General Dynamics Corporation

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics third quarter 2024 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. On the call today are Phoebe Novakovic, Chairman and Chief Executive Officer, and Kim Correa, Chief Financial Officer. I will now turn the call over to Phoebe. Thank you, Nicole.

Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.35 per diluted share on revenue of $11.67 billion, operating earnings of $1.18 billion, and net income of $930 million. Across the company, revenue increased $1.1 billion, a strong 10.4%, led by a 22% increase in our aerospace segment and a 20% increase in marine systems. We enjoyed revenue increases at three of our four business segments compared to the year-ago quarter. Only combat systems was flat. This is strong growth by any reasonable standard. Importantly, operating earnings of $1.18 billion are up $124 million, or 11.7%. Similarly, net earnings increased $94 million, or 11.2%. and earnings per share are up 31 cents, or 10.2% over the year-ago quarter. When earnings are up at a greater rate than revenue in a growth environment, the business is demonstrating solid operating leverage. We are doing just that. On a year-to-date basis, revenue of $34.4 billion is up $3.77 billion, or 12.3% over last year. Operating earnings of $3.37 billion are up 14.1%. Net earnings of $2.63 billion are up 14% despite a higher tax rate. Nevertheless, we missed street EPS consensus by a fair amount because we were able to deliver only four G700s in the quarter. So without further ado, let me move right into aerospace and give you as much insight into this issue as I can. and its implications for the remainder of the year. At the outset, let me give you some comparative numbers that are quite good despite the shortfall of anticipated G700 deliveries. Then I will put all of this in some reasonable context for you. Aerospace had revenue of $2.48 billion and operating earnings of $305 million with a 12.3% operating margin. Revenue is $450 million more than last year's third quarter, a solid 22% increase. The revenue increase was driven by the four G700 deliveries, higher service center and special missions volume, and higher FBO and MRO volume, particularly in the Asia-Pacific region of jet aviation. We delivered 28 aircraft, including four G700s this quarter. This is 11 fewer G700s than we expected to deliver. We also delivered one less G600, G500, and G280 than we did a year ago quarter. But deliveries of these aircraft are at a reasonably steady state, and the modest shortfall is a typical variance, having to do largely with timing and customer convenience. Operating earnings of $305 million are up $37 million or 13.8% over the year-ago quarter. The 12.3% operating margin was 90 basis points lower than the year-ago quarter for a host of reasons, including inefficiencies caused by supply chain deficiencies. So despite a very good quarter, we had planned to do better and Southside consensus reflected our expectations. You might recall that I told you we expected to deliver 50 to 52 G700s this year and that the deliveries would be more or less evenly divided over the last three quarters of the year. Well, we planned 15 for Q2 and delivered 11. We planned 15 to 16 for Q3 and delivered four. Three weeks before the end of the quarter, we still had a reasonable belief that we would deliver at least 11 in the quarter. So what happened? Whenever we miss our forecast so badly, it is almost always for a number of reasons that all play a part. So let me identify the most important and impactful ones. First, due to the timing of engine certification, aircraft engines arrived late to schedule. We painted the aircraft before the engines arrived and then painted and installed the engines. This led to a significant amount of repaint that resulted in increased cost and time spent. Second, many of the aircraft planned for delivery in this quarter have highly customized interiors, first of type intricacies. These intricacies are considered to be major changes for regulatory purposes. This resulted in longer than anticipated efforts to finalize and achieve supplemental type certificates. Related to this, the size and complexity of the G700 cabins has also elongated the customer reviews during final delivery of these planes. Third, and maybe most important, late in the quarter, a supplier quality escape on a specific component caused the exchange of several components on each planned aircraft delivery, up to 16 per aircraft. The supplier is fully cooperative and is providing components for all our needs, but this rework has increased the number of test flights necessary to obtain the final certificate of airworthiness for each aircraft. So the removal and replacement of these components has impacted labor costs and schedule adversely. We are nonetheless working our way nicely through this problem with the cooperation of the vendor. Finally, if that wasn't enough, we lost four days of productivity as a result of Hurricane Helene. Several customers who were in Savannah working with us to accept delivery left and went home to avoid the storm. So, given that there is always risk in precise estimates, I will describe our delivery cadence a bit later and provide some