General Dynamics Corporation

Q2 2021 Earnings Conference Call

8/4/2021

spk05: Good morning and welcome to the General Dynamics Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal an operator by pressing star then zero. After the presentation, there will be an opportunity to ask questions. To ask a question, please press star then one on your touch-tone phone. To withdraw your question, please press star then two. 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, sir.
spk11: Howard Rubell Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics second 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 would like to turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.
spk06: Thank you, Howard. Good morning, everyone, and thanks for being with us. Early this morning, we reported earnings of $2.61 per diluted share on revenue of $9.2 billion, operating earnings of $959 million, and net income of $737 million. Revenue is essentially flat against the second quarter last year, but operating earnings are up $125 million and net earnings are up $112 million. Earnings per share are up 43 cents. To be a little more granular, revenue on the defense side of the business is up against last year's second quarter by $308 million, or 4.2%. Aerospace is down $352 million, pretty much as planned. Operating earnings on the defense side are up 98 million, or 14.3%, and operating earnings in aerospace are up 36 million on a 390 basis point improvement in operating margin. The operating margin for the entire company was 10.4%, 140 basis points better than the year-ago quarter. From a slightly different perspective, we beat consensus by $0.07 per share on somewhat lower revenue than anticipated by the south side. However, operating margin is 20 basis points more than anticipated, coupled with a somewhat lower share count. This led to the earnings feed. On a year-to-date basis, revenue is up $596 million or 3.3%, and operating earnings are up $129 million or 7.3%. Overall, margins are up 40 basis points. The defense numbers are particularly good, with revenue up $752 million or 5.2%, and operating earnings up $143 million or 10.3%. On the aerospace side of the business, revenue on a year-to-date basis is down $156 million, or 4.3%, but earnings are up $16 million, or 4%, on a 90 basis point improvement in operating margins. The quarter was also very strong from a cash perspective. Free cash flow of $943 million is 128% of net income. Cash flow from operating activities was 151% of net income. In summary, we enjoyed a very good growth in the defense businesses in the quarter and had a very solid quarter from an earnings perspective across the board. The year-to-date results give us a solid start to the year and enable us to raise our forecast for the full year, which I will share with you at the end of these remarks. So let me move right into some color around the performance of the business segments, have Jason add color around cash, backlog, taxes, and deployment of cash, and then I will provide updated guidance and answer your questions. First, aerospace. Let me put the aerospace results in some recent historical context so as to put our performance into a perspective where it can be understood. As you recall, in April of last year, we told you we were cutting production as a result of certain supply chain issues. It subsequently became clear that there was a reduction in demand related to COVID-19 that resulted in additional cuts to production. Those production cuts were implemented slowly over the ensuing months and reached their low point this quarter. You may also recall that I told you last quarter that the second quarter would be the most challenging for Gulfstream because of these pre-planned production cuts. On the good news side of the story, we had anticipated renewed post-COVID demand in the second half of this year and planned increased production for the second half. In short, you will see more deliveries, revenue, and operating earnings in the second half as a result. With that, let me turn to the aerospace results in the quarter. Aerospace had revenue of $1.6 billion and operating earnings of $195 million, with a 12% operating margin. Revenue is $352 million less than the year-ago quarter, or 17.8%, as a result of fewer planned aircraft deliveries. On the other hand, operating earnings are up $36 million, or 22.6% on a 390 basis point improvement in margins. From a pure operating perspective, we did very well. From an order perspective, the quarter border long is spectacular. In dollar terms, aerospace had a book to bill of two to one. Gulfstream alone had booked a bill of 2.1 to 1, even stronger if expressed in unit terms. This is the strongest order quarter in number of units in quite some time. It was all the more remarkable in that it did not include any fleet sales. As previously discussed, sales activity truly accelerated in the middle of February and continued on through the remainder of the first quarter. The pipeline that developed in that quarter rolled over into the second quarter, as is obvious from these results. We continue to experience a high level of interest, activity, and a growing pipeline. From a new product