General Dynamics Corporation

Hello and welcome to the General Dynamics first quarter 2022 conference call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypads. If you'd like to withdraw your question, you may press star two. I will now hand over to your host, Howard Rubell, Vice President of Investor Relations for General Dynamics. Over to you, Howard.

Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics first quarter 2022 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 gap measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, InvestorRelations.gd.com. With that completed, I would 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 $2.61 per diluted share on revenue of $9.4 billion, operating earnings of $908 million, and net earnings of $730 million. Revenue is flat against the first quarter last year. Operating earnings are down $30 million, but net earnings are up $22 million. Operating earnings were hurt by a significant expense at the corporate other line, which distorts the truly strong performance of the operating units. The improvement in net earnings was aided by less interest expense and a lower provision for income taxes against the year-ago quarter. Earnings for diluted share are up 13 cents or 5.2% year-over-year. The operating margin for the entire company was 9.7%, 30 basis points lower than the year-ago quarter. This was as anticipated in our earlier guidance to you, but also shaped by the aforementioned expense at the corporate other line. From a slightly different perspective, we beat consensus by $0.10 per share. We have roughly $400 million more in revenue than anticipated by the sell side and almost $20 million more in operating earnings. We also beat our own expectations, particularly so in aerospace, about which I will have more to say shortly. As we indicated in our press release, cash from operating activities is just shy of $2 billion, about 270% of net income. After capital expenditures, free cash flow was $1.8 billion, 250% of net income. This is particularly impressive following a very strong cash performance in the fourth quarter of last year and not at all typical for us in a first quarter. Obviously, we are off to a good start here. This is, in important respects, a very strong quarter, a good foundation for the year. So let me move right into some color around the performance of the business segment, have Jason add color around the spectacular cash performance, backlogged taxes, deployment of cash, and the makeup of the corporate other line. Then we'll answer your questions. First, aerospace. Aerospace enjoyed another strong quarter. It had revenue of $1.9 billion and operating earnings of $243 million, with a 12.8% operating margin. Revenue is $16 million ahead of last year's first quarter, despite the delivery of three fewer aircraft. Revenue is almost $180 million higher than anticipated by the south side. The difference is almost entirely growth at Gulfstream Services and Jet Aviation. Operating earnings of $23 million ahead of last year's first quarter, a 10.5% increase, and well ahead of south side expectations. The 12.8% operating margin is 110 basis points higher than the year-ago quarter. Here, the gross margin on delivered aircraft was slightly better, particularly the 500, but fully offset by increased R&D spending. The improvement comes from higher service revenue, coupled with significantly better margin on that revenue. On the Gulfstream side of the service business, it was the result of an extremely attractive business mix. For jet aviation, it was strong performance at the FBOs in the United States. Aerospace also had another very strong quarter from an order perspective with a book-to-bill of 1.7 to 1. Gulfstream aircraft orders alone had a book-to-bill of 2.1 to 1. The order activity at Gulfstream was strong across the board but driven by orders for the 650. Strong sales activity and customer interest continues so far this quarter as well. The U.S. market remains robust. with some slight improvement in Southeast Asia and the Middle East. China remains slow. The Russian invasion of Ukraine has stopped activity in Eastern Europe and slowed activity in Western Europe. All of this, however, is trumped by the strength of the U.S. market. I should add that flight activity is increasing in Western Europe, including flights to the U.S. This is a good leading indicator of an improving market in Western Europe. On the new product front, the G500 and G600 continue to perform well. Margins are improving on a steady basis, and quality is superb. As of the end of the quarter, Gulfstream has over 160 of these aircraft in service, full support in the U.S., and Abrams' interest from U.S. allies is increasing. Land systems had a book-to-bill of 1.2 to 1. Orders in Europe were higher, primarily from negotiations that have been ongoing. The pipeline in Europe, however, has increased as nations are contemplating higher defense spending to respond to the threat. Turning to marine systems, once again, our shipbuilding units are demonstrating impressive revenue growth. Let me begin with a little recent history. The first quarter of 2020 was up 9.1% against the first quarter in 19. 2021 first quarter was up 10.6%. And first quarter 2022 with the revenue of 2.7 billion is up 6.8% over 21. The growth was led by Columbia class construction and repair volume. We also enjoyed nice increases in TAO and DDG 51 construction volume. I'm pleased that the growth is spread over all shipyards. Operating earnings are $211 million in the quarter, up $11 million or 5.5% on operating margins of 8%. We will strive to improve our operating margin as we progress through the year. The total backlog of almost $43 billion remains robust and is the largest of our operating groups. Finally, technologies. This segment has revenue of almost $3.2 billion in the quarter, down $36 million from the year-ago quarter, about a 1% decrease. However, GDIT enjoyed a $55 million increase in revenue quarter over quarter and a stunning $286 million sequentially. This was GDIT's highest revenue quarter in over two years. Operating earnings at $298 million or down $8 million, roughly 2.6%, on a 9.4% operating margin. Once again, GDIT was up $12 million quarter over quarter and $16 million sequentially. Technology's