General Dynamics Corporation

Good morning and welcome to the General Dynamics fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. Please note, this event is being recorded. I would now like to turn the conference over to Howard Rebell, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics fourth quarter and full year 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. We will also refer to certain non-GAAP financial measures for additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page on our website, InvestorRelations.gd.com. Now, I'd like to turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.

Good morning, and thank you, Howard. Earlier today, we reported fourth quarter revenue of $10.3 billion, net earnings of $952 million, and earnings per diluted share of $3.39. This is, in most respects, consistent with our previous guidance and sell-side consensus. The results in comparison with prior periods are rather straightforward and set out on our press release. I'll go through some of that detail quite briefly as I give you my thoughts on the business segments. As we indicated it would be, the final quarter is our strongest quarter of the year in both revenue and earnings. In fact, earnings, operating margin, net earnings, and return on sales improved quarter over the prior quarter throughout the year. It was a nice steady progression of sequential improvements. On a sequential basis, suffice it to say that revenue is up $724 million. Operating earnings are up $106 million, and earnings per share are up $0.32. So, all in all, a solid quarter with good operating performance. For the full year, we had revenue of $38.5 billion, up 1.4% from 2020. Net earnings of $3.26 billion, up 2.8%. and earnings per fully diluted share of $11.55, modestly better than consensus, and up 55 cents over 2020. We ended the year with a total backlog of $87.6 billion and total estimated contract value of $127.5 billion. Our business was strengthened by significant growth in aerospace backlog to $16.3 billion. I'll have more to say about that when we get to the business segment comments. The total company booked the bill is 1 to 1 for the quarter and the year, led by the powerful order performance of Gulfstream. Our cash performance for the quarter and the year is very strong. The conversion rate for the quarter is 136% of net income and 104% for the year. Jason will have more fulsome comments on this subject and backlog in his remarks. Now let me turn to reviewing the quarter and paying some attention to quarter-over-quarter and sequential comparisons as well as the full year in the context of each group and provide color as appropriate. So first, aerospace. Aerospace revenue of $2.6 billion is up 5.1% over the year-ago quarter on the delivery of 39 aircraft, 35 of which were large cabin. While this was the strongest delivery quarter of the year, it fell short of our expectation by one aircraft, which has flipped into 2022. For the full year, revenue of $8.14 billion is up modestly from the prior year, even though we delivered 119 aircraft, eight fewer aircraft than we did in 2020. The increase was driven by higher service revenue at Gulfstream and a nice increase in revenue at Jet Aviation. Fourth quarter aerospace earnings of $354 million are down $47 million from the year-ago quarter, even though revenue was $125 million higher, resulting in a 270 basis point reduction in operating margins. The major source of the variance is a $50 million increase in net R&D costs driven by the certification effort on the G700 and G800 and accelerated work on the G400. The year-ago quarter was also helped by a significant launch assistant payment that was an offset to gross R&D. Nevertheless, aerospace operating earnings and margins are better than anticipated by consensus. The same can be said for the full year result. I should also point out that aerospace margins improved throughout the year, and that was true with respect to both Gulfstream and Jet Aviation. At mid-year last year, we told you to expect revenue of about $8.2 billion, operating margin around 12.4%, with earnings of $1.01 billion. We finished the year with revenue of $8.14 billion, operating earnings of $1.03 billion, and a 12.7% operating margin. In sum, we were slightly better on earnings and margin, but very close to our forecast on revenues. Far and away the most important story in the quarter for aerospace and frankly for the company was the extraordinary order activity at Gulfstream. Last quarter I told you that orders in the third quarter boarded on the spectacular. This quarter they were significantly better. Order activity in the quarter was beyond anything we had seen since 2008 with the introduction of the G650. Demand that turned very good in mid-February and continued through the Second and third quarters was red hot in the fourth quarter. Let me give you the particulars. The aerospace group, in dollar-denominated orders, had a book-to-bill of 1.7 to 1. Gulfstream alone was 1.8 to 1. In unit terms, it was over two times. Remember that these multiples are off of an increased denominator with 39 deliveries. This translates into very significant backlog growth. Aerospace added $1.6 billion to backlog in the quarter and $4.7 billion for the year. As we go into the new year, the sales pipeline remains robust and sales activity is brisk. The buildup in backlog and the pace of current demand leaves us with the rich problem, but a problem nonetheless. How do we satisfy the demand manifest in our current backlog supplemented by continuing brisk activity having previously turned down production? Can the supply chain support us? Are we ready? Well, the answer is we will increase production in 2022, but not to where it needs to be. Remember also that some of our increased production in 22 will be in building G700s and G800s that will not deliver on 22, a pre-build, if you will. As it turns out, the long pole in the tent is manufacturing wings, which we do ourselves. You may recall that we previously vertically integrated wing supply because of failures in the supply chain. So what do we need to do? We need to expand our new line wing facility and acquire another set of tools and fixtures. All of this is underway and will be in place to satisfy our needs for 23 and beyond. This leads to the question of what are the