perspective, the G500 and G600 continue to perform well. Margins are improving on a consistent basis and quality is superb. We have delivered 115 of these aircraft to customers as we speak. The G700 has approximately 1,600 test hours on the five test aircraft. We remain on track for entry into service in the fourth quarter of 2022, but much remains to be accomplished, particularly with respect to the certification of the new Rolls-Royce engine. Looking forward, we have planned 32 deliveries in the third quarter and 39 in the fourth. If all goes well, we may be able to bring in a few more forward from the first quarter of 2022 to meet current demand. Turning to combat systems, all of the comparisons combat systems, quarter over quarter, sequentially and year to date, are quite favorable. Combat systems has revenue of $1.9 billion, up 8.3% over the year-ago quarter. While ordnance and tactical systems did well, the primary source of growth was combat vehicles at both land systems and European land systems. So all in all, very good growth. It is also interesting to observe that combat systems revenue has grown in 17 of the last 19 quarters on a quarter-over-the-year-ago-quarter basis. For the first half of the year, combat systems revenue of $3.7 billion is $257 million, or 7.4% over the first half of last year. Operating earnings for the quarter at $266 million are up 11.3% on higher volume and a 40 basis point improvement in margins. For the first half, combat system earnings of $510 million are up $48 million, or 10.4%, over the last year's first half. The quarter was also good for combat systems from an order perspective, with a one-to-one book-to-bill, leaving a modest increase in total backlog. Demand for our products, particularly our combat vehicles, remained strong, with Europe leading the way. Abrams' main battle tank demand is also increasing, and the Stryker remains the combat vehicle of choice for multiple U.S. Army missions and operations. This was an impressive performance once again by combat systems. Marine systems. Revenue of $2.54 billion is up $65 million over the year-ago quarter. It is also up sequentially in year-to-date. In the quarter, the growth was led by the DDG 51 and TAO volume. Submarine construction was stable, with increases in Virginia Block 5 and Columbia offset by a decline in Block 4 in engineering. For the first half, revenue is up 302 million, or 6.4%. This is very impressive continued growth. In fact, revenue in this group has been up for the last 15 quarters on a quarter versus the year-ago quarter basis. Operating earnings are $210 million in the quarter, up $10 million or 5% on operating margins of 8.3%. You may recall that we experienced a strike at BAF last year. I am pleased to report that our relationship with the union is strong, and we are both committed to improving bath performance. NASCO is coming down the learning curve on the ESD and is nearing completion on the first of the new oilers. Repair was also strong. Electric boats' performance remains strong, and while early in the Columbia first ship construction contract, the program remains on cost and schedule. Finally, technologies. The segment has revenues of $3.16 billion in the quarter, up $98 million from the year-ago quarter, or 3.2%. The revenue increase supplied by information technology, mostly associated with the ramp-up of new programs, was almost 10%. Mission Systems experienced a modest decline in revenue driven by the sale of our space antenna business last year and a shortage of chips for certain products, which we are working to remedy in the second half. Operating earnings at $308 million are up $61 million, or 24.7%, on a 9.7% operating margin. EBITDA margin is an impressive 13.7%, including state and local taxes, which are our 50 basis point drive on that result. Most of our competitors carry state and local taxes below the line. Total backlog grew $95 million, so good order activity in the quarter with a book-to-bill of one-to-one and good order prospects on the horizon. The book-to-bill at IT was a little better than one-to-one and somewhat less admission system. This is particularly good performance in light of the continued delays by the customer in making contract awards. In total, GDIT has nearly $34 billion in submittals awaiting customer decision, with most representing new work. In addition to these submittals, our first half order book does not reflect approximately $4.6 billion of awards made to GDIT that are now in protest, including two sizable contracts challenged by a competitor. These delays are pushing work we anticipated delivering in the second half of 2021 to 2022. While new award activity has generally been slower, new requests for proposals have remained robust. GDIT's hefty submittals in the first half reflect significant customer demand for modernization and securing IT infrastructure in the wake of COVID. The business has the opportunity to submit another nearly $20 billion in proposals through the end of the year. This concludes my remarks with respect to a very strong quarter in first half. I'll now turn the call over to our CFO, Jason Aiken, for further remarks, and then I'll provide you some guidance.
