General Dynamics Corporation

Good morning and welcome to the General Dynamics second quarter 2020 earnings conference call. All participants will be in a listen-only mode. At the end of today's conference, there will be a question and answer session. To ask a question, you may press star then one to join the queue. To withdraw your question, please press star then two. Please note that we will ask you to limit yourself to one question and a single follow-up. Please also note that today's event is being recorded. I would now like to turn the conference over to Howard Rubell, Vice President of Investor Relations. Please go ahead, sir.

Good morning. Thank you, Rocco. Welcome to the General Dynamics second quarter 2020 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, 10-Q, and 8-K filings. With that complete, I would like to turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.

Thank you, Howard, and good morning, all. Before I address the company's performance in the quarter, let me briefly discuss how COVID-19 is continuing to impact us. We continue in a professional and proactive way to create a safe work environment for our people, adhering to CDC guidelines, encouraging social distancing, and instituting a company-wide mandatory mask policy. We temperature screen our employees and send those home who fail. These procedures have ensured that we have lower infection rates than the locales in which we operate. Of our over 100,000 employees globally, we have had 515 cases to date, less than one-half of 1%. As you would expect, we continue to incur significant COVID-related direct costs across the company. In addition, several of the business units are experiencing considerable program impacts, which we estimate to be around $127 million by the end of the first quarter, second quarter. The most significant impact appears to be at GDIT, which I will discuss later in my remarks. On the good news front, with respect to Congress, all of our major programs are well supported in the congressional markups of the defense funding bills. As we turn to our results in the quarter, I will spend less time on quarterly and year-to-day comparisons that are well stated in the exhibits to the press release and focus my remarks on the operations and the significant non-recurring items in the quarter. Regarding the company's second quarter performance, as you can discern from our press release, we reported earnings of $2.18 per fully diluted share on revenue of $9.26 billion operating earnings of $841 million and net income of $625 million. As one would expect, revenue was down $291 million or 3% against the second quarter last year. Operating earnings were down $249 million or 22.8% and net earnings were down $181 million. The defense side of the business was down very modestly against the year-over-quarter and even less year-to-date. For the defense business in the first half, revenue is down only six-tenths of a percent, and operating earnings are down 3.7% on a 30 basis point lower operating margin. Most of the revenue and earnings challenges in shortfall occurred at GDIT and in our aerospace segments. which was particularly impacted by jet aviation. I'll comment on this in considerable detail later in my remarks. We experienced solid growth at combat systems and marine systems in both the quarter and the first half, along with declines in revenue at GDIT and mission systems, in part caused by the divestiture of our SATCOM business at mission systems. However, mission systems had growth in operating earnings for both the quarter and the half on significantly improved operating margins. Before I get into the details at the operating level, particularly at aerospace and GDIT, and then give you some forecast data anticipating the impact of COVID on our operations for the full year, I want to spend a moment on the resiliency and strength of the company's backlog. Total backlog of $82.7 billion is down $3.1 billion against the end of last quarter. Funded backlog of $61.2 billion is down only $2.6 billion. However, total estimated contract value is up $8.4 billion against the end of last quarter. Let me give you a sense of perspective here. It is important to observe that total backlog is up $15 billion over this point a year ago. Total estimated contract value is up $30.3 billion over this time last year and is at its highest point ever. At Aerospace, you may recall that Gulfstream was able to deliver only 23 aircraft in the first quarter due to travel restrictions. We struggled with the same problem in the second quarter but managed largely to mitigate that problem with 32 deliveries. With that process, aerospace had revenue of $1.97 billion and operating earnings of $159 million with an 8.1% operating margin. Much of the problem in the quarter rests with jet aviation where we incurred a $19 million operating loss driven in part by an $87 million sequential reduction in revenue as a result of COVID-related impacts. At this reduced revenue, Jet had a significant overhead absorption issue. Jet also incurred a $12 million charge for severance. We fully expect to be back on track at Jet in the third and fourth quarters with improved revenue and receiving the benefits of the cost reduction made and paid for in the second quarter. Gulfstream alone had an operating margin of 9.8% on a somewhat disadvantaged delivery mix coupled with a $30 million severance charge and a loss of $10 million related to pre-owned aircraft. The operating margin without severance and pre-owned would have been 12.1%. Much like jet aviation, Gulfstream will improve margins steadily throughout the year with the benefit of efficiencies resulting from actions taken this quarter. From an order perspective, sales activity in the quarter was extremely