General Dynamics Cuts Forecast Citing Weakening Orders

General Dynamics Corp. (GD) and Northrop Grumman Corp. (NOC) said their information technology units suffered weak sales during the second quarter as government contract awards slowed.

General Dynamics cited the slowdown today in reducing its full-year profit forecast to $7 to $7.10 a share, down from $7.10 to $7.20 a share projected in April. Contract delays affected the information systems and technology unit, which provides cybersecurity services to the Pentagon and intelligence agencies, communication equipment to the military and computer services to federal defense and civilian agencies.

The Falls Church, Virginia-based company also said that Phebe Novakovic, its president, will assume Jay Johnson’s role as chairman and chief executive officer in January.

General Dynamics has previously warned that the prospect of almost $1 trillion in reductions from planned defense spending over a decade already is slowing contract awards at some of the company’s units. Johnson has said contracts at the company’s information-technology unit slowed because of reticence by government agencies to use up funds.

The Pentagon plans to cut about $490 billion from planned spending over a decade, and an additional $500 billion in automatic defense cuts known as sequestration will go into effect starting in January unless lawmakers and the White House agree on an alternative deficit-reduction plan.

Budget Uncertainty

CEOs of defense contractors that have announced quarterly results this week have said uncertainty about how Congress and the White House will resolve the budget standoff may affect their performance and lead some to warn employees they may be fired.

“While we’ve not received planning guidance from the government on how sequestration would be implemented, we are developing contingency plans,” Northrop’s Chairman and Chief Executive Officer Wes Bush said today on a conference call with analysts. “Sequestration would result in lower revenues, profits and cash flows for our company.”

Sequestration “continues to be of great concern,” Bob Stevens, Chairman and CEO of Lockheed Martin Corp. (LMT) said yesterday on his company’s call. “Without sufficient planning information, we’ve been unable to more precisely estimate the adverse impacts.” Stevens has said that Lockheed may have to fire as many as 10,000 employees if the automatic budget cuts go into effect.

The fourth quarter of the year “should be a tough revenue quarter for defense contractors,” with the Defense Department “reluctant to release funds, and new starts will probably be scarce” in the third quarter as well, Robert Spingarn, an analyst at Credit Suisse in New York, said today in a note to clients.

General Dynamics

General Dynamics fell 2.2 percent to $62 in New York trading and has declined 6.6 percent this year. Northrop fell less than 1 percent to $63.91 and has gained 9.3 percent this year.

General Dynamics’ revised full-year profit forecast of $7 to $7.10 a share compares with an estimate of $7.17 a share estimated by analysts surveyed by Bloomberg.

The company said its second-quarter profit fell 4.8 percent on the lower information-systems and technology sales.

Net income from continuing operations was $634 million, or $1.77 a share, compared with $666 million, or $1.79 a share, a year earlier, the company said today in a statement. Analysts forecast $1.74 a share, the average of 22 estimates compiled by Bloomberg. Sales rose less than 1 percent to $7.92 billion.

Sales at General Dynamics’ Information Systems and Technology unit fell 9.9 percent and profit declined 24 percent compared with a year earlier.

Government ‘In-Sourcing’

“The government is ‘in-sourcing’ a fair amount” of computer-services work “as it looks to control the budget,” Joel Levington, a bond analyst at Brookfield Investment Management Inc. in New York said in an e-mail. As a result contractors such as General Dynamics’ information technology unit “are experiencing weakness,” he said.

Performance at General Dynamics’ aerospace unit, maker of Gulfstream business jets, has been compensating for weaker defense sales. Revenue at the unit rose 16 percent during the quarter, and profit climbed 23 percent.

Northrop Grumman

Northrop Grumman’s information systems unit had the company’s weakest sales performance during the second quarter with revenue declining 8.6 percent. Unit profit rose 6.9 percent because of improved performance on non-defense computer work, the Falls Church, Virginia-based company said in a statement today.

The question is whether “Northrop can continue to deliver such strong operational performance” in the face of the “budget headwinds” ahead, Levington said.

Northrop today raised its full year forecast to $7.05 to $7.25 a share, up from the $6.70 to $6.95 a share it projected in April. It didn’t increase its forecast for sales, which remained at $24.7 billion to $25.4 billion. Analysts surveyed by Bloomberg forecast a profit of $6.90 a share on sales of $25.1 billion.

Net income from continuing operations was $480 million, or $1.88 a share, compared with $520 million, or $1.81 a share, a year earlier, the Falls Church, Virginia-based company said in a statement. Analysts forecast $1.61 a share, the average of 21 estimates compiled by Bloomberg. Sales fell 4.4 percent to $6.27 billion.

Northrop has reduced its workforce by about 11 percent in the past four years as the company has focused on reducing overhead costs to improve profit margins, Bush said in May.

To contact the reporters on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net; Nick Taborek in Washington at ntaborek@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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