spk12: Thank you, Phoebe, and good morning. I'll start with our cash performance in the quarter. From an operating cash flow perspective, we generated over $1.1 billion on the strength of the Gulfstream order book and additional collections on our large international combat vehicle contract. Including capital expenditures, our free cash flow, as Phoebe noted, was $943 million, or a 128% net earnings conversion. You may recall that for the past several years, our free cash flow has been heavily weighted to the back half of the year. So the strong quarter de-risks that profile somewhat and reinforces our outlook for the year of free cash flow conversion in the 95% to 100% range. Looking at capital deployment, I mentioned capital expenditures, which were $172 million in the quarter, or 1.9% of sales. That's down from last year, but our full-year expectation remains in the range of 2.5% of sales. We also paid $336 million in dividends and spent approximately $600 million on the repurchase of 3.3 million shares. That brings year-to-date repurchases to 7.9 million shares at an average price of just under $173 per share. We have 279.5 million shares outstanding at the end of the quarter. We repaid $2.5 billion of notes that matured in May, in part with proceeds from $1.5 billion in notes we issued in May. We also issued $2 billion of commercial paper during the quarter to facilitate the repayment of those notes and for liquidity phasing purposes. But we expect to fully retire that CP before the end of the year. After all this, we ended the second quarter with a cash balance of just under $3 billion and a net debt position of $11.4 billion, consistent with the end of last quarter and down more than $900 million from this time last year. As a result, net interest expense in the quarter was $109 million, down from $132 million in the second quarter of 2020. That brings the interest expense for the first half of the year to $232 million, down slightly from $239 million for the same period in 2020. We repaid another $500 million of notes on July 15th, as we continue to bring down our debt balance this year and beyond. At this point, we expect our interest expense for the year to be approximately $425 million. The tax rate in the quarter and the first half at 16.3% is consistent with the full year expectation, so no change to our outlook of 16% for the year. Order activity and backlog were once again a strong story in the second quarter, with a one-to-one book to bill for the company as a whole. As Phoebe mentioned, order activity in the aerospace group led the way with a two-times book-to-bill, while combat and technologies each recorded a book-to-bill of one-to-one on solid year-over-year revenue growth. We finished the quarter with a total backlog of $89.2 billion. That's up over 8% over this time last year. And total potential contract value, including options and IDIQ contracts, was $130.3 billion. Finally, a quick note on the operating results in the technologies group. You'll recall in the second quarter of last year, we recognized a loss of approximately $40 million on an international contract that resulted from schedule delays caused by COVID-related travel restrictions. We formally closed out this matter with the customer this quarter, and despite the fact that our activity on the contract has been dormant for over a year, the accounting rules required us to reverse approximately $45 million of previously recognized revenue in the quarter. Without this reversal, the technologies group would have seen organic growth of 6.4% in the quarter. That concludes my remarks, and I'll turn it back over to Phoebe to give you guidance for 2021 and wrap-up remarks.
spk06: Thank you, Jason. Now, let me do my best to give you an updated forecast. The figures I'm about to give you are all compared to our January forecast, which I will not repeat. In aerospace, we expect an additional $200 million of revenue with an operating margin of around 12.4%, which is 10 basis points below what we previously forecast. This will result in an additional $10 million of operating earnings. There could be some upside here if we can squeeze out a few more planes in the year. With respect to the defense businesses, combat systems should have another $100 million of revenue and add another 10 basis points of operating margin. So total revenue of $7.4 billion and operating margin of around 14.6%. Marine systems has an additional $300 million and 10 basis points of improved margin. So annual revenue of $10.6 billion with an operating margin around 8.4%. Technology revenue will be down $200 million from our previous forecast, but add 30 basis points of operating margin. So annual revenue of $13 billion with an operating margin of around 9.8%. So on a company-wide basis, we see annual revenue of about $39.2 billion and an overall operating margin around 10.6%. This rolls up to EPS around $11.50, 45 to 50 cents better than our forecast going into the year. That concludes my remarks, and it will be a pleasure to take your questions.