EBITDA margin was a strong 13.1%, including state and local taxes, which are a 50 basis point drag on that result. Total backlog grew $293 million sequentially and total estimated contract value grew $2.6 billion on the same basis. The book-to-bill for technologies was 1.1 to 1, led by mission systems at 1.2 to 1, a good indication that their growth will soon resume. GDIT had good order activity with a 1 to 1 book-to-bill. Over 75% of its orders awards represented new business. The G700 flight test and certification program continues to progress well. We have five flight test aircraft that have completed over 2,800 flight hours. We also have conducted over 25,000 hours of laboratory simulated flying. All structural testing is complete and all structural requirements have been met. The aircraft design, manufacturing, and the overall program are very mature. The new Rolls-Royce Pearl 700 designed specifically to match the G700 aerodynamics to optimize speed, range, emission, and fuel burn will be certified in the next few months. The engine is performing well and exceeding key performance parameters. Our final step toward entry into service is to complete certification flying with the FAA. This is typically the most predictable part of our test program. All of this has been achieved during a pandemic and a certification process made increasingly rigorous due to industry events unrelated to Gulfstream. In that connection, the flight test process has a first-time requirement that was not part of our original flight test plan or any prior development effort. It is a model-based developmental software validation, a line-by-line examination of the plane software, The level of effort is considerable. Completing 100% of the software validation is the impediment to finishing performance testing by the FAA and G800 first flight. I can assure you that the validation work to date has proceeded well and presented no surprises. It is just resource and time intensive. This leads me to some comments on the timing of certification. We continue to target certification of the G 700 for the fourth quarter of this year, but the ultimate timing is dependent on the FAA. It seems prudent for us at this time to recognize the risk of a three to six months slip in the process and to plan for it accordingly. If such a slip were to occur, we have offset any impact toward 2022 financial plan with an increase of deliveries of current production aircraft. This would also not adversely impact 2023. It also remains our view that the G800 certification will follow the G700 by six to nine months. Gulfstream remains committed to a safe and comprehensive certification test program. Production of customer G700 is underway, and we are preparing for entry into service. We will deliver a mature, high-quality aircraft. Looking forward to next quarter, we expect to deliver 26 aircraft with rapid increases in the third and fourth quarters as we have previously indicated. So far, supply chain issues have been in the nuisance category. However, we expect an increasing number of issues in this regard later in the year and believe we are on a path to work through them successfully. In short, off to a very good start at aerospace. Next, combats. Combat Systems has revenue of $1.68 billion, down 8% over the year-ago quarter. Earnings of $227 million are down 7%. The numbers are reasonably consistent with our outlook and sell-side expectations. Margins at 13.6% are a 20 basis point improvement over the year-ago quarter, so strong operating performance. Stryker and Abrams have considerable support in the U.S., and Abrams' interest from U.S. allies is increasing. Land systems had a book-to-bill of 1.2 to 1. Orders in Europe were higher, primarily from negotiations that have been ongoing. The pipeline in Europe, however, has increased, as nations are contemplating higher defense spending to respond to the threat. Turning to marine systems, Once again, our shipbuilding units are demonstrating impressive revenue growth. Let me begin with a little recent history. The first quarter of 2020 was up 9.1% against the first quarter of 19. 2021 first quarter was up 10.6%. And first quarter of 2022, with the revenue of $2.7 billion, is up 6.8% over 21. The growth was led by Columbia-class construction and repair volumes. We also enjoyed nice increases in TAO and DDG 51 construction volume. I'm pleased that the growth has spread over all shipyards. Operating earnings are $211 million in the quarter, up $11 million or 5.5% on operating margins of 8%. We will strive to improve our operating margin as we progress through the year. The total backlog of almost $43 billion remains robust and is the largest of our operating groups. Finally, technologies. This segment has revenue of almost $3.2 billion in the quarter, down $36 million from the year-ago quarter, about a 1% decrease. However, GDIT enjoyed a $55 million increase in revenue quarter over quarter and a stunning $286 million sequentially. This was GDIT's highest revenue quarter in over two years. Operating earnings at $298 million or down $8 million, roughly 2.6%, on a 9.4% operating margin. Once again, GDIT was up $12 million quarter over quarter and $16 million sequentially. Technology's EBITDA margin was a strong 13.1%, including state and local taxes, which are a 50 basis point drag on that result. Total backlog grew $293 million sequentially, and total estimated contract value grew $2.6 billion on the same basis. The book-to-bill for technologies was 1.1 to 1, led by mission systems at 1.2 to 1, a good indication that their growth will soon resume. GDIT had good order activity with a 1 to 1 book-to-bill. Over 75% of the quarter's awards represented new business. So good order activity in the quarter and good order prospects on the horizon. GDIT alone submitted over $5 billion in the quarter, bringing the number of submitted proposals in the decision or protest queue to $29 billion. As you know, we never update guidance at this time of the year. We will, however, provide you a comprehensive update at the end of next quarter, as is our custom. This concludes my remarks with respect to a very good quarter. I'll now turn the call over to our CFO, Jason Aiken, for further remarks, and then we'll take your questions.

