COMPANY OUTLOOK

General Dynamics sees contract delays as slowing IT growth

Last year was one of transition for General Dynamics’ IT services business through the integration of CSRA and included wins that have not been celebrated yet because of protests.

Fast forward to now, and GDIT sounds like it is in a mild hurry-up-and-wait mode as it turns the page on 2019 and kicks off 2020.

Speaking on GD’s fourth quarter earnings call Wednesday, CEO Phebe Novakovic told investors there were almost $22.7 billion in potential awards that have been delayed as of last year’s end compared to the $10.4 billion held up at the conclusion of 2018.

In an October earnings call, Novakovic told Wall Street analysts that half of the $65 billion in awards GDIT was waiting on at the time had “slipped to the right.”

“We experienced significant delays in the execution of awards, the velocity of execution flowed considerably and the number of potential awards caught in this bit of purgatory increased dramatically,” Novakovic said Wednesday.

Perhaps the most significant award caught in purgatory right now is the potential $7.6 billion Defense Enterprise Office Solutions contract to roll out Microsoft Office 365 email, calendar and other collaboration tools across the Defense Department.

DEOS is going through a redo where the original winner in GDIT and semi-successful protestor in Perspecta are submitting new bids to GSA and the Defense Information Systems Agency. The second try at an award is expected for sometime this quarter. For its part, GDIT is protesting for at least a second chance at one of Leidos' largest recompete wins in the $4.6 billion DISA "GSM-O" global information grid contract.

Also still waiting in the wings is the Navy’s decision on the $3.4 billion “NGEN” services contract to run its global network also used by the Marine Corps. Perspecta is defending its incumbency on that against teams led by GDIT and Leidos.

GDIT’s revenue climbed 1.9 percent last year to $8.42 billion, a touch shy of the $8.5 billion the company had expected. Last year also saw GDIT divest its call center and next-generation 911 businesses to focus more on core mission IT work.

But the business also saw its backlog rise 14.7 percent to $9.1 billion and recorded a book-to-bill ratio of 1.1, which shows the contract inventory is growing faster than bookings against it to realize sales.

That backlog growth came in a year where GDIT also “had several mature programs end” and lost “one or two recompetes,” Novakovic said, “both of which lost near-term volume that will be replaced over time by our new wins.”

“We had anticipated that 2019 from 2020 would show some growth, that growth has now moved to the right in 2021 and we’re expecting mid-single digit growth, driven by the execution and velocity of contract awards,” Novakovic said.

GDIT expects to post $8.45 billion in revenue for 2020 on an operating margin of around 7.6 percent compared to the 7.5-percent figure for 2019.

The segment’s margin of sales to earnings before interest, taxes, depreciation and amortization expenses hit 12.6 percent for 2019. So-called EBITDA margins are closely watched by investors to measure the profitability of government IT and professional services businesses.

General Dynamics Mission Systems -- essentially the company’s IT product segment -- saw revenue increase 4.5 percent to $4.94 billion in 2019 on steady order activity and ended the year with a 1.0 book-to-bill ratio. Chief Financial Officer Jason Aiken told analysts that the GDMS and GDIT segments have both recorded book-to-bill ratios greater than 1.0 for five straight years.

GDMS expects sales to continue growing to $5.1 billion for 2020 on an operating margin of 14.1 percent, up from the 13.8 percent reading for 2019.

The corporate-wide forecast for 2020 sees $40.7 billion in total revenue, up 3.5 percent from last year’s $39.3 billion, and an 11.9-percent operating margin versus last year’s 12.3 percent reading.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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