spk11: Thanks, Phoebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?
spk05: Absolutely, sir. If you'd like to ask a question, please press star then one. If you'd like to remove yourself from queue, please press star then two. Today's first question comes from Peter Arment with Bayard. Please go ahead.
spk15: Yes, good morning, Phoebe, Jason. Nice results. Hey, Phoebe, maybe just to start with combat, and my follow-up will be related to that, it's just Maybe, could you just talk about, I think, the really strong performance that you're seeing, but also it's, you know, we're seeing a lot of activity in the international market that for some of your key platforms, just how you think about, you know, combat growing in what is a domestically flatter budget environment, but based on how you're doing in terms of a lot of your awards. Thanks.
spk06: So domestically, both of our large platform programs And Stryker and Abrams are continuing to grow, particularly Stryker, as the Army assigns new missions and capabilities to that platform. There are also, as you well know, a number of developmental programs that factor into our longer-term thinking. Externally, outside the United States, demand is increasing, primarily driven by by Europe, and again, that is focused and centered on our combat vehicles, both our wheeled vehicles as well as our tracked vehicles, most specifically the Abrams main battle tank.
spk15: And just as a follow-up, just as you talked about the, I guess, some of that international activity. Do you expect that the discussions around recent comments around Poland, that would be closing this year potentially?
spk06: So, you know, Poland's in a very dangerous neighborhood, and I think there's no stronger deterrent than the Abrams main battle tank. I think press reports have suggested that they want 250 tanks. We're working very closely with the U.S. government to ensure we meet whatever ultimately Our, you know, United States and Poland determined that they want. I think our initial estimates are the close is probably a good solid year plus out. But again, more to be, more to come, and then we'll keep you informed as that program unfolds.
spk04: Appreciate it. Thanks for all the talk.
spk05: And our next question today comes from Seth Seidman with JP Morgan. Please go ahead.
spk14: Thanks very much, and good morning. Hi, Seth. Hi. I wanted to follow up on something you mentioned in the remarks, Phoebe, about what needs to be done on the engine for the G700. And I wonder if you could tell us specifically, you know, what milestones we should be looking for and what risk that the engine poses to the schedule for the program.
spk06: So as I noted, we continue to make progress on both the airplane and the engine development. But as I'm sure you know, being a student of new engine development programs, they are always difficult to get through certification. And while there's no particular issue at the time, we still have a ways to go with respect to that certification process. But at the moment, we don't have any particular issues that would impact our overall estimation of timing.
spk14: Okay, great. Thanks very much. And then just as a follow-up, there's been a lot of discussion in the press about the AJAX program. So maybe if you can update us on how that's going. And it doesn't really seem to be having too much of a negative impact on the segment's financial results, but the way that it's playing into financial performance at combat.
spk06: So our UK customer is constructively and actively engaged in this program and we're working very closely with them on two issues that were identified during customer tests. One is noise and one is vibration. And given our long, decade-long history of combat vehicle design and production, we're quite confident that both of those issues can be satisfactorily resolved. You know, interestingly enough, this is a transformational vehicle for the UK Army, and with many transformational programs, testing issues emerge during the testing process. So we will then are dealing with both of those issues, you know, quite closely with our UK government customer.
spk01: Okay, great. Thanks very much.
spk05: And our next question today comes from Christina with Morgan Stanley. Please go.
