General Dynamics CEO 'does not anticipate' full-year CR

Friday’s looming deadline for Congress to complete a government funding package coincides this week with first quarter financial statements from six of the market's largest government contractors and two of their CEOs have commented on the situation to date.

Tuesday morning, Lockheed Martin CEO Marillyn Hewson gave an optimistic and “hopeful” outlook to investors regarding lawmakers’ negotiations on a deal to avert a government shutdown.

Wednesday morning, however, General Dynamics’ Phebe Novakovic struck a more uncertain tone during the company’s first quarter earnings call on the potential outcomes that could arise from Capitol Hill.

She told analysts General Dynamics “does not anticipate” a full-year continuing resolution to keep the government open at fiscal year 2017 spending levels.

“Our customers have made quite clear to (Congress) of the impact on national security of failure to make a budget,” Novakovic added.

Should there be a CR, Novakovic said it “is not material” to results this year, but added its information systems and technology segment could feel some effects in a slowdown to “execute on some task orders.”

The IS&T segment in fact already saw some disruption in the first quarter due to the change in administration, Novakovic said. IS&T experienced a nearly 7.8-percent sales decline in the first quarter to $2.1 billion.

“We had some slowdown in the execution of the contract line items on number of programs,” Novakovic said. “Our view today is we are very much in position to recover that.”

In several previous earnings calls, Novakovic has described the IS&T segment as the most “short-cycled” of its four reportable segments. She reiterated the company’s expectation of IS&T revenue to “increase slightly” this year to about $9.2 billion.

IS&T represented 30 percent of total corporate sales last year and is divided into two houses: a $4.45 billion annual IT services division and a $4.74 billion mission systems unit that builds communications technologies, sensors and cybersecurity tools.

First quarter revenue for IT services fell 7.63 percent to $1.09 billion with mission systems down 10.47 percent to $1.06 billion, General Dynamics’ latest quarterly filing says.

The IS&T’s overall book-to-bill ratio held at 1.1x for the quarter, Novakovic told investors, and that number has held constant at 1.0 over the last four years.

General Dynamics’ role as a subcontractor to AT&T on the 25-year FirstNet public safety network program should help IS&T’s sales too, Novakovic said.

“We consider this a potential growth market into the future and many years to come. It’ll be a nice franchise for us,” she added.

One item seemingly not in General Dynamics’ future is acquisitions as Novakovic sounded definitive in response to an analyst question on potential deals. In prior calls, Novakovic indicated the company did not see an opportunity for an acquisition.

“We’re not going to comment on M&A, it’s simply not appropriate and you all understand the landscape. We haven’t seen much changes in valuations, so no real change,” Novakovic said Wednesday.

General Dynamics acquired underwater drone maker Bluefin Robotics last year, made no deals in 2015 and picked up special operations logistics provider ARMA Global Corp. in 2014.

No deals took place in 2013 either in a stark contrast from the $444 million spent in 2012, $1.6 billion in 2011, $233 million in 2010 and $811 million in 2009.

Shares in General Dynamics opened up nearly 1 percent to a 52-week high of $196.75 on first quarter earnings above Wall Street’s consensus forecast with revenue below analyst expectations. First quarter earnings at $2.48 per share topped the $2.32 Wall Street consensus but sales of $7.44 billion missed analysts’ $7.61 billion outlook.

Full-year guidance remains unchanged at $9.50-$9.55 earnings per share and $31.35-$31.4 billion in revenue. The company did not change its guidance after first quarter results come out.