* 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
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 third quarter despite a dip in revenue, and nudged its full-year earnings forecast higher.
Chief Executive Officer Phebe Novakovic said the better-than-expected results allowed General Dynamics to increase its guidance for full-year earnings per share by five cents to between $6.90 and $7.00. It earned $6.48 per share in 2012.
But during an earnings conference call on Wednesday Novakovic told analysts that General Dynamics was keeping its forecast moderate given continued uncertainty in the U.S. budget environment and the resulting slowdown in orders. Concerns about a drop in orders in its combat systems business pushed the company's shares lower.
The CEO also said a similar slowdown could reoccur in January if U.S. lawmakers are unable to reach a broad budget deal. "It's entirely possible that we find ourselves in an extended period of time trapped in Dante's first circle of hell," Novakovic said.
The company said quarterly net earnings rose 8.5 percent to $651 million from $600 million a year earlier, while revenues fell 1.7 percent to $7.93 billion. Earnings per share rose 8.2 percent to $1.84 from $1.70.
Revenues were largely in line with Wall Street estimates, but earnings beat expectations from analysts polled by Thomson Reuters 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 its aerospace division was producing solid growth.
General Dynamics said company-wide operating margins rose 90 basis points to 12.3 percent on improved performances in the aerospace, combat systems and information systems divisions.
Margins in the marine systems division remained steady as it completed the T-AKE line of dry cargo and ammunitions ships that it built for the U.S. Navy.
COMBAT SYSTEMS SQUEEZED
Shares of most major weapons makers rose on Wednesday, but General Dynamics shares closed 2.2 percent lower at $86.23, amid concerns about its combat systems business, which saw quarterly revenues drop 30 percent.
Joe Nadol at JP Morgan said the combat systems results looked "even tougher than feared" and a 190-basis point margin beat in the segment was not enough to fully offset the top-line disappointment. He said the record-high margin of 16.4 percent in the sector looked unsustainable.
Novakovic said the combat division's revenues fell because U.S. Army orders had slowed more than expected amid uncertainty about future budget levels and the end of U.S. wars in Afghanistan and Iraq.
She said revenue would be significantly higher in the fourth quarter, largely due to international sales. For the full year, the division's revenue should be around 20 percent lower than in 2012, although margins should be higher, she said.
General Dynamics said its funded backlog fell to $40 billion at 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.