General Dynamics boosts profit, raises full-year forecast


* Q3 EPS up 8.2 percent, tops estimates

* Operating margins rise 90 basis points to 12.3 percent

* Forecast still modest on continued budget uncertainty

By Andrea Shalal-Esa

WASHINGTON, Oct 23 (Reuters) - General Dynamics Corp,the maker of Gulfstream business jets and U.S. Navy warships,reported higher earnings and operating margins for the thirdquarter despite a dip in revenue, and nudged its full-yearearnings forecast higher.

Chief Executive Officer Phebe Novakovic said thebetter-than-expected results allowed General Dynamics toincrease its guidance for full-year earnings per share by fivecents to between $6.90 and $7.00. It earned $6.48 per share in2012.

But during an earnings conference call on WednesdayNovakovic told analysts that General Dynamics was keeping itsforecast moderate given continued uncertainty in the U.S. budgetenvironment and the resulting slowdown in orders. Concerns abouta drop in orders in its combat systems business pushed thecompany's shares lower.

The CEO also said a similar slowdown could reoccur inJanuary if U.S. lawmakers are unable to reach a broad budgetdeal. "It's entirely possible that we find ourselves in anextended period of time trapped in Dante's first circle ofhell," Novakovic said.

The company said quarterly net earnings rose 8.5 percent to$651 million from $600 million a year earlier, while revenuesfell 1.7 percent to $7.93 billion. Earnings per share rose 8.2percent to $1.84 from $1.70.

Revenues were largely in line with Wall Street estimates,but earnings beat expectations from analysts polled by ThomsonReuters I/B/E/S, who had forecast EPS of $1.68.

Rob Stallard with RBC Capital Markets said General Dynamics'defense revenues were down, but not as much as expected, and itsaerospace division was producing solid growth.

General Dynamics said company-wide operating margins rose 90basis points to 12.3 percent on improved performances in theaerospace, combat systems and information systems divisions.

Margins in the marine systems division remained steady as itcompleted the T-AKE line of dry cargo and ammunitions ships thatit built for the U.S. Navy.


Shares of most major weapons makers rose on Wednesday, butGeneral Dynamics shares closed 2.2 percent lower at $86.23, amidconcerns about its combat systems business, which saw quarterlyrevenues drop 30 percent.

Joe Nadol at JP Morgan said the combat systems resultslooked "even tougher than feared" and a 190-basis point marginbeat in the segment was not enough to fully offset the top-linedisappointment. He said the record-high margin of 16.4 percentin the sector looked unsustainable.

Novakovic said the combat division's revenues fell because U.S. Army orders had slowed more than expected amid uncertaintyabout future budget levels and the end of U.S. wars inAfghanistan and Iraq.

She said revenue would be significantly higher in the fourthquarter, largely due to international sales. For the full year,the division's revenue should be around 20 percent lower than in2012, although margins should be higher, she said.

General Dynamics said its funded backlog fell to $40 billionat the end of the third quarter from $43.2 billion in the year-earlier period. The total backlog was $47.9 billion, down from$51.5 billion a year earlier.


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