Thank you, Phoebe, and good morning. The first thing I'd like to address is the unusually high corporate operating expense of $71 million in the quarter, which is up from $32 million in the year-ago quarter. Given our full year expectation of around 110 million in corporate expense this year, you might have expected a first quarter number similar to last year. However, this year was impacted by a change to some of the terms of our equity compensation plans, which resulted in the acceleration of the expense associated with those awards. This was a one-time non-cash item, and you should expect a lower corporate expense in the remaining quarters to result in our full year outlook of 110 million. If you consider the performance of our operating segments in the quarter, excluding this corporate expense anomaly, the segment margins improved from 10.3% a year ago to 10.4% this quarter. Turning to our cash performance, we had the strongest first quarter we've seen in some time. Following several years of negative free cash flow in the first quarter, this quarter was a marked improvement due in large part to the strong order activity at Gulfstream, and ongoing progress payments on our large international vehicle program at Combat Systems. For the quarter, we generated operating cash flow of nearly $2 billion for a conversion rate of 270% of net income. Including capital expenditures of $141 million, our free cash flow was $1.8 billion, or a conversion rate of 250%. So the quarter was well ahead of our expectations, some of which was favorable timing in our operating working capital, but the performance certainly reinforces our outlook for the year of free cash flow conversion at or above 100% of net income. Looking at capital deployment, I mentioned capital expenditures were $141 million in the quarter, or 1.5% of sales, which is consistent with last year. We're still planning for CapEx to be around 2.5% of sales for the year. We also paid $330 million in dividends, and increased the quarterly dividend nearly 6% to $1.26 per share. And we spent over $290 million on the repurchase of 1.3 million of our shares at an average price of almost $225 per share. After all this, we ended the first quarter with a cash balance of $2.9 billion and a net debt position of $8.6 billion, down $2.8 billion from this time last year and about $1.3 billion below the year-end position. Brett KenCairn, Net interest expense in the quarter was $98 million down from 123 million in the first quarter of 2021 the decrease in 2022 is due to the one and a half billion dollar reduction in debt last year. Brett KenCairn, We have another 1 billion of outstanding debt maturing later this year and we'll have more to say about our plans related to those notes as we get closer to their maturity in November. The tax rate in the quarter at 14% benefited from the timing of equity compensation activity and associated deductions consistent with our expectations. So no change to our outlook of 16% for the full year. But of course that implies a higher rate for the balance of the year to arrive at that outcome. Order activity and backlog were once again a strong story in the first quarter with a one-to-one book to bill for the company as a whole. As Phoebe mentioned, the order activity in the aerospace group led the way with a 1.7 times book to bill, which is also the book to bill for the group over the last 12 months. As a result, aerospace backlog has increased by almost 50% in the past year. Technologies and combat systems also had solid quarters with a 1.1 times and a 1 times book to bill, respectively. We finished the quarter with a total backlog of $87.2 billion, while total potential contract value, including options and IDIQ contracts, was $129 billion. Finally, a quick note on our expectations for EPS progression for the balance of the year. We expect the second quarter to be roughly 10 cents above the first quarter, with more significant steps up in the second half of the year. Howard, that concludes my remarks. I'll turn it back over to you for the Q&A.