spk08: Hi, Phoebe and Jason. Phoebe, can you provide your color on the federal customer profile Gulfstream? Are the demands from corporates or individuals U.S. versus international?
spk06: Sure. All in all, we see a reasonable balance across a broad cross-section of buyers. The U.S. had a particularly strong quarter generating over more than half of this quarter's orders. I saw some new customers and a broadening of the market, and importantly, our core Fortune 500 customers have reengaged. So in all, the market we are looking at at the moment is robust.
spk08: Thanks. And my follow-up is on pricing. Since there doesn't seem to be too many used jets in inventory, are you getting more pricing power for new orders?
spk06: Well, let's just say, as a matter of course, we never talk about pricing. So I'm not about to break my discipline, but let me give you a little context here. Gulfstream has always been extremely disciplined about its pricing, and that long history of disciplined control around pricing will continue. You know, price is precious. And once Once you relent on your discipline around pricing, it's a long way back up the hill.
spk08: Great. Thank you, Phoebe.
spk05: And our next question today comes from Robert Stallard with Vertical Research. Please go ahead.
spk01: Thanks so much. Good morning. Good morning. Phoebe, just to follow up on that topic and the strength of the demand environment and the order intake at aerospace, at what point would you feel comfortable raising business jet production?
spk06: Well, we're increasing our business jet production. Gulfstream production rates throughout the remainder of this year. We've got 71 deliveries to go and we will, as you all know, set production for next year in the fall of this year and then report fully to you on those production levels in next year.
spk01: Okay, and just to follow up on the pricing issue, are you seeing any of your competitors doing anything what you might call maybe irrational on the new pricing front?
spk06: Well, that's your word, not mine. Hey, look, we tend not to, first of all, we don't compete on price, most importantly. And I never comment on other people's behavior. I find that's a wise and judicious stance to adhere to.
spk14: Okay, fair enough. Thanks so much.
spk05: And our next question today comes from Sheila Keoghlu with Jefferies. Please go ahead.
spk00: Hi, good morning, and thank you for the time, Phoebe, Jason, and Howard. Maybe on mission, if we could just talk about what's going on there for a second. I appreciate the divestiture and the semiconductor chip issue, but it seems like it was flat year over year organically, and then the book to bill is slightly below one. So maybe, Phoebe, can you talk about what the drivers in that business are and what you're seeing?
spk06: Well, I think you need to look at, as you well noted, our divestiture of our SATCOM business. But I believe absent that and given the chip issue that we and others have had, and that we are working assiduously to address. We've seen some growth, and we anticipate some additional growth going forward, but it'll be best measured.
spk12: And I think to add on to that, to Phoebe's point, assuming that business can overcome some of the supply chain issues that they've seen, which at this point they're getting good signals that they'll be able to in the second half, we ought to see some modest organic growth out of that business for the full year.
spk00: Okay, and then maybe just one on combat. You know, that was also a really good quarter there, and the first half is up, I think, 7%. It implies a deceleration into the second half. So what's maybe falling off there?
spk06: Well, I think it's only slightly in percentage terms. I think we had originally guided to an increase in revenue of about $100 million, and now we're looking at $200 million. A fair amount of that came in the first half, but we'll see a little bit of that in the second half. And as I said, the primary drivers of what was the impetus behind growth in the first half We'll repeat in the second half, and that's largely, again, vehicle production and deliveries in both the United States and outside the United States.
spk05: Okay. Thank you so much. And our next question today comes from George Shapiro with Shapiro Research. Please go ahead.
spk03: Yes, Phoebe. Could you comment on what services did in the quarter? I imagine it was up and what you expect for the rest of the year. You mean in aerospace services? Yeah, Gulfstream.
spk06: Yeah, well, our services include both jet aviation services as well as Gulfstream. So we saw some nice order, nice recovery in the United States, but Europe, Mideast, and Asia are recovering a little more slowly. So, I think we had anticipated about a half-a-billion-dollar increase in revenue. I think that's a bridge too far in the moment. And I think we're looking more along the lines of... Call it $375-ish million for the year at this point. So, not tremendously off our original estimate, but... But as I said, It's the international recovery that's been just a touch slower than we anticipated, but the U.S. has been very, very strong, Jason.
