April 25, 2018 / 12:02 PM / a month ago

UPDATE 3-General Dynamics' jet delivery delay hurts profit beat

(Updates shares, adds context, management comments)

By Mike Stone and Sanjana Shivdas

April 25 (Reuters) - General Dynamics Corp reported a better-than-expected quarterly profit on Wednesday, with sales of tanks and weapons systems lifted by greater U.S. defense spending, even as overall sales figures were dented by fewer corporate jets deliveries.

The company’s shares dropped $9.42 or 4.2 percent to $212.49 in trading on the New York Stock Exchange.

Sales in the combat systems unit, which makes boats and tanks, rose 11.9 percent to $1.44 billion in the quarter ended April 1. But the company’s aerospace division, its biggest unit, reported a 12 percent drop in revenue due to lower deliveries of its larger cabin Gulfstream aircraft.

The delivery delay of two Gulfstream jets was done at the request of the customers, CEO Phebe Novakovic said during a call on Wednesday with Wall Street analysts.

“They were ready and scheduled for delivery in the quarter, but were delayed for the convenience of the customer.” Novakovic said.

The business jet market has struggled to recover since the financial crisis, with overall global sales last year about half of the 1,317 planes delivered in 2008.

“We think Gulfstream business jet deliveries have found a bottom and the aerospace segment will begin growing again,” Morningstar analyst Chris Higgins said in a pre-earnings note.

The company’s earnings per share beat expectations but quarterly profit margins shrank 5 percent from 14.1 to 13.4 percent since last year. The company increased investment in research and development.

In addition to strong arms sales during the quarter, earnings were also buoyed by favorable changes in the U.S corporate tax law that passed late last year. The effective tax rate was 16.8 percent for the quarter, CFO Jason Aiken said on the call. Last year General Dynamics reported it had 28.6 percent effective tax rate.

In order to take further advantage of the new tax law, Aiken said the company planned to increase its pension contribution from $300 million to $550 million. He said move would impact operating cash forecasts.

In the first quarter, cash flow was negative $600 million which Aiken attributed to the timing of “payments from customers and payments to suppliers.”

Earlier this month, General Dynamics bought peer CSRA Inc in a deal valued at about $9.7 billion. The competitive sale process for CSRA was won by General Dynamics because it was able to pay cash, something other bidders were unable to do.

The purchase will begin to help earnings per share in the third quarter of the year, management said on the call.

During the quarter, the Falls Church, Virginia-based company’s order backlog shrank from $63.1 billion at the end of 2017 to $62.1 billion.

Net earnings rose to $799 million, or $2.65 per share, in the quarter ended April 1 from $763 million, or $2.48 per share, a year earlier.

Analysts had expected a profit of $2.49 per share, according to Thomson Reuters I/B/E/S.

Revenue rose to $7.5 billion from $7.4 billion. (Reporting by Mike Stone in Washington and Sanjana Shivdas in Bengaluru Editing by Anil D’Silva and Frances Kerry)

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