Incoming General Dynamics Chairman & CEO Phebe N. Novakovic today used her first earnings call to promise investors greater discipline and realism. Although the company’s finances are strong — cash on hand is five times greater than debt — it has repeatedly disappointed investors in recent years by failing to meet earnings expectations, and Novakovic clearly has decided to set a more sober tone for her tenure. To quote a comment she made during the question-and-answer portion of today’s earnings call, “We’ve cleaned up our business, 2013 is our reset year, and I’m going to be pretty conservative here.”
General Dynamics used to be the best-run company in the defense business. It routinely outperformed peers in the sector by focusing constantly on shareholder value. But the company’s reputation for strong performance has taken a beating in recent years, and that isn’t due just to a softening in Pentagon demand. Novakovic frankly conceded that the company’s internal planning processes are somewhat broken. It still executes extremely well on contracts (especially in the Marine Systems unit that she previously ran), but it has projected business conditions and financial results too optimistically, making investors increasingly wary about holding company shares.
Not surprisingly, Novakovic predicted strength in the company’s business-jet unit during the year ahead despite a significant drag on bizjet services due to the European economic slowdown. The weakness is concentrated in military lines, particularly short-cycle information services that were relatively low-margin to begin with. Revenue growth has flattened out in naval shipbuilding and armored vehicles, but margins remain strong due to tight management of those units. Against that backdrop, Novakovic declined to promise upside surprises in the year ahead, but urged investors to focus on “margin expansion, earnings and cash” — areas where a return to investor-friendly management would be most clearly reflected. The message coming through loud and clear from Phebe Novakovic’s first earnings call at the helm of General Dynamics is that she is determined to deliver financial performance as disciplined and demanding as the operational culture that has made her company a world leader in each of its core franchises.
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