General Dynamics Corporation

Good morning and welcome to the General Dynamics third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please press star then zero to reach a conference specialist. To ask a question after today's conference, please press star then one. To remove yourself from the queue, please press star then two. We also ask that you limit yourself to one question with a single follow-up. Please also note today's event is being recorded. I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Rocco, and good morning, everyone. Welcome to the General Dynamics Third 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, it's my pleasure to turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.

Thanks, Howard, and good morning. Before I address the company's quite good performance in the quarter, let me briefly update you on COVID-19's continuing impact. As we discussed last quarter, we are working hard to protect our people. We adhere to CDC guidelines, encourage social distancing, and have a mandatory mask policy. We continue to have lower infection rates in our surrounding communities. To date, of our 100,000 employees, we've had about 1,800 cases, 1,500 of whom have fully recovered and are back to work, while many of the others are working from home during their quarantines. In short, the pandemic remains an issue, but we have dealt with the health of our workforce in an effective way and continue to do so. As we turn to our results in the quarter, I'll spend less time on quarter over year-ago quarter and year-to-day comparisons that are well stated in Exhibits A and B to the press release, and instead focus my remarks on operations, the significant sequential improvements, and meaningful developments in the quarter. Regarding the company's third quarter performance, as you can discern from our press release, we reported earnings of $2.90 per diluted share on revenue of $9,430,000,000, operating earnings of $1.08 billion, and net income of $834 million, all very significant improvements over the second quarter. As one would expect, revenue was down $330 million, or 3.4%, against the third quarter last year. Operating earnings were down $132 million, or 10.9%, and net earnings were down $79 million. For the defense businesses alone, the year-to-date revenue is up $98 million, and operating earnings are down only $51 million. All up, the defense business has been seriously impacted, but is holding up and recovering well, as you will see in the details. As you all are aware, most of the revenue and earnings shortfall this year to date has occurred in our aerospace segment, which saw significant write-offs last quarter associated with reductions in force at both Gulfstream and Jet Aviation. However, there is mostly good news for both companies this quarter, which I'll get into shortly. But before I get into the details at the operating level, particularly at aerospace and GDIT, where we experienced significant improvement, I want to spend a moment on the resilience and strength of the company's backlog. Total backlog of $81.5 billion is down $1.1 billion against the end of last quarter. Funded backlog at $60.2 billion is down only $950 million. However, Total estimated contract value of 132 billion is down only 336 million against the end of the last quarter. While these numbers are down slightly, they represent a solid and enduring backlog. We have a good news story at Aerospace this quarter across the board. Aerospace had revenue of 1.98 billion and operating earnings of 283 million. with a 14.3% operating margin. On a sequential basis, this is an operating earnings improvement of $124 million, driven by a 620 basis point improvement in operating margins. Last quarter in my remarks, I told you that we fully expected to be back on track at JET and Gulfstream in the third and fourth quarters, receiving the benefit of the cost reductions made and paid for in the second quarter. That certainly turned out to be correct in the third quarter. Gulfstream led the way with 32 deliveries, 25 large and seven midsize. The largest number of deliveries within that mix was the G650 model. From an order perspective, sales activity in the quarter was a quantum leap better than the second quarter. While we saw pipeline activity improve week by week during the quarter, demand is still dampened by fears of concerning the economy, by an unsettled political climate, and by a wide variety of travel restrictions. Nevertheless, we had a .921 book to bill, once again led by orders for the G650. The G500 and G600 program is progressing quite nicely. As of October 13th, we had 78 customer deliveries in the program and anticipate another 14 for the rest of the quarter. So by year end, we should have over 90 aircraft in this family in customers' hands. The G700 development continues to proceed apace, with the first three flight test airplanes accumulating 750 hours at the end of the quarter, reaching a speed of Mach 0.99 and climbing to an altitude of 54,000 feet. First flight for aircraft number four was the week of October 5th, and number five flew last week. I am frequently asked about production and deliveries for next year. While I dislike giving piecemeal guidance when our plan for next year is not final, it is fair to say that we contemplate fewer deliveries. As you know, the GE550 will go out of production next year. So there will be 13 fewer G550 deliveries. Pre-pandemic, we had planned to make up that shortfall by delivering more of the other large cabin aircraft. It now appears that the marketplace will not support such an increase. So the other three large cabin aircraft will not experience much of a change in production rate or delivery. There will also be a modest reduction in midsize aircraft. However, We will have the opportunity to revisit this in April of 2021 to see if market demand at that point justifies turning up production. We will give you greater specificity on all of this on the fourth quarter call after our planning is