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Abu Dhabi, UAEWednesday 19 September 2018

Saudi tanks order helps General Dynamics' profits surge

Maker of Abrams battle tanks gains from major sale to kingdom as earnings top expectations

Battle tanks sales to Saudi Arabia helped General Dynamics post better than forecast results. Eric Feferberg/AFP
Battle tanks sales to Saudi Arabia helped General Dynamics post better than forecast results. Eric Feferberg/AFP

General Dynamics, the maker of Gulfstream jets, tanks and US Navy ships, has reported higher than expected earnings, helped by battle tank sales even as indecision in Washington hurt revenue.

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

Combat Systems revenue jumped 13 per cent versus last year. Mr Aiken said that unit's revenue would also increase next quarter by about 15 per cent. Growth in 2017 has come from international programmes within the Combat Systems unit, Mr Aiken said, including deliveries of some of the 130 Abrams battle tanks and 20 armoured recovery vehicles and other equipment ordered by Saudi Arabia last year.

Lower-than-expected sales in the information systems and technology unit (IS&T) to the US 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 the chief financial officer Jason Aiken.

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 per cent, over the second quarter, but was down 7.6 per cent compared with the same quarter last year.

In July, General Dynamics' chief executive Phebe Novakovic had warned that the US President Donald Trump's failure to fill dozens of senior-level positions at the Pentagon made it difficult for defence contractors to forecast business.

Mr 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 per cent to $764m, or $2.52 per share, up from $731m or $2.36 per share a year ago.

Wall Street analysts expected $2.44 per share.

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 per cent.

Revenue at General Dynamics' Aerospace unit, which contains the Gulfstream private-jet business, was up $70m or 3.6 per cent.

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Lockheed Martin, the world's largest weapons maker, disappointed Wall Street when it reported results on Tuesday, sending the stock down 2.3 per cent for the day. Although the company expected increased defence spending under Mr Trump, it forecast only a 2 per cent rise in sales in 2018.

Mr Trump is seeking a $54bn increase in overall US defence spending, a proposal that must be passed by Congress and faces sceptical policymakers. Political gridlock in Washington could stall the process further.

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

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

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