General Dynamics Corporation
) has entered into an agreement to acquire the Ship Repair and
Coatings Division of Earl Industries. The value of the cash
transaction, which General Dynamics expects to be accretive to
earnings in 2013, has not been disclosed. General Dynamics
expects to close the transaction this summer.
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Privately held Earl Industries is a leading East Coast ship repair
company that supports the U.S. Navy fleet in Norfolk, Virginia and
Mayport, Florida. The Ship Repair and Coatings Division
employs approximately 575 workers in the Norfolk and Mayport
areas. Earl Industries has been conducting U.S. Navy ship
repair and conversions since 1985. It is a prime contractor
for nuclear aircraft carrier multi-ship, multi-option ("MSMO")
contracts. MSMO contracts provide for maintenance,
modernization and repair of all ships of a class in specific
homeport areas. The company also provides maintenance and repair
services to frigates and other classes of naval ships.
The acquisition of the Ship Repair and Coatings Division of Earl
Industries will extend the reach of General Dynamics' ship
maintenance and repair operations in two key East Coast naval
This move enhances General Dynamics' ability to deliver
cost-effective maintenance and repair services to the U.S. Navy,
maximizing the life of in-service ships for the betterment of the
entire U.S. fleet.
The Ship Repair and Coatings Division of Earl Industries will
become part of the shipbuilding, maintenance and repair operations
of San Diego-based General Dynamics NASSCO, a leading provider of
ships to the Navy and a major producer of Jones Act commercial
Looking forward, key drivers include the improving business jet
market, its stable business of U.S. military vehicles, a backlog
(though declining) of over $55 billion, an ongoing share repurchase
program and strong cash flow generation. However, the company is
largely tied to the U.S. defense budget, where the threat of budget
cut is looming. Also, we have turned slightly cautious about the
company's steadily dropping order backlog, and risks related to the
execution of key projects.
Headquartered in Falls Church, Virginia, General Dynamics 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
operates through four segments: Information Systems &
Technology (IS&T), Combat Systems, Marine Systems, and
General Dynamics was the third largest U.S. defense contractor in
terms of revenue in fiscal 2011, after
The Boeing Company
Lockheed Martin Corporation
). The company is one of two contractors equipped to build
nuclear-powered submarines in the U.S.
For the future, the company's focus will be on the revival of the
business jet market (Gulfstream) along with programs such as the
Warfighter Information Network Tactical program and Joint Tactical
Radio System in the IS&T division.
Similarly, the Combat Systems and Marine Systems segments will
receive a boost from higher volumes in the U.S. military vehicle
business (Stryker combat vehicles and Abrams tanks) and ship
programs like DDG-51, Virginia class submarines and the Mobile
Landing Platform program.
General Dynamics' total order backlog steadily decreased to $55.2
billion at the end of the first quarter of 2012 from $59.6 billion
at fiscal-end 2010. Going forward, the U.S. economic fundamentals
are basically being kept on a leash as the Euro-crisis continues to
cast its spell over the financial markets, keeping risks of further
cutbacks in future defense budgets at a high level. Our
apprehension is fueled by $15 trillion of national debt and an
unemployment rate hovering around 8.2% which would lead to the
Budget Control Act's dictum of automatic cutbacks across the board
Going by the pulse of the economy and the pros and cons, we prefer
to maintain our long-term Neutral recommendation on the stock.
Moreover, General Dynamics holds a Zacks #3 Rank that translates
into a short-term Hold rating.