monthly forecasts so that you can monitor the quarter from publicly available data. All right, back to some good numerical comparisons. For the year to date, aerospace revenue is up $1.63 billion, an increase of 27.7%. Operating earnings are up $146 million, an increase of almost 20%. I recite these figures, which will reflect even more growth by the end of the year, so that we do not get lost in the third quarter delivery issue. This is still eye-watering growth. So what impact should we now expect for the fourth quarter in the year given the fewer than planned G700 deliveries in the second quarter and third quarters? You may recall that we expected to deliver 50 to 52 G700s this year. We now expect to deliver around 42 for the year with 27 in the fourth quarter. This number is not without risk, but there's also some opportunity to bring plans forward. The real issue here is supply chain support during this critical period. Let me give you some insight into the sequencing of the 27 planned deliveries in the quarter. We anticipate five in October, nine in November, and 13 in December, recognizing there is some risk as these numbers could vary a little bit up or down through the quarter. You can, as I have said, follow this with fairly accurate, but not perfect, publicly available data. Turning to market demand, the interest level of buyers and the expiration of accelerated depreciation at year's end suggests a reasonably strong order intake in the fourth quarter, and that is what we are seeing. After some slowing in the U.S. during the second and third quarters, we are seeing improved interest across all models in the fourth quarter. Europe and Middle East activity is quite strong, but current activity in Southeast Asia and China has slowed. Interestingly, the overall number of prospects in all areas continues to increase. The overall number of prospects in our pipeline is at an all-time high, with the most active models being the G500, 600, and 700. We have a good cross-section of U.S. businesses in this mix. In summary, the aerospace team had a very good quarter, albeit disappointing from the perspective of G700 deliveries. We look forward to a strong finish to the year in the fourth quarter, but we'll fall somewhat short of our mid-year forecast. So let's move on to the defense businesses. As a collective, we once again saw strong growth and good operating performance across the portfolio. Let me walk you through each segment in turn. First, combat systems. Combat systems had revenue of $2.2 billion for the quarter, similar to a year ago. Earnings of $325 million are up 8.3%, and margins at 14.7% represent a 120 basis point increase over Q3 last year. Each of the businesses increased earnings with particularly strong operating leverage in munitions and customer service businesses. On a sequential basis, while revenue decreased 3%, earnings rose almost 4%. Year-to-date, revenue of $6.6 billion is up almost 12%, and earnings of $920 million are up $124 million, or almost 16%. Combat saw robust order activity, over $3.3 billion awarded in Q3, resulting in a book to bill of 1.5 to 1 for the quarter. Orders came from across the portfolio, with notable orders in munitions and air defense vehicles for the U.S. Army. Overall, demand remains solid across combat, particularly in our ordnance and international combat vehicle businesses. In the U.S., we are increasing production of 155-millimeter ammunition projectiles, as well as expanding our support to the U.S. Army across several other areas, including final loading and assembly of artillery. Our combat systems backlog at roughly 18 billion reflects this strong demand. All in all, a strong performance quarter for combat. Turning to marine systems, once again, our shipbuilding group is demonstrating strong revenue growth. Marine systems revenue of $3.6 billion is up $597 million, 20% against the year-ago quarter. Columbia-class construction and engineering volume, as well as Virginia-class volume, drove the growth. DDG 51 revenue also increased somewhat. Just to put this in some context, this 20% growth follows 15% growth in Q4 of 23, 11% growth in Q1 of 24, and 13% growth in Q2 of 24. Impressive growth by any standard. Operating earnings are $258 million, up $47 million over the year-ago quarter, with a 20 basis point increase in operating margins. However, margins continue to be adversely affected by additional delays from the submarine industrial base, partially offset by improved margin performance at NASCOE. Sequentially, revenue increased 4.2% and earnings improved 5.3% in Q3, driven by volume at EB. Year-to-date, marine revenue of $10.4 billion is up 14.7%. and earnings of $735 million are up 12%. So across the business, we have seen rapid growth of revenue and earnings, but stagnant margin performance. As I noted last quarter, although the supply chain is improving in places, EB continues to be severely impacted by late deliveries from major component suppliers, which has delayed schedule and is continuing to impact costs. Our out-of-sequence work on modules weighing thousands of tons is time consuming and therefore expensive, sometimes up to eight times the cost of in-sequence work. The operating metrics tell us that we have, in fact, increased our productivity to