Corporate earnings offer key insights on competitive environment

Large defense companies and one federal technology business reported this week their latest quarterly financial results to investors. They offer more than just numbers but also the broader trends that drive them as well as what they are optimistic about and perhaps where they might be pessimistic.

The next three weeks will see more of the government market’s publicly-traded players adding their details to the picture.

Here is a snapshot of what we know so far.

Budgets: Somewhat hushed tone

Notably absent from the question-and-answer sessions during this week’s round of conference calls with analysts were inquiries about what executives are making of the current budget environment. The government is under a continuing resolution through Nov. 21.

That stopgap funding measure did feature in opening remarks by the chief executives of Lockheed Martin, Northrop Grumman and Raytheon during their third quarter calls.

Lockheed’s Marillyn Hewson said her company does not expect any impacts this year but “could experience some level of impact to our 2020 trending data” if the CR continues. Northrop’s Kathy Warden sees no “significant disruption to our fourth quarter activities or our outlook for next year as long as there is not a prolonged CR.”

Raytheon’s Tom Kennedy said “our guidance has taken this (CR)” into account and asked “lawmakers to work swiftly” on getting defense appropriations through before the year ends as it “is in the best interest of our customers and industry.”

The specter of more time with a CR in place may have affected General Dynamics’ just-ended third quarter and especially in its IT services segment, although protests also factored in those results along with award delays.

Less hushed: The secret stuff

A bulk of GovCon revenue comes from one central place (the taxpayer-funded U.S. federal government) and falls somewhere in the results, so companies have to give investors at least something about the classified work they cannot talk much about.

This dichotomy is not a new trend, but some of the defense hardware companies gave more glimpses this week of how secret work factors into their financial profile. Northrop Grumman is one of the most detailed about what it often calls the “restricted portfolio,” which the company said in this July investor presentation could exceed one-fourth of its sales this year.

On Thursday, Warden told investors Northrop has booked $8.5 billion in restricted awards over the first nine months of this year including one won by its services business “valued in the hundreds of millions of dollars.”

Raytheon also lifts the curtain somewhat. The company’s outlook for this year sees $29.1 billion-$29.4 billion in revenue. How much of that could be for work behind closed doors?

“Twenty percent plus or minus a point, one way or the other for both the bookings and sales,” Raytheon Chief Financial Officer Toby O’Brien said Thursday. “Based upon the outlook for the year, we'll have a record year for classified sales this year as well.”

Lockheed gives slightly less detail. Or as Chief Financial Officer Ken Possenride put it Tuesday: “Unfortunately, our customer frowns upon us spiking out our classified.” But he did say Lockheed expects $600 million in hypersonic revenue this year and $1 billion there next year. Classified contracts in Lockheed’s missiles and Skunk Works divisions are “growing faster than the corporation,” he added.

Back to the budget, and ahead to next year’s election

It is hard to quantify the impact of a presidential election and especially potential changes depending on which political party is in control. But companies have to consider the impact along with the other budget happenings such as continuing resolutions.

The head of ASGN’s government technology division hinted Wednesday that part of how companies navigate those uncertainties depends on what they do and who their customers are. ECS Federal’s customers include many of the defense and intelligence agencies that had full appropriations last year. Many civilian agencies did not and some even were shut down for much of January when funding ran out.

“Our customer set, even in the federal civilian space, is in the Department of Homeland Security, Department of Justice… these are areas that even though there might be some funding shifts from one party to the other and in some of the other federal and civilian organizations like EPA and such like that, the funding streams for the mission-critical customer sets are pretty, pretty even whether it's a Democrat or Republican,” ECS President George Wilson said Wednesday.

ECS can feel comfortable with where it is at. Its book-to-bill ratio on a trailing 12-month basis as of Sept. 30 was 2.4 to measure the rate that it added its backlog of contracts versus drawdowns to book revenue, indicating the unit has runway for growth.

In ASGN’s 2018 annual report, the company says ECS posted $642 million in revenue. ASGN acquired ECS last year to enter the government IT market.

Who’s up this week?

This week’s lineup of calls begins when Leidos reports Tuesday morning. L3Harris Technologies is teed up for Wednesday morning with ManTech International set to talk later that afternoon after markets close.

CACI International follows on Thursday morning, then Booz Allen Hamilton wraps up the week’s round on Friday morning.

One subject is almost a guarantee to come up in substantially every one of these calls: the Defense Department's award of its JEDI cloud infrastructure contract to Microsoft well after markets closed Friday. Expect analysts to ask Leidos, ManTech, CACI and Booz Allen in particular what they make of the JEDI situation and any opportunities they see for services wrapped around that cloud project. L3Harris is less likely to be quizzed about that contract, although a question cannot be discounted given DOD is that company's main customer.