General Dynamics Forecasts 2013 Profit Short of Estimates

General Dynamics Corp. (GD) forecast a 2013 profit short of analysts’ estimates and reported a $2.1 billion fourth-quarter loss that the company attributed to ill- advised acquisitions and to declining defense spending.

For 2013, profit will be $6.60 to $6.70 a share, the company said. The average estimate of 21 analysts surveyed by Bloomberg was for a profit of $7.32 a share on sales of $32.1 billion.

The fourth-quarter loss for General Dynamics, the maker of Abrams tanks and Gulfstream business jets, compared with a profit of $603 million or $1.68 a share, a year earlier. After adjusting for certain items, profit in the quarter was $1.39 a share, the company said today in a statement. Analysts forecast a profit of $1.89 a share, the average of 20 estimates compiled by Bloomberg. Sales declined 12 percent to $8.1 billion.

The results and “charges that we have recorded in the fourth quarter reflect the fact that some of our markets are contracting as government budgets shrink at home and abroad,” Chairman and Chief Executive Officer Phebe Novakovic said in the statement.

General Dynamics gained 1 percent to $71.45 at the close in New York trading and have fallen less than 1 percent in the past 12 months.

European Sales

Declining sales for the Falls Church, Virginia-based company’s European land systems unit was the single largest cause of falling revenue, Novakovic said on a conference call with investors today.

The company cut the goodwill value of its Information Systems and Technology unit by $2 billion because its revenue is down 14 percent from a high point in 2010, Chief Financial Officer Hugh Redd said on the call.

The unit’s margins declined 2.7 percent in that period, he said. It had made 38 acquisitions since being created in 1997, he said.

Novakovic, who took the top job on Jan. 1, said on the call that she was “not a particular fan” of some of the company’s previous acquisitions.

‘Clearing Decks’

The goodwill writedowns and charges “included some anticipated clearing of the decks, though the scale of the write downs are pretty eye-watering,” Robert Stallard, a London-based analyst at RBC Capital Markets LLC, wrote in a note to investors today. The company “has arguably over-paid for certain acquisitions leading to the non-cash goodwill impairment as the defense environment turns down.” He rates the stock as neutral.

While all U.S. defense contractors face tightening budgets, General Dynamics will be “under more pressure than the other large defense primes because of its exposure to Army and IT services,” Douglas Harned, an analyst at New York-based Sanford C. Bernstein wrote in a Jan. 22 note to clients.

The company and its peers in the industry must also deal with the uncertainty of operating without a budget approved by Congress this year as well as the prospect for across-the-board cuts of $45 billion if Congress and President Barack Obama can’t reach agreement on alternative spending cuts.

Even with declining orders for technology services in the U.S., the company anticipates margins improving at the Information Systems and Technology unit, Novakovic said.

The unit’s sales fell 12 percent to $2.6 billion in the fourth quarter compared with the previous year and declared a loss.

Abrams Tank

The U.S. business of the company’s Combat Systems unit is “extremely stable on its vehicle orders and backlog,” Novakovic said. The unit makes the Abrams tanks as well as Stryker vehicles for the Army. It’s bidding for the Army’s new Ground-Combat Vehicle program.

General Dynamics had “no acquisition candidates in the current pipeline,” according to Novakovic, who said that she was focusing on cutting costs, increasing margins and generating cash. “I’m not looking at reshaping our portfolio at the moment.”

The company’s Aerospace unit, the maker of Gulfstream business jets, posted the only revenue increase in the quarter, a gain of less than 1 percent to $1.9 billion, while profit fell. The unit’s margins suffered because the company had to retrofit its new G650 jet, which is in production, with changes mandated by the Federal Aviation Administration.

The G650 received its initial certification in September after a delay because of a crash in April 2011 during a test flight that killed all four crew members.

To contact the reporter on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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