Thanks, Jason. As a reminder, we asked participants to ask one question. with one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?

Thank you. We will now begin the Q&A. If you'd like to ask a question, you can press star 1 on the telephone keypad. If you would like to withdraw your question, you may press star 2. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Ron Epstein of Bank of America. Ron, your line is now open.

Good morning, everyone. This is Mariana from Pérez Mora on for Ron today.

Hey, good morning. Before you get into your question, some of you may have noted an interesting juxtaposition of the subjects in my remarks. And I'll just note this, the capacity for technology to air is endless. So nonetheless, I hope you got the message. All right, go ahead.

That's fine. We got the message. Sorry, but we got it. So Anairo, you mentioned strong volumes and margins at services. Could you please give us some more color on what were the main drivers and please help us understand how sustainable are those volumes and margins? Yes.

So we had higher R&D, but we had a very strong margin performance in services and a particularly good mix in service R&D at Gulfstream. We had also some improvement in gross margins. So that mix drove margins.

How sustainable are the volumes of services? Did anything change in the services business?

We think that that particular mix is going to be hard to replicate, but for the moment we're sticking to our margin guidance that we gave you. Just to remind everybody, it is our custom to update you at the end of the second quarter with a full and detailed analysis of our prospects for the rest of the year by group and then a wrap-up for the whole company. But we'll stick with what we've got now. We're off to a good start, however.

Thank you. Our next question comes from Miles Walton of UBS. Miles, your line is now open.

Thanks. Phoebe, on your comment around the software validation approach in the certification, is that something that's been recently added after the original certification plan was agreed to? Or is it just that you're getting to the point where you're having to accomplish this new element?

No, this was an added process that we had not contemplated when we originally laid out our certification plan. And it's a result of events that are independent of us.

I see. Okay. And then on the free cash flow, Jason, is it The case, it looks like, unbilled was pretty favorable, and we know about the Canadian combat vehicle, but did the UK combat vehicle also start to pay out?

No. As you point out, we continue to receive steady payments on the international program that we reset a couple of years ago, so that continues apace. We're still working through issues with the customer on the UK side, so we hope to see that resolved later this year.

Thank you. Our next question comes from David Strauss of Barclays. David, your line is now open.

Great. Thanks. Phoebe, could you touch on a little bit more marine margins? I think at 8%, that's the lowest we've seen in a while. I think you've talked in the past about that business eventually getting 9% plus kind of margins. So can you talk about what it What exactly happened in the first quarter and the progression from here to get to that above 9% level? Thanks.

So as we've noted before, margins will be compressed as we work down our learning curves on Columbia. And as you may recall, we are booking initial Columbia at a conservative margin. That coupled with the well-publicized supply chain scheduling issues in Virginia have driven some margin compression. But we expect those to stabilize over time as well.

And just to add to that, David, and put another point on what Phoebe mentioned there, the Columbia program, while we saw growth, as she mentioned, in all three of the shipyards, the Columbia program did bring more than half of the volume increase in the quarter. So just from Nick's perspective, those early margin rates on that program are impacting the aggregate margin for the group, too.

Okay, and Phoebe, I mean, the outlook for this business longer term, you still think it can, you know, as Columbia, you know, gets into production, you know, further into production, and you still think it can be a 9% to 10% margin business?

Yes, as we get further into production, the schedule stabilized on Virginia, and both Bath and NASCO will also contribute. So we are targeting that, and we believe that that is fully achievable.

