General Dynamics sees COVID disruptions on two sides of the pond

General Dynamics’ aerospace segment that makes the Gulfstream jet continued to face coronavirus-related challenges in the second quarter on production and delivery delays.

GD anticipates some improvement ahead there and that is all we will say about that. But GD also is seeing continued disruptions in its IT services segment that in some ways the company and peers cannot do much about just like the global commercial aerospace slump.

In its second quarter second quarter financial release, GD reported a 12.7-percent decline in IT services revenue to $1.88 billion due to restrictions at some government worksites that have resulted in company employees either staying home or not working a normal schedule.

GDIT accounted for nearly 21 percent of total revenue last year and 13.5 percent of operating earnings.

For many classified facilities, agencies have limited them to essential personnel only in line with social distancing directives and contractor employees in many instances are now working on a shift basis.

During GD’s earnings conference call with investors, CEO Phebe Novakovic said about 10 percent of the IT segment’s 30,000 employees are “either idle or underutilized, and a significant portion of that workforce is in the classified area.”

“It’s impossible to do classified work from home, so as our customers sort through how they judiciously and prudently bring back employees in this COVID environment and how we manage and how we augment all of that, will depend on going forward where we are,” Novakovic added.

GD is able to get at least a reimbursement of costs for keeping employees at home under the CARES Act economic relief law but in many instances not the fees.

That translated into a 2.7-percent hit on the bottom line for IT services to a 4.4-percent operating margin. Many of those impacted programs bring in high margins for GDIT and have come to a “hard stop,” Novakovic told analysts.

Pandemic-related item number two out of GDIT’s hands is very similar: a complete stop on work to support a non-U.S. government customer in Europe for one simple reason as Novakovic put it.

“We can’t get our people from here to there to do the work required by this contract,” she said, owing the halt to travel restrictions. “This is the most painful programmatic impact of COVID 19 we have experienced.”

GD recorded a $40 million charge against its earnings on that program and is working to seek relief because of the work stoppage.

The company lowered its full-year outlook for GDIT to $8.1 billion in revenue from $8.4 billion and a 6.3-percent operating margin. But Novakovic did note that GDIT's funded backlog stands at a record $5.46 billion and that agencies are not slowing down in putting bids out to industry.

“GDIT continues to see unprecedented bidding opportunities in the quarter as the government is moving to the cloud and leveraging the power of data analytics, integrating enterprise IT, artificial (intelligence) and cyber tools,” Novakovic said.

Second quarter revenue in the mission systems segment that makes IT hardware fell 7.5 percent year-over-year to $1.18 billion in part on the now-completed sale of a ground antenna business and some demand disruptions such as shipping delays.

GD’s sales expectations for mission systems are at around $4.9 billion, down from $5 billion-$5.1 billion but owing to $150 million in divested revenue, with a 14.5-percent operating margin.

The revised company-wide financial outlook sees $38.4 billion in revenue and operating earnings of $4.2 billion for this year.