implications of this for 2022 guidance. I'll address 22 guidance a little later. Further, given the robust and enduring backlog at Gulfstream, we also feel comfortable with giving you a look at what is anticipated for 23 and 24 as well. Finally, on the new product development front, all 5G 700 flight test aircraft are flying and have over 2200 flight test hours. We have completed over 65% of all required testing. Next, combat systems. Revenue in the quarter of $1.89 billion is off 3.7% from the year-ago quarter. Operating earnings of $281 million are off $28 million on a 90 basis point decrease in operating margin. Let me point out, however, that a 14.9% margin in the quarter is highly respectable. For the full year, revenue of $7.35 billion is up $128 million, a 1.8% increase after strong growth in 2019 and moderate growth in 2020. Operating earnings for the year of $1.07 billion are up $26 million, a 2.5% increase. By the way, this performance is in line with the guidance we provided earlier in the year. As we look forward for the next few years, we believe that combat volume will soften somewhat in the increasingly constrained budget environment faced by the U.S. Army. While our platform programs remain critical to the Army war fight, we may see some contraction, in part offset by international growth in Abrams and wheeled combat vehicles. We will continue to drive margins as we always have, Remember that Combat Systems has had very good margins in much more constrained revenue environments. In short, this group has had a positive revenue growth for several years now, continued its history of strong margin performance, has good order activity, and has a strong pipeline of opportunity as we go forward. Next, Marine Systems. The Marine Systems growth story continues. Fourth quarter revenue of $2.9 billion was up less than 1% over the year-ago quarter. However, revenue is up 8.8% sequentially and 5.5% for the full year. Similarly, operating earnings are down somewhat in the quarter, but up sequentially and for the full year. Once again, this is the highest full year of revenue and earnings ever for the Marine Group. In our initial guidance to you, we anticipated revenue of about $10.3 billion, operating margin of 8.3%, and operating earnings of $855 million. We came in above that for both revenue and earnings and spot on the predicted operating margin. Our shipyards have continued to perform well, overcoming most of the challenges that COVID lay in our path, first continuing to operate without ceasing throughout COVID, and more recently managing labor shortages, part shortages, supply chain disruptions, and increasing commodity prices. Importantly, on the latter point, our long-term shipbuilding contracts provide protection from material escalation. I'm happy to report that we are working very well with the BATH unions and workforce, and together we have worked to put the past behind us and concentrate on improving schedule and performance. As a result, staff has begun to see improvement on both scores. In response to significant increased demand from our needy customer that you'll see in these results, we continue to invest in each of our yards, particularly at EB to prepare for Virginia Block 5 and the Columbia Ballistic Missile Submarine. Suffice it to say that we are poised to support our needy customer as they increase the size of the fleet and deliver value to our shareholders as we work through this very large backlog. Finally, the technologies group, which consists of GDIT and mission systems. Just to remind you, this is the group in the defense segment that had had the most impact from COVID-19, with the most remote participation from employees and the most difficulty accessing customer locations whose employees also have been working remotely. It is also where we had the most impact from the short supply of chips and other key components at mission systems. With that said, let's turn to the results and commentary on the group and the specific businesses. For the quarter, technologies had revenue of $2.98 billion off 7.9% from the year-ago quarter. Operating earnings, however, of $334 million are off only 5.1% on a 30 basis point improvement in margin. The operating margin of 11.2% is the strongest since the formation of this group. Revenue for the full year at $12.46 billion is off 1.5%, but earnings are up $64 million or 5.3% on a 60 basis point improvement in operating margin. All considered, the group performance showed good strength and earnings are in line with guidance from us. Revenue came in at $543 million below our guidance, driven by mission system challenges that we have discussed last quarter. offset in part by 2.2% growth at GDIT. Margins at both companies were very good, enabling us to meet our earnings forecast, so very good operating leverage in a very challenging environment. The group enjoyed a nice order quarter with significant wins and a book to bill of one to one, a little bit stronger at GDIT and a little bit lower at Mission Systems. Mission Systems did a very good job overcoming many of their supply chain challenges, working hard to satisfy the pent-up demand that was driven by a significant backup of work orders in some customer sites and by supply chain shortages. Turning to IT, our Fed and civilian division had a particularly strong year in 21 and helped drive a 60 basis point improvement in margin over 2020. And as has been the case since the acquisition, GDIT's cash performance was outstanding, well in excess of 100% of their imputed net income. GDIT's backlog at the end of 2021 was $8.7 billion, 4% higher than year-end 2020. Book-to-bill was 1.1 to 1 on sales growth at 2.2%. This is notable. in light of the dollar value of GDIT wins ensnared in protests that went from about 800 million at the end of 2020 to a whopping 6 billion at the end of 21. While we expect these protests will resolve in our favor, protest resolution timing is outside our control. As we look into 22, we have a healthy pipeline of opportunities to pursue as customers focus on digital modernization and over $32 billion of bids, largely all new work, awaiting customer decisions. So all in all, we expect a good year for the business. Let me turn the call over now to Jason Aiken, our CFO, for additional commentary, and then return with our guidance for next year. Jason?