerospace segment.

Total backlog at General Dynamics, at the end of the quarter under review, was $55.23 billion, which slipped 4.1% from $57.41 billion reported in the year-ago comparable quarter. However, funded backlog increased by 5.5% year over year. The company continued to experience demand for its Gulfstream aircraft during the quarter.

Total operating income in the quarter under review was $860 million, down 7.4% year over year. Despite a decline in operating expenses, the lackluster revenue resulted in the decline in operating income.

Segment Performance

The Aerospace segment reported revenue of $1.62 billion, up 20% from the prior-year period. Operating income from this segment was $271 million, up 17.8% year over year.

Combat Systems reported revenue of $1.91 billion, down 2.3% year over year. Operating income from this segment was $203 million versus $277 million in the prior-year period. During the quarter, the segment received new orders worth $130 million from U.K. Ministry of Defense and $75 million from the U.S Army.

Marine Systems reported revenue of $1.61 billion, a decline of 4.2% from the year-earlier period. Operating income from this segment was $185 million, up 10.8% from the prior-year period. During the quarter, the segment received a $665-million order from the U.S. Navy for the construction of a second DDG-51 destroyer and a $360 million contract for the construction of the third Mobile Landing Platform auxiliary support ship.

Information Systems and Technology reported revenue of $2.44 billion, reflecting a decline of 13.3% from the previous year. Operating income from this segment was $218 million versus $276 million in the prior-year period.

During the quarter, the segment received new orders worth $155 million for combat and seaframe control systems on two Navy Littoral Combat Ships, a $75 million contract from the U.S. Air Force for networking and computing products and support under the Network-Centric Solutions program and various other contracts.

Financial Condition

Cash and cash equivalents as of March 31, 2012, were $2.6 billion versus $2.5 billion as of March 31, 2011. Long-term debt of the company was $3.9 billion compared with $2.4 billion at the end of March 31, 2011.

Net cash provided by operating activities during the quarter were $414 million compared with $328 million in the year-ago period. Capital expenditure increased to $90 million from $61 million in the comparable period in 2011.

Guidance and Outlook

Going forward, the company does not expect significant award activity and approved funding mainly for its IS&T programs. However, based on its ability to execute existing programs, secure work associated with delayed awards and seize new opportunities, the company reaffirmed its EPS guidance in the range of $7.10 to $7.20 per share for fiscal 2012.

Peer Update

Last week, General Dynamics’ competitor Textron Inc. (TXT) announced first quarter 2012 operating earnings of 41 cents per share versus 10 cents per share in the year-ago quarter, reflecting substantial growth of 310.0%. The first quarter results surpassed the Zacks Consensus Estimate by a nickel.

Our Take

Despite a dip in total backlog, the total potential contract value of the company increased by 5.1% from the prior-year period. We believe this factor will boost the topline of the company going forward.

We also believe that the company’s Gulfstream aircraft project will offset the headwinds from the current environment to some extent. Also, its broad portfolio of products and services in a number of uncorrelated markets will assist in keeping the overall growth momentum steady.

However, we are concerned about the company’s dependence on the U.S. defense budget, where the threat of budget cuts is high. Also, we are slightly cautious about the risks related to the execution of key projects.

The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

Headquartered in Falls Church, Virginia, General Dynamics is a market leader in business aviation; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and information systems and technologies.

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