difficult, exacerbated by fears concerning the economy, by inability to travel, by inability to arrange demonstration flights, and by difficulty getting before the customers other than by telephone. In that environment, our sales force concentrated on redeveloping a good sales pipeline, which they did. This gives us optimism for an improved third quarter. We actually feel reasonably good about the 0.5 to 1 of the bill under the circumstances. We also see increased interest in Europe and the Far East. Finally, we are holding to the delivery forecast we gave you last quarter of between 125 and 130 deliveries for the year. I'll say more about that on our forecast at the end of these remarks. Combat systems had revenue of 1.75 billion, up 5.7% over the year-ago quarter. However, operating earnings at 239 million were down 3 million, or 1.2%, on a 100 basis point reduction in operating margin, largely attributed to a 330 basis point degradation in margin at ELS as a result of COVID-19 ramifications in Spain. The largest impact to our operation in the quarter was the temporary but mandatory shutdown of two of our large European manufacturing sites in Seville and Trubia by the Spanish government. We have since reopened and are ramping up production to pre-COVID levels. We are on the mend at ELS. Combat systems had nice order activity in the quarter with over $1.4 billion in funded orders. and another 2.1 billion in IDIQ contracts or options for potential contract value of 3.6 billion. Our ordinance business had a particularly strong order book in the quarter from higher rocket, gun, and other munition orders. The group had a book to bill of 0.8 to 1. As I indicated earlier, information technology is our defense business most directly impacted by COVID-19, and that is reflected in our results. Information technology had revenue of over $1.88 billion in the quarter, operating earnings of $83 million, and an operating margin of 4.4%, driven by a charge of approximately $40 million in a legacy GDIT program where execution is occurring in Europe. We can't get our people from here to there to do the work required by this contract. This is the most painful programmatic impact of COVID-19 we have experienced. While we have taken a charge in the quarter, we will aggressively seek contract relief as we move forward. As previously noted, toward the end of the last quarter, some of IT's customers, including a number of our classified customers, closed their sites to all but Mission Essential employees. This impacted revenue and earnings and will continue to do so. Some of IT's services' highest margin programs have come to a hard stop because of COVID-19. While this is the first quarter in some time that IT has failed to achieve a one-to-one book-to-bill, it is important to note that the funded backlog has increased to $5.46 billion, the highest ever. Another fact worth observing about IT's performance in the quarter is its cash performance. It produced free cash flow in excess of $250 million of imputed net income. Since the acquisition of CSRA, information technology has supplied $1.7 billion of free cash flow over nine quarters, a stunning 156% of imputed net income. These cash contributions have been critical for us during a period when we have been making significant cash investments in the marine and aerospace groups. GDIT continues to see unprecedented bidding opportunities in the quarter as the government is moving to the cloud and leveraging the power of data analytics, integrating enterprise IT, artificial and cyber tools. We remain confident that we will win our fair share of these new bid opportunities. Turning to mission systems, mission systems revenue of $1.81 billion was down $96 million quarter over quarter in part due to the divestiture of our ground-based satellite antenna business. However, earnings of $164 million were up $2 million against the year-ago quarter on a 120 basis point improvement operating margin. Mission systems also enjoyed very strong growth in both revenue and earnings on a sequential basis. For the first half, revenue is down 138 million, but earnings are up slightly over last year's first half on a 90 basis point improvement in operating margins. Mission Systems had a good quarter from an order perspective, with orders of 1.29 billion versus revenue of 1.18 billion, over 110 million more in orders, resulting in a book-to-bill of 1.1. There were modest revenue adjustments to backlog as a result of the SATCOM divestiture. MS continues to perform well across its portfolio. In the marine group, this is once again a good news story. Revenue of $2.47 billion is up significantly against the year-ago quarter, sequentially and on a year-to-date basis. Earnings are up as well. against all comparison periods, but only modestly due to a mixed shift at NASCO and the failure of many employees to report to work at Bath Ironworks, leading to operating issues. Electric boats' performance was particularly solid. The strike at Bath was immaterial to our results. This is our smallest shipyard, generating less than 2% of our profits, so its impact was negligible. You may recall the announcement during the quarter that Electric Boat received an $11.5 billion Cost Plus contract for the Columbia Ballistic Missile Submarine Program, including the construction of the first two boats. Of that amount, $869 million went into firm backlog and the remainder into potential contract value. Something in excess of $10 billion will come into firm backlog when the 2021 defense bills are passed by Congress later this year. This is an important continuation of the Marine Group growth story. So let me now turn the call over to our CFO, Jason Aiken, for additional remarks, and then I'll give you our updated guidance.