Thank you. Our next question comes from Seth Seifman from JP Morgan. Seth, your line is now open.

Thanks very much, and good morning. Good morning. You mentioned the outlook for Gulfstream both for this year and reinforced the guidance for next year, so I understand that that's where we're headed in terms of deliveries, but I guess can you walk through the mechanics a little bit more if, you know, if Gulfstream needs to see a significant step up in deliveries at the second half at the same time that we'll be seeing incremental supply chain issues, and then there might be a need to backfill some G700 deliveries in 2023 with those supply chain issues potentially still out there, kind of some of the things that give you confidence in that delivery outlook, given those sort of qualitative headwinds that you talked about.

So with respect to the supply chain, we are working through all of those, and we don't see those as impacting our 23 or 24 estimates that we gave you. Our estimates on Gulfstream are predicated on the current demand environment, which has been strong, as I noted, continues into this quarter along with our backlog. So we're pretty comfortable that we've got both the supply chain and manufacturing capability to meet all of those two out-year requirements. And as I noted in my remarks, should there be a slip, then we will increase in production aircraft this year. But look, with respect to that slip, potential slip. We wanted to be as transparent as possible to give you some insight when we saw it and then tell you how we were going to address that so that there's no economic impact from that in either year, 23 or 24.

Great. Thank you. And then as a follow-up, Jason, I guess maybe you mentioned you talk about addressing the debt on the next call maybe, but we could ask for a little bit of a In terms of how you're thinking about it generally, there's probably some debt due each year for the next several years. We just saw one of your peers look to kind of term things out for a while. How do you think about where you want to take the capital structure from here and the role of debt repayment now that interest rates are going up?

Yeah, I think our overarching approach to this remains unchanged. We continue to target the midday credit rating and want to get our metrics in line with that for the long term. In keeping with that, I think you can expect us to retire this debt that we see coming due later this year. What happens after that, I think, remains a little bit in play. We'll have to see because we talked about the elevated debt we had post-CSRA acquisition and the fact that we intended to bring that down, but we never intended to get back to the level we had been with essentially zero net debt prior to that acquisition so now we're getting into the range looking ahead into the next couple of years of where we're probably going to be evaluating is this the place to land we don't have an answer to that yet but but that's going to become more of the conversation so we'll see where that plays out i expect at this point that we'll go ahead and retire uh the debt that uh matures at the end of this year but but then we'll be more active in that conversation but again i think ultimately targeting that midday credit rating and everything that is attended to that

Thank you. Our next question comes from Robert Stallard of Vertical Research. Robert, your line is now open. Thanks so much. Good morning.

Good morning. Phoebe, you mentioned the very strong order performance in the aerospace this quarter, but I was wondering what sort of impact this has had on the lead time for jets, specifically the G650 you mentioned. and whether this is starting to have any sort of impact on customer demand. Are people saying it's going to take too long to get my jet?

No, we've managed that lead times very successfully. So present and even given the robust demand, we do not see that as an issue.

And just as a follow-up, how has the pricing environment evolved over the last three months?

Well, as you know, we are reticent and loathe to talk about pricing, but you can imagine that the pricing has kept pace with other economic factors.

Thank you. Our next question comes from Robert Spingarn from Mellius Research. Robert, your line is now open.

Good morning. Morning. Phoebe, I was hoping to dig into combat a little bit and just ask what types of products you expect European nations to demand most and to what extent you expect those to be products from combat systems and particularly from ELS. So...

Should the recent threat environment drive increased spending in rearming and recapitalizing land forces, we will see an increase in demand. And I suspect it to be aligned along our ordinance business as well as our vehicle business, both in the United States and at ELS. But I'm careful not to get ahead of our customers here.

Do you see much opportunity in technologies perhaps for mission or even GDIT maybe on the cyber side over there?

There could be some because clearly in today's warfighting environment, interoperability on networks and communication is critical and reliable interoperability. So I suspect there could be some opportunities. increased demand, but we have not seen any of that so far.

Thank you. Our next question comes from Doug Hand from Bernstein. Doug, your line is now open.

Good morning. Thank you. Good morning. Can you comment on inflation? When you look forward, obviously, we're in perhaps a difficult inflationary environment. in terms of how you see it affecting both on the Gulfstream side and on the government customer side, in terms of what you can pass through, what could pressure margins?