spk12: And, George, to that point, I think it's driven a nice rebound this year, I think to the tune of around 25% growth over last year. And importantly, I think as some people are watching, the levels we've seen through the first half of this year are within, call it, 95-ish percent of where we were at this time in 2019. So I think that's a good initial indication of the strength of the recovery in that business. here in 2021.
spk03: Okay. I'll stick with my one. Thank you. Thanks, Jake.
spk05: And our next question today comes from Doug Harned with Bernstein. Please go ahead.
spk04: Good morning. Thank you.
spk03: Good morning.
spk04: I wanted to go back to Gulfstream because when you talk about the demand, and the order is obviously very good. You talked a little bit about where they're coming from. Can you give us a sense of the psychology of your customers? And by that, I mean, are you seeing these orders come in really as kind of pent-up demand that's been slowed recently? Or are you seeing people actually think about the use of business jets differently coming out of, as we hopefully soon come out of this COVID period?
spk06: So we have no evidence that there's been any fundamental shift in thinking about the use of business aviation. I think it would be way, way too premature. to get real clarity about that. You're kind of getting at a question that we've received a number of times, and that goes to kind of, is there a structural change as a result of this pandemic in business aviation? And if you think critically about change, what we know is that structural change is almost never apparent prospectively. it almost always is apparent retrospectively. And so I have believed that it is premature to assume any pronouncements about structural change. Now, that said, you know, we've seen our customers, the same kinds of customers that we've had historically back in. I think there was some slowing, obviously, there was some slowing of demand last year. And a number of our customers, particularly in the Fortune 500, are on their aircraft replacement cycle. And that remains unchanged. We did see some new entrants into the market as some industries have expanded in the COVID environment, creating opportunities for those companies. But yeah, I think psychology is an interesting word, but I think I've gotten to the essence of your question.
spk04: And a little bit related to that, you described the unit book-to-bill as higher than the revenue book-to-bill. Have you seen a mixed shift toward, say, smaller aircraft? And what do you see driving that difference in unit versus revenue book-to-bill right now?
spk06: Well, we have not seen a movement particularly into the smaller jets. I think the 280 was maybe about... less than about 20% of the order book. And really, it's demand for both the in-service airplanes, the 500, 600, 650, and of course, the 700. So really, a strong demand pull across all of our airplanes. So I don't think there's anything in particular to discern from that. These are our regular customers back buying to replace airplanes and the missions that they have, that they need and they have, and the airplanes that they buy then meet each one of those missions. That's the way we think about it.
spk04: Okay. Very good. Thank you.
spk05: And our next question today comes from David Strauss from Barclays. Please go ahead.
spk10: Thanks. Good morning. Good morning. Phoebe, on Gulfstream production, just to kind of level set us, you talked about it coming down in fire issues and COVID-19. Are you taking Gulfstream – I guess just looking at it holistically on the large cabin side and adjusting for the G550, are you taking large cabin production back to where we were prior to all this or above that?
spk06: Well, look, we are – Increasing on a reasonable basis our production of all of our existing now airplanes. And we are not back at the 2019 production levels. But on a two-go basis, we're looking at second-half orders of 71. And so that in and of itself suggests that we've got, you know, solid production. I will tell you in that production plan, contemplates increased production in each and every one of our in-service large cabin fleet.
spk10: Okay. All right. And, Jason, quick follow-up. Just given the strength of, you know, Gulfstream water activity and advances you're seeing there, could you be looking at, you know, closer to kind of the 100% or maybe even a little bit above that free cash flow conversion this year?
