GD's IT business faces market head winds

General Dynamics saw a continued slump in its IT segment during the second quarter and cautioned investors Tuesday that this year may not show growth for a group that has seen headwinds from the transition to the Donald Trump administration.

The information systems and technology group’s second quarter revenue fell 5 percent from the prior year period to $2.1 billion, which followed a first quarter decline of 7.8 percent to $2.14 billion. When combined, the IS&T group registered a 6.4-percent decline over the six-month period to $4.25 billion, compared to $4.54 billion for the same period last year.

CEO Phebe Novakovic told investors during General Dynamics’ first quarter earnings call in April the transition to a new administration resulted in slower execution on task orders in a segment she refers to as the most “short-cycled” out of the company’s four segments.

And the second quarter saw much of the same for the company and has led to some revised expectations, Novakovic said in the second quarter call Tuesday morning.

A slow pace of political appointments has hampered agencies’ ability to get contracts processed for companies to work under, she said.

Newly-revised guidance for IS&T puts forecasted revenue as “essentially flat” with the prior year period’s $9.19 billion figure versus original expectations of “up modestly,” Novakovic told investors Tuesday.

That revision helped to pressure General Dynamics’ overall top-line revenue expectations to what Novakovic described as “somewhat lower” compared to initial guidance of $31.35 billion-$31.4 billion. General Dynamics’ stock showed a 4.46 percent decline in late afternoon trade Wednesday as investors appeared somewhat spooked by the lowered guidance.

The second quarter slowdown impacted General Dynamics’ IT services division in particular, Novakovic told investors. That was driven by “very slow execution on programs in several civilian agencies, primarily driven by uncertainty and, in some cases, reduction in funding levels,” she said.

An extended continuing resolution in particular impacted the IS&T mission systems division that makes communications products primarily for the military, according to Novakovic. The latest CR lasted seven months until Congress approved a fiscal 2017 omnibus spending bill that held defense funding at the prior year’s levels and slightly increased civilian budgets.

Trump’s fiscal 2018 budget blueprint calls for a $54 billion boost to defense spending coupled with a civilian spending slash of the same amount.

While Novakovic said there is “clear intent in the administration and in parts of the Congress for increased defense spending,” she added the slow pace of Defense Department leadership appointments from the Trump administration is also a factor in how budgets and priorities get formulated.

An appointment tracker run by the Partnership for Public Service and the Washington Post pegs the number of confirmed Senate nominations at 50 out of the 574 key positions that require confirmation. Of those positions, 358 spots have no nominee, 155 have been formally nominated and 11 are “formally nominated” but not officially submitted to the Senate.

Within the Defense Department, the PPS and Post have put the confirmed appointee number at 7 out of 53 total. Of those, 19 are in the confirmation process, including the nominee for DoD acquisition leader in former Textron executive Ellen Lord.

“Without these appointments, it is difficult to process contracts and get authorized and appropriated funds obligated to contracts,” Novakovic said. “At this juncture, both are proceeding more slowly than we thought would happen.”

Novakovic is not the only CEO to take note of the slow pace of staff appointments by the Trump administration. Leidos CEO Roger Krone has twice mentioned the low staffing levels in remarks to investors in recent months.

During Leidos’ first quarter earnings call in April, Krone told analysts the slowness and related budget uncertainty has caused "a delay in the procurement process award decisions” as “procurement deadlines have been slipping to the right.”

Later in June, Krone said at the 2017 Citi Industrials Conference in Boston that Leidos has not “seen anything that would cause us to change our view [that appointments] ... are way behind.”

Novakovic told investors Tuesday she views the IS&T segment’s ability to recover in this year’s second half as a “question of timing” for when agencies execute contract programs. Much of the uncertainty falls on the IT services side as “the administration sorts out some of the funding for some of the civilian agencies,” she said.

Even with revenue headwinds, the IS&T segment’s operating margin climbed to 11.2 percent in the year’s first six months from 10.4 percent in the prior year period. Novakovic touted the group’s “attention to cost, schedule and performance,” three priorities she set out for it upon her CEO appointment in 2013.

General Dynamics' overall second quarter sales of $7.68 billion missed the analyst consensus of $7.75 billion, while earnings of $2.45 per share barely topped Wall Street's $2.47 EPS outlook.

The company raised its full-year earnings guidance from $9.50-$9.55 to $9.70-$9.75 per share, again below the analyst consensus of $9.81 EPS.