So let me address that holistically across a company, because we've dealt with inflationary pressures and increases in commodity costs. in varying ways through a portfolio of actions. One is our contract architecture. A second is, to the extent possible, price increases. We've cut costs in other areas to offset some of the increases. And then where possible, we've had commodity substitutions and parts substitutions. So that combination of arrows in our quiver has mitigated any impact. And at the moment, we do not project a margin compression as a result of increased prices.

So you're, so you actually, you see, are these things that you would have not done before? Are you doing things that offset basically reduce your costs in other ways? Or is it more on the ability to pass through some of the price increases?

You know, I can't give you a very, I can't unpack that and give you very clear distinction between which of these capability or which of these tools has resulted in the largest impact on our ability to offset inflationary increases because it's a combination of things. In some contracts, you've got contract architecture that protects you. In other cases, you take additional costs, cuts that you had not anticipated taking before. But, you know, one of the things you expect from a company with strong operating leverage is when a cost increases somewhere else, you have to find offsetting cost reductions. And so we have historically done that, and we're continuing to do that. And then in some instances, you can have product substitutions. That's not particularly frequently, but it can happen in some critical products. So I think it's that panoply of weapons that we've used to offset these increases.

Thank you. Our next question is from Shia Kyaloglu from Jefferies. Shia, your line is now open.

Hey, good morning, Phoebe, Jason, Howard. Thank you. So I wanted to ask about R&D profile of the business for Gulfstream in 2022, 23, and 24, since you've given guidance for Gulfstream profitability. You know, when we think about the G700, the G800, and the 400, what's the magnitude of the investment you have to put in to work with the FAA, or is it more of a heavy time burden? Like, how do we think about that, Phoebe, in terms of the dollar amount, or is it just more time and a push out of

Well, as we've noted, it's more a question of time resources, certainly on the new requirements. But, you know, you saw an increase in R&D this quarter, and it was because we have this new set of software validation requirements that we need to walk through, and we've accommodated that in our plan. Jason, I don't know if you want to add anything to that.

Yeah, just making sure we understand the nature of your question. I mean, if it's about this potential risk that Phoebe talked about and the additional effort we have to undertake in the certification process, it is both a time risk but, of course, cost travels with time. And so there's the burden of the additional effort that goes on, the man hours that have to occur to accomplish those tasks. It puts some pressure on the R&D budget, and as Phoebe said, you saw some of that even in the first quarter. But I don't think any of this is enough to change the profile of what we've talked about, either from an R&D spend in the aggregate in the 2022, 2023, 2024 timeframe, or as we think about it in terms of the margin rate impact that it has on the business. So, again, just to recap where we see this, we're in an elevated state this year. It will remain elevated in 2023. And then once we get the 700 and the 800 certified, it remains somewhat elevated, but we'll notch down a step down in 24 as the effort shifts more toward the 400. And then we'll see it sort of return back to more of a normal run rate level beyond beyond 2024.

OK, and then maybe one more on technology. You know, how are you thinking about the technologies portfolio? I think it has a lot of good businesses in there, but you know, organic growth hasn't been as robust as say marine. So you know, How do you think about the good businesses in that portfolio overall? Do you like it as a whole as a combined technologies and mission business or any thoughts to that?

Yeah, we spent a fair amount of time early on after the acquisition of CSRA trimming that portfolio both in our IT business as well as in our mission systems business, so we like the mix of lines of business that we have right now. We believe they're complementary and we believe that they're good growth engines. But I don't know that we heard your questions that clearly, but if one of them was, and correct me if I'm wrong, but if one of them was comparing this to marine growth, very few items in the defense budget are going to grow as reliably and as robustly as the submarine and shipbuilding accounts. So I wouldn't hold that as the metric. I think continued steady growth on the top line but more importantly the bottom line in technologies has really been our focus. Does that make sense?

Thank you Phoebe.

Thank you. Our next question comes from Mike Morgery from Wolf Research. Mike, your line is now open.

Hey, thank you, everyone. I think historically sort of your commentary has been for 400 to 500 of annual revenue growth at Marine. Sort of implies some moderation from here. Growth's been strong over the last few years, maybe some risk retirements coming through on Columbia class. So with that said, I mean, is there any sort of good reason to think that growth should moderate over the next few years at Marine?