somewhat offset cost. As I noted last quarter, throughput, a significant measure of productivity, continues to improve. And while we will continue to work on improved productivity, there is no point hurrying portions of the boat only to have to stop and wait increasingly extended periods of time for major components to arrive. It is neither good for the boat, over time, nor cost. Given the recent projections from the supply chain on deliveries, we need to get our cadence in sync with the supply chain. and take costs out of the business if we are to hope to see incremental margin growth. Put another way, the supply chain is not getting better at a fast enough rate as we had hoped. Through our internal efficiency, we have now outpaced them. This is the reality of the post-COVID environment for many of our most important suppliers. Finally, to be clear, Current submarine delivery projections are not incrementally impacted since they already reflect the anticipated delays from the supply chain. We will, of course, carefully monitor supply chain performance and accelerate our work should their deliveries to us improve. And lastly, technologies. It was another strong quarter with revenue of almost $3.4 billion, which is up 2% over the prior year. Operating earnings in the quarter were $326 million, up 3.5%, on a margin of 9.7%. That is a 20 basis point improvement in the year-over-year. The year-to-date comparisons are similar. Revenue at $9.9 billion is up 1.2%, but earnings of $941 million are up almost 5% on a 30 basis point improvement in operating margins. The growth for this quarter and the first nine months was driven by GDIT's investments in their digital accelerators. Mission Systems was flat year over year as they continued to transition from legacy programs to new franchises. Strong operating performance across the group more than offset the relative growth in services at GDIT compared to hardware at Mission Systems. The group grew 2.5%, spread relatively evenly over both businesses, with margins steady at 9.7%. Order activity was particularly strong in the quarter with a book-to-bill of 1.3 to 1. That resulted in backlog at the end of the quarter of $14.4 billion, up 13.5% from the year-ago quarter. Through the first nine months, the group achieved a book-to-bill ratio of 1.2 to 1. more than keeping pace with the strong revenue growth across the business. GDIT and mission systems have shared in the robust order activity so far this year, demonstrating the strength of this portfolio. And prospects remain strong with a large qualified funnel of more than $120 billion in opportunities they are pursuing across the group. That concludes my comments about the defense businesses. Let me now turn the call over to our CFO, Kim Correa, and then we'll wrap up with our guidance for the remainder of the year.

Thank you, Phoebe, and good morning. We had a solid quarter from an orders perspective with an overall book-to-bill ratio of 1.1 for the company. This is particularly impressive with the continued strong revenue growth in the quarter. Combat systems and technologies led the way with book-to-bills of 1.5 times and 1.3 times, respectively. This order activity led to our backlog increasing to $92.6 billion at the end of the quarter. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at a record level of $137.6 billion. Moving to our cash performance, this was another good story in the quarter. Cash flow improved as anticipated over the prior two quarters. We produced $1.4 billion of operating cash flow. All segments contributed to the results with particularly strong cash generation in technologies. Including capital expenditures, our free cash flow was $1.2 billion for the quarter, or 131% of net income. For the fourth quarter, we are expecting free cash flow to again be greater than 100% of net income, but we now expect the full year to fall short of our 100% conversion target, as G700 deliveries push into 2025. As a reminder, total free cash flow generation between 2021 and 2023 was quite strong with a three-year conversion rate of 107%. Looking at capital deployment, capital expenditures were $201 million in the quarter, or 1.7% of sales. We're still targeting to be around 2% of sales for the full year given the commitments that remain. We paid $390 million in dividends and repurchased a little over 150,000 shares of stock for $44 million during the quarter. We ended the quarter with a cash balance of over $2.1 billion. That brings us to a net debt position of $7.2 billion, down over $700 million from last quarter. As a reminder, we have an additional $500 million of fixed rate notes maturing in the fourth quarter that we plan to repay with cash on hand. Net interest expense in the quarter was $82 million, bringing interest expense for the first nine months of the year to $248 million, down from $265 million for the same period in 2023. Finally, the tax rate in the quarter was 16.5%, bringing the rate for the first nine months to 17%. The rate was slightly lower than expected principally due to increased U.S. and foreign tax credits and benefits and other timing items. As a result, for the year, we believe our full year tax rate will be closer to 17%. Now let me turn it back over to Phoebe for some final remarks.