spk12: Yeah, you know, I think, David, as I alluded to in the remarks, I think the way you think about the strength of the first half and the strength of the activity at Gulfstream is it somewhat de-risks the profile for the second half in getting to that 95% to 100% range. You'll recall over the past several years we've had a pretty steep slope in the second half on our free cash flow generation with, frankly, at times – Most, if not all, of our free cash flow for the year coming in the second half, if not even most in the fourth quarter. So that's not anything I would put together by design, and I'm really encouraged by the shift in that slope that we've seen this year. So it does give us, I think, even reinforced confidence to get into that 95% to 100% range. I think if you think about that range as a percentage in net income and combine that with Phoebe's guidance on increasing net income, you can imply increasing free cash flow to support that number. And frankly, if I'm going to lean a little forward, I think it could possibly put us toward the top into that range of the 95% to 100% range. I don't know that I'd want to get out above 100% this year. I think we still look to next year and beyond to be nicely above 100%. But bottom line, I think this reinforces improvement in overall free cash flow and maybe pushes us up toward the higher end of that 95% to 100% range.
spk10: Great. Thanks very much.
spk05: And our next question today comes from Miles Walton at UBS. Please go ahead.
spk02: Thanks, Mark. Phoebe, you talked about the 12.4% margins in aerospace. And obviously, in the first half, you were slightly under that. But the first quarter included a charge. And the second quarter, I'm sure, had production inefficiencies because of the manufacturing being at its lowest point. So I'm just curious. It would look like there's more upside in the second half barring some pickup in R&D or other expenses. Is that an area of conservatism?
spk06: So when we think about the second half margins, they will be better than our first half margins. Our first half margins were our low point. But we will see some negative impact from two factors. One is the absence of the 550 deliveries, as that airplane is now out of service, and higher R&D as we move toward G700 certifications.
spk02: Okay. All right. And then maybe just give us some color, if you can or if you want to, on the first availability of delivery slots, particularly on the 500, 600 at this point.
spk06: So, you know, we got out of the practice of doing that because it became a lot less meaningless with new airplane delivery. So we're not going to, with new airplanes, so we're not going to, I think, reinstitute that. Go back to there? Yeah, go back to there. But I think if you think about the environment that we're looking at now, And I think we've been very clear and consistent about this. Starting, really, it was in mid-February, we saw an increase in demand, and it was consistent and steady throughout that first quarter. That led to the order quarter. You saw this quarter and second quarter. And then as we look at both the pipeline and the market at the moment, it is robust. So we're seeing a return, as I said, of our Fortune 500 customers, as well as the new entrants. And North America was quite strong. So all in all, I think we're looking at a pretty good market. Thank you.
spk05: And our next question today comes from Matt Akers at Wells Fargo. Please go ahead.
spk15: Yeah. Hi. Good morning. Thanks for the question. A couple on the IT business, I guess. I think in particular you can point to that kind of drove the strength of this quarter by either by customer or product. And then I guess I think you said you were seeing some delayed awards. Is that true? Is that comment limited to the protest that you mentioned, or is that kind of a broader statement about the market? Anything you can elaborate on there?
spk06: Yeah, sure. Our growth in the quarter was fueled across many of our 7,000 contracts, but notably, proportionally, a bit more from new contract awards, so contract awards for new work, which is significant. We have seen a delay in contract awards from two fundamental factors. One, there's been an increase in elongation in the customer decision cycle. And two, we've seen an increased propensity of many in the IT industry to protest repeatedly. Early and often seems to be the... the mantra. So, both of those have increased our expectations for when we can see that growth coming. But, you know, I think I mentioned that we've got about $34 billion already in customer hands awaiting some sort of decision. And we've got about $20 billion in the pipeline. So, all of that drives growth. It's just given this elongated cycle and given this increased propensity to protest, it's going to make the recognition of that revenue a little bit lumpier.
spk10: Got it. Okay, thank you.
spk05: And our next question today comes from Robert Springer with Credit Suisse. Please go ahead.
