General Dynamics Corporation

Good morning and welcome to the General Dynamics fourth quarter and full year 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance today, please press star then zero to reach a conference specialist. After today's event, there will be an opportunity to ask questions. To ask a question, you may press star then one. And to remove yourself from queue, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Howard Rubell, Vice President of Investment Relations. Please go ahead.

Howard Rubell Thank you, Operator. And good morning, everyone. Welcome to the General Dynamics fourth quarter and full year 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.

Good morning. Thank you, Howard. Earlier today, we reported fourth quarter revenue of $10.5 billion, net earnings of $1 billion, and earnings per diluted share of $3.49. This is, in most respects, a very solid quarter, even though we missed consensus by five cents. I'll have more to say about that shortly. Despite the adverse impact of the pandemic, we achieved most of our operational and financial goals, added dramatically to our backlog, and had a very good cash quarter. The results and comparisons with prior periods are rather straightforward and set out in our press release. Because of the adverse impact to the economy caused by COVID-19, I'll devote less time to the quarter-over-quarter comparisons and spend more time on the sequential improvement that tells a compelling story of recovery. I'll go through that in some detail as I give you my thoughts on the business segment. As we indicated that it would be, the final quarter is our strongest. It is quite remarkable that we came within two cents of the very strong pre- Pandemic fourth quarter of 2019. On a sequential basis, suffice it to say that revenue is up 11.1%. Operating earnings are up 20.6%. Net earnings are up 20.1%. And earnings per share are up 20.3%. So all in all, a solid quarter with good performance even compared to the year-ago quarter, but really good sequentially. For the full year, we had revenue of $37.9 billion, down from 3.6% from the prior year, net earnings of $3.17 billion, and earnings per fully-deleted shares of $11, once again modestly below consensus. Our business was strengthened by significant growth in the backlog to a year-end record high of $89.5 billion. The same is true of total estimated contract value at $134.7 billion. The total company booked a bill was 1.1 to 1 for the year, led by the particularly strong order performance of ElectricVote. The strong order intake across the board positions the company well for 2021 and beyond. Our cash performance for the quarter and the year was stronger than expected with a conversion rate of 91% in net income for the year. Jason will have more fulsome comments on this subject in his remarks. Let me review the quarter, paying particular attention to sequential comparisons and the full year and the context of each group and provide some color as appropriate. First, aerospace. Aerospace revenue of $2.4 billion is up 23.3% over the third quarter on the strength of the delivery of 40 aircraft, 34 of which were large cabins. While this was the strongest delivery quarter of the year, it fell short of our expectations by three aircraft, two of which delivered after the first of the year for reasons related to customer preference. The third aircraft had a willing customer but was not ready for delivery by year end. That one's on us. For the full year, revenue of $8.08 billion is off 17.6% from the prior year. Nevertheless, operating earnings are still over $1 billion, sparring away the industry leader. Fourth quarter operating earnings of $401 million is 41.7% better than the third quarter on the strength of higher revenue, and a 220 basis point improvement in operating margins. However, the shortfall against consensus for the quarter and year is found in the three anticipated deliveries that slipped into this year. This should not in any respect diminish the outstanding performance of Gulfstream in this environment. Furthermore, margins increased on a sequential basis throughout the year, ending at 16.5% in the fourth quarter. At mid-year last year, we told you to expect revenue of about $8.4 billion with earnings of $1.13 billion. We finished the year with revenue of $8.1 billion and earnings of $1.08 billion. The entire shortfall is attributable to 127 deliveries versus our expectation of 130. All in all, still within the 125 to 130 deliveries we gave you right after the initial shock, to the economy caused by the pandemic became manifest on the order front activity in the quarter was very good and the pipeline remains quite active the book to bill at aerospace in the fourth quarter was 0.96 to one dollar denominated for the year the book to bill was 0.88 to one this order activity was in my view quite good in the midst of a pandemic-induced depression We are of the well-considered view that order activity will improve further as travel restrictions are lifted and the economy begins its recovery. Let me give you some thoughts on our product portfolio. First, the G500, G600 unit manufacturing costs continue to decline, and we are producing superb quality. We had 92 units of this family of aircraft in service at year end. Anecdotally, the G500 led the order book in the fourth quarter. Next, some in the analyst community have expressed concern about the continuing demand for the G650, which first entered into service eight years ago. At the end of this year, we had 436 G650 in service, an average of 54 per year. The 650 continues to be in demand, but not at that level. I can add anecdotally that in the fourth quarter, it was a close second to the G500 in demand. It remains a strong competitor to anything in the air and will remain a strong contributor to our revenue and earnings for the next several years. Finally, on the new product development front, all five G700 flight test aircraft are flying and have over 1,000 hours of test flights. We appear to be on track for entry into service in the fourth quarter 2022. That will stimulate both revenue and earnings next year. If you've been following our aerospace R&D spend, you know that there's