complete. Finally, we had previously forecast full-year deliveries for 2020 of 125 to 130. It now appears that we will be right around 130. Turning to combat systems, they had revenue of $1.8 billion, up 3.5% over the year-ago quarter. Operating earnings of $270 million were up $6 million, or 2.3% over the year-ago quarter. Sequentially, revenue was up $47 million, or 2.7%, and operating earnings were up $31 million, or 13%, on a 140 basis point improvement in operating margins. The year-to-date figures show a 4.5% growth in revenue and a 2.8% growth in earnings. Pretty impressive given the COVID-related problems which were incurred early in the year, particularly in Spain. Combat systems had nice order activity in the quarter with over $1.65 billion in funded orders. Funded backlog, total backlog, and total estimated contract value all grew nicely in the quarter. The group had a book-to-bill of 0.9 to 1, together with favorable exchange rates and the acquisition of Medeco. The three taken together result in good growth and backlog. Our European land systems business had a particularly strong order book in the quarter, and OTS has the largest total estimated contract value in their history. Land systems estimated potential contract value also rose in the quarter. Undergirding combat system strengths are several important facts that I am not sure are well understood by investors. First, we are without question the premier integrator of land combat systems worldwide. Second, we are the U.S. Army's leading source of innovation through our rapid prototyping facility in Sterling Heights, Michigan. We have a well-earned reputation with the Army for high quality, on schedule, and on budget performance that is unrivaled in the industry. All of this underscores what we have been talking about for some time, that combat systems will continue to grow into the foreseeable future. As I indicated earlier, information technology, our defense business most directly impacted by COVID-19, had a very good third quarter. They had revenue of over $2 billion in the quarter, operating earnings of $146 million, with an operating margin of 7.2%. There are very nice sequential improvements in revenue, operating earnings, and operating margins. The year-over-year comparisons are reasonably favorable as well. GDIT continued its strong cash performance. It produced free cash flow of 140%. of imputed net income in the quarter, and 149% year-to-date. This is the best cash performance across General Dynamics, both in the quarter and year-to-date. From an order perspective, GDIT's wins in the quarter, a number of which are highlighted in our release, demonstrate that GDIT is gaining traction and expanding their footprint in key technology focus areas. such as cloud computing, cybersecurity, artificial intelligence, and digital modernization. COVID-19 has accelerated trends in technology that began before the pandemic, including the speed with which technology is being developed and deployed to meet emergent mission requirements. We saw strong momentum on the growth front at GDIT with the largest award quarter this year, and significant contract wins across all markets, including over $1.5 billion of awards in our federal civilian and defense divisions. Through the first three quarters of 2020, we have won considerably more new competitive work than in all of 2019. Over 50% of awards in the third quarter are from competitive new businesses. This improved award performance is encouraging and bodes well for the business as it submits a record number of proposals this year. Third quarter was the largest dollar quarter this year for submitted bids, with over $9 billion of proposals submitted. These third quarter submittals are additive to billions of dollars of prior proposal submissions awaiting customer decisions. We are beginning to harness the power of the broader corporation to drive wins, including working even more closely with our tactical communications business at Mission Systems. With respect to Mission Systems, revenue of $1.22 billion is essentially the same quarter over quarter, but up $40 million or 3.4% sequentially. Similarly, earnings of $168 million are up $4 million or 2.4% sequentially. Year-to-date, revenue is down $137 million, or 3.7%, and earnings are down $15 million, or 3%, versus last year. This is not bad, considering the divestiture of our ground-based satellite antenna business in the second quarter and the impact of COVID-19. We saw lighter customer activity, which reduced expected sales of some products, but we expect that to remedy as customers return more fully to work. From an order perspective, Mission Systems had a book-to-bill of 0.821 in the quarter. We have done some portfolio shaping at Mission Systems so we can concentrate on growing our nuclear triad lines of business, cyber defense, intel, and assured navigation and positioning, all of which are critical capabilities that support U.S. defense strategies. Marine systems is yet again a good news story, with quarter, over a year ago, quarter growth in both revenue and earnings. This growth is attributable largely to our submarine program's electric boat. Over half of the 7.6% growth year-to-date is Columbia, with considerably more coming. We've been talking about Columbia for some time, and you're beginning to see the significant growth of this program. On a sequential basis, revenue of $2.41 billion is down modestly, but earnings are up $23 million on a 120 basis point improvement in margin. The 9.3% operating margin is handsome. It is part of our continuing effort in the Marine Group to improve operating margin to go with a very real growth in revenue over time. This is a work in process. But on balance, I am confident that we are on a path to improved operating margins. So with respect to forecasting, I think the guidance we gave you last quarter is still our best view. Let me turn the call over to our CFO, Jason Aiken, for additional remarks, and then we'll turn to your questions.