General Dynamics Corporation

for a 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, you may signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Howard Rebell, Vice President of Investor Relations. Sir, please go ahead.

Howard Rebell Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics first quarter 2021 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 completed, I'd like to turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.

Thank you, Howard. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $2.48 per diluted share on revenue of $9.4 billion, operating earnings of $938 million, and net income of $708 million. Revenue is up $640 million, or 7.3% against the first quarter last year. Operating earnings are up $4 million, and net earnings are up $2 million. To be a little more granular, revenue on the defense side of the business is up against last year's first quarter by $444 million, and aerospace is up $196 million. The operating earnings on the defense side are up $45 million, or 6.4%, while operating earnings in the aerospace side are down $20 million, but still nicely above consensus. I'll have more to say about this a bit later. The operating margin for the entire company was 10%, 70 basis points lower than the year-ago quarter. This was driven by a 250 basis point lower margin rate at aerospace, as was fully anticipated in our guidance to you, combined with $21 million more in corporate operating expense. From a slightly different perspective, we beat consensus by 18 cents per share. We have roughly 500 million more in revenue than anticipated by the sell side, and almost 50 more in operating earnings. So it's a pure operations beat. I must confess that we also beat our own expectations rather handsomely. This is, in almost all respects, a very solid quarter. It's hard to find something not to like about it. It's a very good start to the year. So let me move right into some color around the performance of the business segment, have Jason add color around cash, backlog, taxes, and deployment of cash, and then we'll answer your questions. First, aerospace. Aerospace enjoyed revenue of $1.9 billion and operating earnings of $220 million with an 11.7% operating margin. Revenue is almost $200 million higher than anticipated by us and the sell-side. Revenue is also $196 million higher than the year-ago quarter. The difference is almost exclusively more G500 and G600 deliveries than the year-ago quarter. The 11.7% operating margin is lower than the year-ago quarter, but consistent with our guidance and sell-side expectations. Finally, we took some mark-to-market charges with respect to our G500 test inventory. Without the charge from a pure operating perspective, performance in the quarter was superb. Aerospace also had a very strong quarter from an orders perspective with a book-to-bill of 1.3 to 1. Gulfstream alone had a book-to-bill of 1.34 to 1. In unit terms, this is the strongest order quarter for the last two years, excluding the fourth quarter of 2019 when we launched the G700. The sales activity truly accelerated in the middle of February and continued on through the remainder of the quarter. The momentum developed in the quarter appears to be rolling over into the second quarter as well. We are experiencing a high level of interest in activity. It is constructive to see this accelerated activity level without the benefit of the removal of travel restrictions and quarantine requirements in many countries outside the US. Demand should improve even further when these restrictions are ultimately removed. Gulfstream experienced a 5.7% increase in service revenue. On the other hand, Jet Aviation's FBOs and certain of its maintenance facilities are recovering more slowly. Jet aviation service revenue is down around $31 million, coupled with a modest increase in service operating earnings. The FBOs and MRO sites will do much better as business travelers accelerate. The G500 and G600 continue to perform well. Margins are improving on a consistent basis, and quality is superb. As of the end of last week, we have delivered 104 of these aircraft to customers. The G700 has over 1,400 test hours on the five test aircraft, and the first fully outfitted G700 is flying. Its interior is absolutely beautiful. We remain on track for entry into service in the fourth quarter of 2022. Looking forward, we expect the second quarter to be our most challenging from a delivery perspective. However, we also expect rapid improvement in the third and fourth quarters as we had planned for an increase in production and more delivery. Combat Systems. Combat Systems has revenue of $1.8 billion, up 6.6% over the year-ago quarter. While all three companies within the group contributed to the growth, the primary source was increased sales of our 8x8 wheeled combat vehicles to Switzerland and Spain, and sales of our 6x6 Eagle vehicles. So all in all, good growth. It is also interesting to observe that combat systems revenue has grown in 16 of the last 18 quarters on a quarter-over-the-year-ago quarter basis. Operating earnings at $244 million are up 9.4% on higher volume and a 30 basis point improvement in margin. This was an impressive performance by any reasonable measure. You may recall that a notable development for this segment in the year-ago quarter was the formal signing of the restructured contract on the Canadian International Program, which settled all issues. The parties continued to perform on that contract as contemplated. This was helpful to free cash flow last year and continues to be so this year. This risk item appears to be behind us. Turning to marine systems. You may recall that at this time a year ago, I was able to report that revenue in the first quarter of 2020 was up 9.1% against the first quarter in 2019. I am very pleased to report today that first quarter 2021 revenue of $2.48 billion is up 10.6% against first quarter 2020. The growth was led by Block 5 Virginia-class and Columbia-class construction volume. We also enjoyed nice increases in ESB and TAO construction volume at NASCO. This is very impressive continued growth. In fact, revenue in this group has been up for the last 14 quarters on a quarter versus the year-ago quarter basis. Operating earnings are $200 million in the quarter, up $16 million, or 8.7%, on an operating margin of 8.1%. We will strive to improve our operating margin as we progress through the year. On the order side, I should observe that total backlog was down only $231 million sequentially, leaving a powerful $49.8 billion in total backlog. There was obviously significant order activity in the quarter, including the award of the 10th Block 5 Virginia Class Summary. Finally, technologies. This segment had revenue of almost $3.2 billion in the quarter, up $95 million from the year-ago quarter, or 3.1%. The revenue increase was supplied by information technology, mostly associated with the ramp-up of new programs. IT alone grew 5% in the quarter. Operating earnings at $306 million or up $8 million or 2.7% on a 9.6% operating margin. This is about 40 basis points ahead of consensus. EBITDA margin is an impressive 13.3%, including state and local taxes, which are a 50 basis point drag on that result. Most of our competitors carry state and local taxes below the line. This is a best-in-class EBITDA margin. Total backlog grew $359 million sequentially, and total estimated contract value remained about the same. There were also some notable items in GDIT's first quarter worth mentioning. On the bid and proposal front, GDIT submitted the highest dollar value of proposals in any quarter since the acquisition of CSRA, 90 percent of which represent new business opportunities. They ended the quarter with over $30 billion in proposals awaiting customer decision, most of which also represent new business opportunities versus re-competition of existing work. So good order activity in the quarter with a book to bill of 1.1 to 1 and good order prospects on the horizon. That concludes my remarks with respect to a very good quarter. As you know, we never update guidance at this time of the year. We will, however. give you a comprehensive update at the end of the second quarter, as is our custom. I'll now turn the call over to our CFO, Jason Aiken, for further remarks, and then we'll take your questions.