more to come on this subject. Next, combat systems. Revenue in the quarter of $1.96 billion is essentially the same as the year-ago quarter, operating earnings of $309 million or $25 million or 8.8% ahead of the final quarter of 2019, on the strength of 140 basis point improvement operating margin to 15.8%. For the full year, revenue of $7.2 billion is up $216 million, a 3.1% increase after 12.3% growth in 2019, despite a revenue decline at ELS driven by COVID shutdowns in Spain earlier in 2020. Operating earnings of $1.04 billion are up $45 million, a 4.5% increase. By the way, this performance is consistent with the initial guidance we provided earlier in the year. In the U.S., our Army customer is continuing its modernization, which provides steady demand for our combat vehicles and munitions businesses. The fourth quarter had some nice order activity, including a contract for Abrams Version 3 with a ceiling of $4.3 billion and additional Stryker Shorad orders with a ceiling of up to $1.2 billion. Outside the U.S., we are beginning to see increased demand as our NATO allies start to emerge from COVID-constrained activity, including over 200 million of Canadian ammunition orders in the quarter. In short, this group has had quite positive revenue growth for several years now, continued its history of strong margin performance, had very good order activity, and has a strong pipeline of opportunity as we go forward. Next, marine systems. This is once again a good news story. Marine fourth quarter revenue of $2.9 billion is up $292 million, a compelling 11.4% increase over the year-ago quarter. Operating earnings of $247 million are up $48 million against a good fourth quarter in 2019. Importantly, there is an 80 basis point improvement in operating margins. The results are much the same sequentially. Revenue is up $452 million, and earnings are up $24 million, or 10.8%. For the full year, revenue was almost $10 billion, up $796 million, or 8.7%. Operating earnings for the year of $854 million are up by $69 million, or 8.8%. This is the highest quarterly and full-year earnings ever for the Marine Group. In our midyear guidance to you, we anticipated revenue of about $9.6 billion and operating earnings of $845 million. We came in above that for both revenue and earnings. In response to significant increased demand from our Navy customer that you can see in these results, we continue to invest in each of our yards, particularly at electric boats, to prepare for Block 5 and the new Columbia ballistic missile submarine. So suffice it to say that we're poised to support our Navy customers as they increase the size of their fleet and deliver value to our shareholders as we work through this very large backlog and improve our return on invested capital. Finally, the technologies group, which consists of GDIT and mission systems, is reported together for the first time in a while. You may recall we used to report this group, as then constituted, as information systems and technology. This new reporting reflects the way we manage these businesses, with Group Executive Vice President Chris Marzilli reporting to me. We have also discovered that in this era of end-to-end solutions melding technology, hardware, and software, these business units increasingly go to market together, seeking to provide end-to-end systems and support solutions. We will, however, continue to provide operating transparency by providing company-specific data where appropriate. Jason will have more to say about this in his remarks. This is, of course, the group in the defense segment that has had the most impact from COVID-19, with the most remote participation from employees and the most difficulty accessing customer locations. With all that said, let's turn to the results and commentary on the group and specific businesses. For the quarter, technologies had revenue of $3.23 billion, off less than 1% sequentially. Operating earnings of $352 million are up $38 million, or 12.1%, on 120 basis point improvement margins. As you would expect, given the environment, revenue for the first full year is off 7% $111 million, or 5.3%, and earnings are off $100 million, or 7.6%. It is well to remember that these revenue and earnings numbers exclude the SATCOM business that was sold in the first half of last year. All considered, the group performance showed good strength, and earnings guidance from us was close. Revenue came in at $350 million below our guidance, $12.65 billion versus $13 billion, but margins, particularly at GDIT, were better, leading our earnings forecast to be on target. From a margin perspective, GDIT was at 7.9%, up 40 basis points sequentially. Mission Systems, at 16.2%, was up 290 basis points over the last quarter. For the full year, the group's free cash flow exceeded 150% of full year imputed net earnings, the strongest performance within General Dynamics. GDIT's performance was even stronger. It was the best quarter cash performance in its history. The group enjoyed a tremendous order quarter with significant wins by GDIT in four major programs, all of which are IDIQ contracts. As a result, Under our conservative accounting policy, these awards are found in total estimated contract value rather than an unfunded backlog. Jason will get into this more in his remarks as well. Each quarter in the past, I've tried to give you some insight about GDIT. Once again, let me share some thoughts. The fourth quarter was an extension of the momentum GDIT built throughout the year despite COVID headwinds. They remained focused on what they could control in an otherwise turbulent year, supporting customers and their employees while controlling costs, converting cash, and winning new business. On the new business front, GDIT won several large deals in key technical focus areas, including cyber, cloud, and artificial intelligence. These wins drove GDIT's total estimated contract value up $2 billion, or 11%. as compared to both the third quarter and year-end 2019. As you will see in our guidance, GDIT is poised for very nice growth in 2021. Let me now turn the call over to Jason Aiken, our CFO, for additional commentary, and then return with our guidance for next year. Jason?