General Dynamics, one of the largest US defense contractors, reported strong second-quarter earnings, comfortably above Wall Street expectations. But it took down future guidance, warning of political problems with the defense budget and slow progress in staffing key Defense Department appointments. CEO Phebe Novakovic told investors on today’s conference call that 2nd-half revenue would be lower than expected, and the company’s stock fell nearly 4%, the worst performer in the S&P 100:
“There’s clear intent in the administration and in parts of the Congress for increased defense spending. We believe this intent will manifest in some level of increased defense spending in the procurement and R&D accounts. The question is how much and when? Relevant considerations include the dispatch with which Congress approved a higher defense budget and how soon the administration can propose and the Congress can approve the department senior leadership appointment. Without these appointments, it is difficult to process contracts and get authorized and appropriated funds obligated to contract. At this juncture, both are proceeding more slowly than we thought would happen. Nevertheless, we remain confident in the direction of defense spending.
So turning to guidance. Let me provide some guidance for the year for each segment, compare it to what we told you in January and then wrap it up into our driver EPS outlook. For aerospace, our guidance was to expect revenue of 8.3 billion to 8.4 billion, up 6.4% from 2016, operating earnings of approximately 1.6 billion with an operating margin rate of 19.1% to 19.2%. We now expect to be approximately 8.1 billion of revenue with margins of 19.5% to 19.6%. This implies pressure on margins in the second half, particularly in the fourth quarter. This will result in no change to the operating earnings forecast, still a very strong industry-leading performance.”