October 25, 2017 / 1:04 PM / a year ago

General Dynamics profit tops expectations, revenue falls

(Reuters) - General Dynamics Corp (GD.N), maker of Gulfstream jets, tanks and U.S. Navy ships, reported higher-than-expected earnings on Wednesday, helped by battle tank sales even as indecision in Washington hurt revenue.

A 1-percent year-over-year drop in quarterly revenue to $7.6 billion missed Wall Street analyst estimates of $7.94 billion, sending shares down 1.8 percent.

Lower-than-expected sales in the Information Systems and Technology unit (IS&T) to the Army hurt third-quarter results as caps on government spending hampered the Army’s decision making. “And, of course, the change in administrations slowed some execution as well,” said Chief Financial Officer Jason Aiken on a conference call with Wall Street analysts.

General Dynamics’ IS&T is the largest unit by revenue and has thousands of shorter sales-cycle service contracts which can reflect delays quickly. IS&T revenue increased by $50 million, or 2.3 percent, over the second quarter, but was down 7.6 percent compared with the same quarter last year.

In July, General Dynamics’ CEO Phebe Novakovic had warned that U.S. President Donald Trump’s failure to fill dozens of senior-level positions at the Pentagon made it difficult for defense contractors to forecast business.

Aiken said by the end of 2017, IS&T will be flat versus last year.

Despite missing Wall Street’s expectations for total revenue, third-quarter 2017 results showed net earnings from continuing operations up 4.5 percent to $764 million, or $2.52 per share, up from $731 million or $2.36 per share a year ago.

Wall Street analysts expected $2.44 per share, according to Thomson Reuters I/B/E/S.

The company raised its earnings per share forecast for the year by 5 cents to a range of $9.75 to $9.80. It said this quarter’s earnings-per-share were aided by a lower-than-expected effective tax rate of 25.6 percent.

Growth in 2017 has come from international programs within the Combat Systems unit, Aiken said, including deliveries of some of the 130 Abrams battle tanks and 20 armored recovery vehicles and other equipment ordered by Saudi Arabia last year.

Combat Systems revenue jumped 13 percent versus last year. Aiken said that unit’s revenue would also increase next quarter by about 15 percent.

Revenue at General Dynamics’ Aerospace unit, which contains the Gulfstream private-jet business, was up $70 million or 3.6 percent.

Lockheed Martin Corp (LMT.N), the world’s largest weapons maker, disappointed Wall Street when it reported results on Tuesday, sending the stock down 2.3 percent for the day. Though the Bethesda, Maryland-based company expected increased defense spending under Trump, it forecast only a 2-percent rise in sales in 2018.

Trump is seeking a $54-billion increase in overall U.S. defense spending, a proposal that must be passed by Congress and faces skeptical lawmakers. Political gridlock in Washington could stall the process further.

General Dynamics did not make any 2018 projections on Wednesday.

The Falls Church Virginia-based defense contractor said its total order backlog at end of third-quarter 2017 was $63.9 billion, up 9.2 percent from the end of the previous quarter.​

The company-wide operating margin was 13.9 percent, a 60 basis-point increase. General Dynamics had also improved operating margins by 60 basis points during the prior quarter.

Shares of U.S. defense companies have rallied since November on Trump’s promises during his election campaign to spend more on defense.

General Dynamics shares were down $3.84 to $208.24 in afternoon trading.

Reporting by Mike Stone in Washington, DC; Editing by Nick Zieminski

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