No. We continue to project $400 million to $500 million a year on average. You'll see some perturbations in quarterly growth, largely driven by material sales, but nothing that changes the trajectory.

Got it, thank you. And then sticking with Maureen, can you speak to the pipeline at Bath, maybe some upside there as it might relate to hypersonic work on DDG 1000, additional work for DDG 51, or are we sort of pretty much tapped out there from a capacity standpoint?

Well, yeah, those are mixing kind of two different predicates. One, there's been a lot of talk about integrating various weapon systems onto shipboard platforms, but we haven't yet seen any of that materialize. And so it is not a question about capacity. We have adequate capacity that we have expanded and updated and upgraded in the last few years through our capital deployment improvements at Bath and, frankly, the other shipyards. So it's simply a question of the demand coming out of the U.S. Navy. And we haven't had any surprises there that are continuing with respect to bath and maybe has continued to support DDG 51 production. So we expect that to be a steady pace going forward.

Thank you. Our next question comes from Peter Arment from Baird. Peter, your line is now open.

Thanks. Good morning, Phoebe and Jason. Hey, Phoebe, maybe just to circle back on your comment regarding the pipeline increasing, you know, potentially with combat. I'm just curious about your overall comments on how we should expect it to eventually show up in backlog. Should we consider this more of a 23 and 24 event when we're thinking about that? And then just as a follow-up related to kind of the budget outlook, just, you know, now that we've gotten the 23 requests and we saw what was enacted for 22, maybe you could just give some high-level thoughts on how – how GD is faring, given the request. Thanks.

Well, if you're talking specifically about combat, I think that, you know, it's hard to give projections about timing when, in fact, the budgets, for the most part, have not materialized in significant increases. But were they to in the land force's modernization, We have every expectation that combat vehicles demand will increase and ordnance and armaments will increase. So I think it's premature. It's about growth until you really see some of that. And I would say that one of the interesting things that we have not quite seen at the same level is the Abrams interest from multiple U.S. allies. So we'll have to see how that plays out over time. There's some potential out there, but as I said, don't want to get too far ahead of our customers here. You've got to see how all this, you know, takes time to get from the threat to full funding to allocation of awards. I think you'll hear that from a lot of folks, not just us.

Thank you. Our next question comes from Kai Von Rumo from Cohen. Ty, your line is now open.

Thank you so much. So, Phoebe, BATH, you recently had a mid-contract wage hike where the lower five of the 10 pay grades had a pay hike of over 20%. Now, I assume mix is an issue. But could you comment on what that impact is on labor availability and cost? And is there any read across to electric boat that this should be a concern there too?

So the wage increase at Bath is an attempt to help stabilize the manufacturing workforce and build ships faster. So this, in turn, will ultimately help competitiveness and margins. So we think we can fully address any cost impact. And I think the touch labor market has been less impacted by some of the well-publicized labor shortages. And they tend to be more regional to the extent that they've existed. So we take each one of our lines of business on a case-by-case basis. and then react accordingly. But Bath was a special set of circumstances given Maine and the realities in Maine regarding workforce.

Thank you very much. Great. And then switching gears a little bit, what impact do the Russian sanctions have on your business at Gulfstream?

So To the extent that we expected an impact, we anticipated it to show up at Jet Aviation in some of their European locations. But Jet was able to offset that with additional volume. With respect to Russia, as I noted I think before, they're less than 5% of our Gulf Stream backlog. And we had no deliveries this quarter, obviously. We've had no cancellations. And we have, in this demand environment, been able to manage the relatively few number of Russian airplanes in our backlog. So we do not see an impact at the moment.

Thank you. Our next question comes from Matt Akers from Wells Fargo. Matt, your line is now open.

Hi. Good morning. Thanks for the question. I wonder if you could talk about technologies, a couple of things. I guess one, I think you commented on some supply chain impacts on emission systems, just how those are trending, and then also just the timing of some of these new awards and when they can start to ramp up.

