Why General Dynamics feels bullish about IT in 2018

General Dynamics' IT product and service group sales in 2017 lagged amid general procurement sluggishness. But the defense contractor sees better days in 2018 and beyond.

First things first, General Dynamics did not see top-line growth in its shorter-cycled IT product and services segment last year amid many disruptions in the market. Not the least of those which included the change to the Trump administration, plus the lack of a full federal budget out of Congress.

With that said, the Falls Church, Virginia-based defense contractor sees sales in that information systems and technology group as a case of moving to the right. Full-year revenue for IS&T was down 2.8 percent to $8.89 billion -- short of its own revised expectations of “essentially flat” over last year’s $9.19 billion.

But IS&T sales in the fourth quarter jumped 9.5 percent from the same period last year to $2.49 billion and the company is forecasting revenue for 2018 of $9.3 billion-$9.4 billion for the segment, CEO Phebe Novakovic told analysts Wednesday on their fourth quarter earnings call with investors.

That guidance range implies year-over-year growth of 4.6 percent-5.7 percent. And through 2021, General Dynamics is forecasting 5.5-percent growth on a compound annual basis.

Novakovic said the company’s ability to record revenue from its backlog continued to be slower than they anticipated in 2017 on a combination of extended continuing resolutions to fund the government and the White House transition.

That slowdown was particularly felt in the federal civilian area of the IT services business, Novakovic said. IT services is one of two units within IS&T alongside the mission systems unit that builds defense and space communications hardware.

“Both defense and federal civilian picked up in the second half, but we simply did not have enough time before year-end to recover fully,” she said. Product shipments in the hardware business and particularly with the Army had been slower in particular amid the procurement slowdown.

Owing to its short-cycled nature, Novakovic said IS&T is “more affected” by a CR than its two other defense platform businesses. But General Dynamics’ “ability to manage a CR is significantly better this year” as they “hedge our guidance with expectations around varying lengths of a CR,” she said.

Shares in General Dynamics were up 5 percent as of mid-afternoon trade after the conference call with analysts.

In August, Novakovic complained during General Dynamics’ second quarter call that a slow pace of political appointments at the Defense Department and other agencies affected their ability to get contracts processed and task orders executed.

That pace has picked up in recent times but still lags significantly behind predecessor administrations, as reported by our sister publication FCW.com.

Regarding prospects of civilian agency budget cuts, Novakovic said there were some reductions “we had not forecasted, but that’s been addressed by our customers… as they’ve modified their plans.”

General Dynamics additionally felt headwinds of the Army’s decision last year to halt funding for the branch’s battlefield IT backbone known as WIN-T until the completion of a review of that and other communications programs. That drove “a couple months of revenue” away from 2017 and into 2018, Novakovic said.

There is also the expectation by market analyst and other observers that 2018 will be a busy period for mergers and acquisitions in the government market just like it was last year. But do not expect General Dynamics to say anything about it anytime soon.

“We never comment on the environment for acquisitions, so I think I’ll pass on that,” Novakovic said in response to an analyst question on M&A.

Overall fourth quarter revenue climbed 8.1 percent to $8.28 billion with full-year sales up 1.3 percent to roughly $30.97 billion. Wall Street analysts expected General Dynamics to report $8.41 billion in fourth quarter revenue.

For 2018, General Dynamics expects revenue to climb $32.35 billion-$32.45 billion at growth of 4.4-4.8 percent with earnings of $10.90-$11.00 per share. Analysts expected revenue guidance of $32.97 billion and earnings guidance of $10.94 per share.

The 2017 earnings picture for General Dynamics is complicated by a $119 million one-time, non-cash charge the company recorded in the fourth quarter on the heels of President Donald Trump’s signature on the massive tax reform package that included a corporate rate cut.

When factoring in that charge, fourth quarter earnings come out to $2.10 per share, or $636 million. Without that charge, fourth quarter earnings come out to $2.50 per share, or $755 million.

Full-year earnings with the charge included were $9.56 per share, or $2.9 billion. Without that charge, full-year earnings total $9.95 per share, or $3 billion.