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UPDATE 2-General Dynamics profit beats, revenue sags; shares drop

(Adds CEO comments, background)

July 26 (Reuters) - General Dynamics Corp, the maker of Gulfstream business jets and military equipment, posted higher-than-expected quarterly profits driven by increased sales in the unit that makes tanks, but projected slightly lower aerospace sales.

Its stock fell 4.4 percent because investors expected the arms maker to deliver a more handsome beat of analysts' estimates. Rivals Lockheed Martin Corp and Northrop Grumman Corp handily beat Wall Street's second-quarter estimates.

Chief Executive Officer Phebe Novakovic on Wednesday told analysts on a post-earnings conference call that revenue for its aerospace division, which makes airplanes including Gulfstream, would be $8.1 billion for the year, versus a previous forecast of $8.3 billion to $8.4 billion. The sale of private jets had helped the company post strong profits in recent quarters.

Despite the lower sales forecast, Novakovic forecast division profits for the year increasing by up to 19.6 percent from the previous outlook of 19.1 percent.

Revenue fell 1.3 percent from last year to $7.68 billion as sales decreased in both its aerospace unit and information systems and technology division.

Analyst Jason Gursky at Citigroup said the share drop came because investors expected the company to beat analysts' overall profit expectations by a wider margin, and were put off by the lowered sales guidance.

Novakovic said she anticipates U.S. defense spending increasing, but the timing and amount were uncertain.

"Right now, it's a giant fur ball," with Congress working through the budget process and defense companies waiting to "see what comes out to the other side," the CEO said.

The House is currently looking to provide $658.1 billion in funding for the Department of Defense in fiscal 2018, an increase of $68.1 billion from the 2017 fiscal year.

On the analysts' call, Novakovic pointed to difficulties resulting from President Donald Trump's slow pace of installing decision makers at the Pentagon.

"Without these appointments, it is difficult to process contracts and get authorized and appropriated funds obligated to contract."

Despite the headwinds, the Falls Church, Virginia-based company raised its full-year earnings per share forecast to between $9.70 and $9.75, from $9.50 and $9.55.

Sales in the combat systems unit, which makes battle tanks and combat vehicles, rose 9 percent in the quarter ended July 2.

Novakovic told analysts she is seeing increased demand from the United States and abroad for its Abrams tanks.

In addition, the formal order for a previously announced sale of tanks to Kuwait and Saudi Arabia was expected land in the fourth quarter of this year.

General Dynamics' operating margins rose to 13.8 percent in the quarter from 13.2 percent a year earlier.

Net income from continuing operations increased to $749 million, or $2.45 per share, from $714 million, or $2.30 per share. Analysts polled by Thomson Reuters I/B/E/S expected $2.43.

The aerospace business, its third biggest, delivered 30 aircraft in the second quarter, compared with 36 a year earlier.

Shares fell $8.73 to $194.83 in early-afternoon trading. (Reporting by Mike Stone in Washington and Rachit Vats and Sweta Singh in Bengaluru; Editing by Chris Sanders and Jeffrey Benkoe)