We discussed, I think, with you, I think starting maybe in the third quarter and again in the fourth quarter, some of the chip shortages that we were experiencing at Mission Systems that was constraining the ability to deliver a series of different kinds of products. So we have largely worked through those issues at Mission Systems, but we are now contending with the pent-up demand that resulted was generated by last year's slower deliveries as a result of chip shortages. And as we work through that, that ought to be upside for mission systems on the revenue side as we go forward. And then the timing of new orders, typically at GDIT, they tend to be a You tend to have a quarter lag or a quarter and a half lag from time of award to new starts. So we'll see some of the more recent, larger awards begin to show up next quarter and then increasing over time.

Thanks. That's helpful. And if I could, on Gulfstream, I mean, one of the questions I've gotten is how... sort of sustainable this business could be if we do go into a recession? I guess could you talk about if that's come up at all with your customers? Are people concerned about the economic outlook and sort of how resilient do you think this business could be if we do have a downturn?

Well, we haven't heard a whole lot of that in the pipeline, but let's pass this prologue here. And I think what we have demonstrated repeatedly at Gulfstream is that Gulfstream is a very good cyclical company. And in the past, what we've seen is relatively short economic perturbations and a pretty quick recovery at Gulfstream. So I think, you know, our job is to manage and play the cards that are dealt to us, and we've done so very effectively. So, you know, you can probably estimate the future of the U.S. economy better than we can. That seems to be, you know, a great sport. Get a Nobel Prize if you get it right. but we're quite comfortable at the moment on where we stand, and I'm very comfortable at Gulfstream's ability to continue to be a good cyclical.

Thank you. Our next question comes from Christine Lewag from Morgan Stanley. Christine, your line is now open.

Thanks. Phoebe, looking at the FISCLIR 23 budget request, we're seeing a generational investment in the nuclear triad benefiting the Columbia class. And we're also seeing advanced capabilities like space-based systems, seeing outsized growth. So as you look at your portfolio, with the IT business stable, leverage has come significantly down, what's your appetite to add a new vertical to the business to capture more of this outsized growth in advanced capabilities that you may not have today?

Well, I think, you know, we do not discuss potential acquisitions or divestitures, but we like where we are positioned to take advantage of the recapitalization of the triad. You want to ask another question?

Great. Yeah, and maybe following on capital deployments and, you know, understanding that you're not going to talk about large M&A, what about additional priorities for cash? How should we think about dividend payments versus share repurchases, particularly as you're in a leverage where you want to be and the business is generating significant amount of free cash flow?

You know, I think fundamentally there's no change to the way we've articulated our capital deployment priorities. We talked a little earlier about the dividend increase earlier this year. That was the 25th annual consecutive annual increase. And, you know, we've made pretty clear the significant investments we've been making in the business over the past several years. And now really, if you will, if there's any pivot at all, it's shifting back the attention more toward rewarding those patient shareholders with return of capital and share repurchases. And you've seen us do that last year. We embarked on that a little bit in the first quarter, and I think you should expect to see us continue that in a tactical and opportunistic way. M&A is always opportunistic, and as Phoebe said, not something that we disclose out in front of anything. So that's kind of how you should expect us to behave.

And operator, we'll take one more question, please.

Thank you. Our final question for today comes from George Shapiro from Shapiro Research. George, your line is now open.

Okay, thanks. Phoebe, You had 104 million cancellation in the quarter, and I guess from what you said in response to the question before, it wasn't due to Russia, so if you could tell us where that might have been.

We had one cancellation, and I have no clue where it was, but it wasn't Russia.

Okay, thanks.

Is that okay? You got it?

Yes, that's fine. And then, Jason, were the payments from the Canadian contract in the first quarter similar to last year's first quarter, which was around $1 billion? And also, do you expect more to occur this year as well? Thanks.

Yeah, payment levels this year are very similar to last year, both in the first quarter and for the balance of the year. So the pattern should be pretty similar. And, again, that customer has been very consistent in their payments since week. negotiated the recast of that program.

Thank you. That concludes the Q&A for today. I will hand back to Howard Rubell for any closing remarks.

Thank you, Alex. And thank everybody else for joining our call today. As a reminder, please refer to the General Dynamics website for our first quarter earnings release and highlights presentation. If you have any questions, I can be reached at 703-876-3117. Thank you very much for your attention today.

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