General Dynamics Corporation

Good morning and welcome to the General Dynamics fourth quarter 2019 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Howard Rubell, Vice President of Investor Relations. Please go ahead.

Thank you, Alyssa, and good morning, everyone. Welcome to the General Dynamics fourth quarter and full year 2019 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings. With that concluded, I would like to turn the call over to our Chairman and Chief Executive Officer, Bibi Novakovic.

Good morning, and thank you, Howard. So earlier today, we reported fourth quarter revenue of $10.77 billion, earnings from continuing operations of $1.02 billion, and earnings of $3.51 per fully diluted share. This 14 percent improvement in EPS against the fourth quarter of 2018 was the result, in part, of a 50 basis point improvement in operating margins. The quarter-over-quarter earnings improvement at aerospace was a major driver of this result. We enjoyed a very solid fourth quarter and a strong 2019. We achieved most of our operational and financial goals and added meaningfully to our backlog, in some cases rather dramatically. The results and comparisons with prior periods are straightforward and rather compelling. I'll go through them briefly to leave more time for my thoughts on the business segments, our outlook for 2020, and your questions. I also think you'll find the press release and the highlights chart on our website fulsome and helpful. As we had indicated at the start of the year, the final quarter was our strongest. Earnings per share at 351 be consensus by 6 cents. Revenue and operating earnings were somewhat better. Our provision for tax was lower, offset somewhat by a higher share count and higher borrowing costs. So all in all, a solid quarter with good performance compared to the year-ago quarter as well as the third quarter of 2019. For the full year, we had fully diluted earnings per share from continuing operations of $1,198. Revenue of $39.35 billion was up over 2018 by $3.2 billion and increased at each of our reporting segments. Operating earnings of $4.6 billion were up $191 million or 4.3% over 2018. Earnings from continuing operations of $3.5 billion were up $126 million or 3.8% over 2018. Importantly, Earnings per share from continuing operations were 76 cents above 2018. Our business was strengthened by significant growth in our backlog to a new high of $87 billion. The very strong order take, particularly in aerospace and marine, positions the company well for 2020 and beyond. Let me review the full year and the quarters on a year-over-year basis without reference to sequential comparisons. On a sequential basis, suffice it to say that we had significantly more revenue, higher operating earnings, higher earnings from continuing operations, and higher earnings per share than in the third quarter of 2019. So I'll discuss each group, provide some color where appropriate. First, aerospace. Aerospace revenue of $2.9 billion was up $226 million or 8.4% against the year-ago quarter. This increase was attributable to deliveries of the 600 and favorable mix related to the rest of the product line. Services were stable. Quarterly earnings were up $98 million, an increase of more than 25%. For the full year, revenue of $9.8 billion was up $1.35 billion, or 16% over 2018. Operating earnings of $1.53 billion were up $42 million on lower operating margins. The lower operating margins were attributable to the mix as we continued the transition at Gulfstream, delivering G500s and the initial G600 aircraft. Pre-owned sales also negatively impacted margins and profits. Excluding the pre-owned revenue and losses provide an indication of the underlying strength of the operations. Margins on that basis were 16.1 percent versus 15.6 as reported. Furthermore, margins increased on a sequential basis throughout the year. At mid-year last year, we told you to expect revenue of about $9.95 billion with earnings of about $1.525 billion. We finished the year with somewhat less revenue, a better margin rate, and somewhat higher earnings. Deliveries were 147 versus our forecast of 145. All in all, very close to the forecast we gave you. On the order front, activity in the quarter was stellar and the pipeline remained strong. The book to bill at Aerospace in the fourth quarter was $1.7 to $1.00 denominated and better than that for Gulfstream alone. For Gulfstream airplane deliveries versus orders, it was two times on a dollar basis. For the year, on both a unit and dollar basis, orders were 54% higher than 2018. Backlog is up about $2 billion sequentially and for the year. From a qualitative perspective, we were quite pleased with the customer mix and product demand. All major regions experienced greater demand, including Asia Pacific, the Mideast, and particularly Europe. During the year, we delivered the 400th G650. The airplane continues to be in demand. Order for the aircraft were up year over year. We continue to work with EASA and expect G600 to be certified shortly. All five of the G700 flight test aircraft are complete, and we have begun installation of an interior on the sixth aircraft. We are making good progress toward first flight. G500 and G600 unit manufacturing costs continue to decline, and we are producing very