Shutdown lingers in the background for defense contractors

The word "shutdown" wasn't said during General Dynamics' fourth quarter earnings call, but it still lingers in the background for GD and other large defense contractors.

The word “shutdown” was not said Wednesday during General Dynamics’ fourth quarter and year-end earnings call with investors, but the recent five-week closure of several civilian agencies was certainly alluded to in an analyst question about “a lot of uncertainty and volatility” in the political environment.

And like some of her industry counterparts, GD CEO Phebe Novakovic does not sound all that concerned that disagreements over many civilian budgets will bleed over into those for the Defense Department, which is fully funded for fiscal 2019 and stayed open during the recent budget impasse.

Those disagreements “haven’t necessarily affected the defense spending and in fact defense spending has been increasing in this environment, so we are quite comfortable that we’re going to see through at least our initial planning horizon very nice funding for all of our key programs,” Novakovic told analysts.

Including the acquisition of CSRA in April of last year, GD’s revenue climbed 17 percent to $36.1 billion. GD is forecasting sales growth of 6 percent this year to $38.5 billion.

General Dynamics expects its IT services segment with CSRA in tow to hold flat at around $8.3 billion in revenue this year. GDIT was touted as a nearly $10 billion-revenue with CSRA included at the time of that deal’s closure, but the segment divested three non-core businesses last year that posted almost $1 billion in annual sales.

Before the shutdown, President Trump was expected to release his fiscal year 2020 budget request in the first week of February but that submission is set to be delayed for a few weeks. It could be pushed back even further if the current three-week stopgap funding measure expires on Feb. 15 with no deal in place and once-closed civilian agencies like the Homeland Security Department and NASA have to shut down again.

But this week’s round of earnings calls from aerospace-and-defense giants such as General Dynamics, Lockheed Martin and Harris Corp. show that industry is expecting continued growth in military funding even in light of the current uncertainty.

That flush of added defense money is going toward new equipment, weapons and high-end technologies aimed partly at regaining the U.S.’ technological advantage over others like China and Russia.

In her comments Tuesday, Lockheed CEO Marillyn Hewson said she sees bipartisan support for higher defense spending and sought to separate that discussion from the domestic side of the budget. The civilian side is where she will watch for “how much pressure there will be.”

Hewson also said the most recent partial shutdown did not significantly impact Lockheed's business but cautioned the company "could see some delays in 2019 awards and orders" in the event it happens again.

And Harris CEO Bill Brown said Tuesday that intelligence budgets in particular “has been growing over the last three or four years” and those “end to be a little bit more resilient, more well-funded.”

Harris of course is merging with L3 Technologies to create a sixth defense prime that can capture a larger share of that anticipated market growth.

Like other A&D firms, General Dynamics looks relatively insulated from any impact of the recent partial shutdown. Exactly half of GD’s $31 billion in revenue for 2017 came from Defense Department contracts, according to regulatory filings. Non-DOD sales of $2.8 billion represented 9.2 percent of corporate revenue.

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