spk13: Hi, good morning. Good morning. Phoebe, just maybe one on shipbuilding, a little bit strategic. But one of your peers in shipbuilding stated that the future of the Navy is going to be platform plus, where shipbuilding platforms will be tailored around capabilities and technologies that are key differentiators. Would you agree with this? I'm not sure it applies to submarines as much as surface ships, but would you agree with this? And would GD need to make any additional investments, either organically or inorganically, to position yourself for this.
spk06: That's one plus. I'm not sure I can give you any real insightful color around that. I will tell you how we see our ships. Let's talk about the surface combatants first in the DDGs. That is an extraordinarily versatile ship that has, over the years, had multiple instantiations of improvements and remains a very, very agile ship in terms of its ability to upgrade. So we're already on the block. or Flight 3 upgrades, which give it additional capability. I suspect that that ship and others like it can be the type of platform that evolves over time to address different kinds of missions. I think that that's pretty much regular order. I don't know that that's a systemic change in the way the Navy has ever looked at its combatant fleet. With respect to our auxiliary ships, I think those tend to be, and those come out of NASCO, and I'm thinking the Oilers, ESB, those tend to be purpose-built ships for a particular mission. And then submarines. Submarines remain a pivotal competitive advantage for the United States. And what we have historically focused on and will continue to focus on is integrating any new technologies or capabilities on that submarine. I think it's very important when you're in a complex business like shipbuilding, and particularly submarine design and construction, that you focus on the business side. of designing and building those ships and ensuring that you can successfully integrate any new capabilities that your customer wants. And we have a long history of that, and I suspect us to continue that for some time to come.
spk11: Rocco. Thank you. Rocco Lafter, we'll just take one more call, please.
spk05: Yes, sir. And our final question today will come from Kai Von Rimmer with Callen. Please go ahead.
spk09: Yes, thanks so much. So GDIT, when do you expect those two protests to be kind of adjudicated? And secondly, you know, you have an above-average exposure to Fed Civil, you know, where the funding is strong. Q3 normally is the strongest booking quarter for the second book-to-bill quarter. So give us some color of what we should expect this quarter to the extent you can.
spk06: So, Kai, you've got to go ask the judge. We have very little insight, like none, into the timing of protest resolution. That really is up to the reviewing authority. With respect to federal civilian, I think we have... We've been with many of those customers for 30 years, and we have a lot of customer intimacy across several, many key federal civilian agencies. And I would imagine that as they receive more funding and the ubiquitousness of IT infrastructure to all of their missions, I would see that as some additional upside and potential for us. When that comes, again, will depend on a whole series of issues around timing. But you can rest assured that in that pipeline, on a going forward basis that we're looking at, we've got some good sieve work in there.
spk09: Great. And so a follow-up on the AJAX, you mentioned you're confident you can resolve all the issues, but I believe... Two issues.
spk06: I believe I said two issues.
spk09: Okay. Two issues. Good point. And, but I believe it's a fixed price contract and there's been call there that basically you pay for all you know, the additional expenses. Do you see that jeopardizing profitability on that contract?
spk06: We have been able to make any changes heretofore in a very cost-effective and time-efficient manner to meet the needs of our customer for the testing program, but I do not see at the moment any impact in the on our EACs or, frankly, on our ability to produce this vehicle efficiently. The kinds of changes we're likely to see and that we anticipate typically are cut into the production line, so I don't see a whole lot of perturbations from a cost or schedule impact from the changes that we can envision resulting from this. from the resolution that we come to our customer with on these particular issues.
spk09: Terrific. Thanks so much.
spk11: Thank you for joining our call today. As a reminder, please refer to the General Dynamics website, the second quarter earnings release, and, of course, the highlight presentation, which includes our revised guidance. If you have any additional questions, I can be reached at 703-1050. Thank you, Rocco. Thank you, everybody.
spk05: Yes, sir. Thank you as well. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Disclaimer

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Q2GD 2021

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