good quality. You should see more G500 and G600 deliveries as the year unfolds. Next, combat. Revenue in the quarter of $2 billion was 13.1% above a year ago. Operating earnings of $284 million were also well ahead of the final quarter of 2018. For the full year, revenue of $7 billion was up $766 million, a 12.3% increase. Operating earnings of $996 million were up $34 million. By the way, this performance is reasonably consistent with the guidance we provided at mid-year. We enjoyed better revenue than our forecast and had earnings of about $1 billion, similar to our outlook. We continue to see the opportunity for further growth of the business. The FY20 Army budget fully supports our programs and we continue to see significant international opportunities, particularly in Europe. We are continuing to negotiate with Spain on a large vehicle program that provides the Spanish Army with important new capabilities. In the U.S., our Army customer is modernizing, which provides steady demand across our combat vehicle munitions businesses. In short, this group had quite positive revenue growth, continued its history of strong margin performance, and had very good order activity. Next, marine systems. This is a really good news story. Marine fourth quarter revenue of $2.57 billion was up $268 million, a compelling 11.7% increase over the year-ago quarter. Operating earnings of $199 million were down $14 million against the strong fourth quarter in 2018. For the full year, revenue of $9.2 billion was up $681 million, or 8%. Operating earnings for the year of $785 million were up by $24 million, or 3%, despite a 50 basis point drop in margins. At the midpoint of 2019, we expected revenue of about $9 billion and operating earnings of $770 million. We came in above that for both. As you are aware, we signed the Virginia-class Block 5 contract in December. This $22 billion award provides the Navy an important increase in its capability and affords us the opportunity to make a fair return. In response to the significant increased demand from our Navy customer, we continue to invest in each of our yards, particularly at AEB, to prepare for Block 5 and the new Columbia ballistic missile submarine. In preparation for EB's increased work scope on Block 5, we constructed additional facilities at Constant Point to build the payload modules. So suffice it to say that we are poised to support our Navy customers as they increase the size of the fleet and deliver value to our shareholders as we work through this very large backlog. Now to information technology. IT generated revenue in the quarter of $2.024 billion and operating earnings of $172 million with an attractive 8.5% operating margin. EBITDA margin was 13.1%. Quarter-over-quarter revenue was lower due to several bill vestitures, delays in award execution, and the completion of mature programs and the start of new ones. In other words, timing and mix. A case in point, there are now $22.7 billion in awards that had been delayed compared to $10.4 billion at the end of 2018. Our integration remains ahead of schedule both in terms of building an integrated and unified business as well as achieving our cost synergies. The benefit of both are beginning to emerge. For the year, revenue was $8.4 billion and operating earnings were $628 million with a 7.5 percent margin. EBITDA margin rose to 12.6% in 2019 from 12% in 2018. We are encouraged by the 14.7% year-over-year increase in our backlog to $9.1 billion, but there is more work to be done. At mid-year, we had indicated revenues of about approximately $8.5 billion, and operating earnings would be around $630 million. We were a touch light in revenue, but operating earnings were as predicted. Let me remind you of something about us. We never accept lower margins in exchange for revenue. Next, mission systems. Revenue in the quarter of almost $1.3 billion was up 2.5% against the year-ago quarter. Operating earnings of $188 million were up $7 million, with margins up 20 basis points to 14.7%. For the year, revenue of $4.94 billion was up $211 million or 4.5%. Operating earnings of $683 million were up $24 million or 3.6%. Book-to-bill for the year was one time with backlog at $5.4 billion. Mission Systems revenue of $494 billion was just a touch short of the approximately $5 billion in revenue we'd expected for this business at mid-year. Margins of 13.8% matched our expectations. The business continues to show steady, profitable growth. Mission Systems offers critical, high-consequence C4ISR and cyber systems that are built into platforms and missions that our customers rely on. This has positioned them well as they have worked to expand those capabilities into new market segments and to new platforms. On this call at mid-year, on a company-wide basis, our forecast for 2019 was to expect revenue of approximately $39.2 billion, operating earnings of $4.6 billion, and EPS of $11.85 to $11.90. As you know, we wound up ahead of that forecast. Now, before I address guidance, I'm going to ask Jason to address cash, specifically the near resolution of our issues with respect to our large international contract to Canada and several other key items. There have been some positive, very positive developments with respect to these issues in the last three weeks. Jason?