GENERAL-DYNAMICS Earningcall Transcript Of Q2 of 2024


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executive officer; and Kim Kuryea, chief financial officer.

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I will now turn the call over to Phebe. 

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we

reported  earnings  of  $3.26  per  diluted  share  on  revenue  of  $11.98  billion,  operating  earnings  of

$1.16  billion,  and  net  income  of  $905  million.  We  enjoyed  revenue  increases  at  each  of  our  four

business segments compared to the year-ago quarter.

Across  the  company,  revenue  increased  a  strong  18%  with  a  51%  increase  in  our  aerospace

segment and a 10% increase across our defense units, strong growth by any standard. Importantly,

operating  earnings  of  $1.16  billion  are  up  almost  $200  million  or  20.2%,  demonstrating  solid

operating leverage. Similarly, net earnings are up 21.6%, and earnings per share up 21% over the

year-ago quarter. You will note, we missed Street EPS consensus by $0.02 due entirely to the slip

of four G700 deliveries from the last week in the quarter to the beginning of Q3.

One  has  since  been  delivered,  three  are  imminent.  From  a  different  perspective,  the  sequential

comparisons are also quite favorable. Revenue was up $1.2 billion, and operating earnings are up

$120 million on steady margins. On a year-to-date basis, revenue of $22.7 billion is up $2.67 billion

or 13.3% over last year's first half.

Operating  earnings  of  nearly  $2.2  billion  are  up  15.4%.  Net  earnings  of  $1.7  billion  are  up  15.6%

despite a higher provision for income taxes. In a few minutes, our CFO, Kim Kuryea, will provide you

with free cash flow for the first half and remainder of the year, our strong continued order activity and

backlog,  as  well  as  some  additional  relevant  financial  information.  But  first,  I  will  take  you  through

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each of the segments.

We'll start with aerospace. Let me give you some comparative numbers that will show the front end

of a tremendous growth surge for aerospace that will progress favorably throughout the year, then I

will  attempt  to  put  all  of  this  in  some  reasonable  perspective  for  you.  Aerospace  had  revenue  of

$2.94  billion  and  operating  earnings  of  $319  million  with  a  10.9%  operating  margin.  Revenue  is

$987 million more than last year's second quarter, a remarkable 51% increase.

The revenue increase was driven by additional new aircraft deliveries, coupled with higher service

revenue.  We  delivered  37  aircraft,  including  11  newly  certified  G700s  in  the  quarter.  This  is  four

fewer  than  we  expected  to  deliver  but  more  about  that  in  a  minute.  Operating  earnings  of  $319

million are up $83 million, 35% over the year-ago quarter.

The 10.9% operating margin was 120 basis points lower than the year-ago quarter. This was driven

by  G700  deliveries  that  carried  more  than  expected  costs  from  three  things:  first,  retrofit;  second,

out-of-station  work  related  to  the  late  arrival  of  parts;  and  three,  the  extended  certification  period.

This cost burden will affect 20 Lot 1 aircraft, which includes five test aircraft that we will not deliver

this year. So we are through the Lot 1 cost burden for this year within the next four deliveries.

The good news is that margins on the G700 are expected to increase by 600 to 700 basis points in

Lot 2 and by a similar increment in Lot 3. By the time we reach Lot 3 production and deliveries, we

will  have  reached  a  steady  state  in  terms  of  productivity  and  predictability.  A  few  comments  on

predictability. 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, but

we've planned 15 for Q2 and deliver 11, so much for predictability.

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We  actually  had  the  remaining  four  completed  and  ready  to  go  but  could  not  get  through  the

preflight delivery testing in time. You might be surprised to learn that each G700 is flown about 30

hours  of  tests  before  delivery.  Two  of  the  planes  also  needed  a  supplemental-type  certificate

because of a very different cabin configuration. That wasn't done by the end of the quarter.

All  right,  back  to  some  numerical  comparisons.  The  sequential  numbers  are  equally  impressive.

Revenue  is  up  $856  million,  a  strong  41%  increase;  and  operating  earnings  are  up  $64  million,

about  25%,  affected  by  130-basis-point  degradation  in  operating  margins  for  the  reason  I  just

mentioned  a  moment  ago.  You  will  see  much  stronger  operating  margins  in  the  third  quarter,

followed by even better operating margin and related earnings in the fourth quarter.

Separately, we still expect to deliver 50 to 52 G700s this year, look for about 16 in the third quarter

and  23  to  25  in  the  fourth  quarter.  From  an  orders  perspective,  we  had  a  respectable  quarter  at

0.9-to-1 book to bill in dollar terms. There is strong interest in a fair pipeline across the product mix.

As I noted last quarter, bringing transactions to a close has elongated somewhat as there is some

caution while customers digest the impact of geopolitical events, in general, and the U.S.

presidential  election,  in  particular.  The  United  States  remains  our  strongest  market,  but  the  EU  is

improving. And Middle East shows very strong potential. And just very recently, we have seen some

improvement in China.

The  interest  level  of  buyers  and  the  expiration  of  accelerated  depreciation  at  the  end  of  the  year

suggests  a  reasonably  strong  order  intake  in  the  second  half  of  the  year,  particularly  in  the  fourth

quarter. We are pleased to have both G700 FAA and EASA certifications behind us. The aerospace

comparative  revenue  and  earnings  numbers  in  the  quarter  are  very  good  by  any  reasonable

standard but still behind consensus, largely attributable to deliveries that did not make it to the wire.

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In summary, the aerospace team had a very good quarter.

It is handling the rapid increase in deliveries and revenue in a methodical and disciplined fashion.

We  look  forward  to  a  powerful  second  half  with  increasing  revenue  and  earnings  quarter  over

quarter as we forecasted at the end of last quarter. Moving to the defense business 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 almost $2.3 billion, up 19% over the year-ago quarter with growth at each of the three

business  units.  Earnings  of  $313  million  are  up  almost  25%,  and  margins  at  13.7%  represent  a

70-basis-point increase over the Q2 last year.

In  short,  very  strong  operating  performance  from  combat  systems.  The  increased  revenue  came

from  facilities  expansion  and  artillery  work  in  our  ammo  business,  coupled  with  increases  in

international  tank  and  wheeled  vehicle  sales  and  U.S.  Army  programs  of  record.  Each  of  the

businesses increased earnings nicely with particularly strong operating leverage in our international

vehicle business.

On a sequential basis, revenue increased 8.8%, and earnings rose 11%. Year to date, revenue of

about  $4.4  billion  is  up  19.3%,  and  earnings  of  $595  million  are  up  almost  $100  million  or  20%.

Combat saw robust order intake with over $3.4 billion awarded in Q2, resulting in a book to bill of

1.5-to-1  for  the  quarter.  Orders  came  from  across  the  portfolio,  ranging  from  ammunition  to  main

battle tanks for the U.S.

Army and wheeled vehicles for an international customer. Demand remained steady, particularly for

the  Abrams  main  battle  tank  and  international  wheeled  vehicles.  We  expect  demand  for  ammo  to

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continue  to  rise  for  some  time  to  come  as  we  rapidly  increase  production  of  artillery  shells  and

components. All in all, a very strong growth and performance quarter for combat systems.

Turning  to  marine  systems.  Once  again,  our  shipbuilding  group  is  demonstrating  strong  revenue

growth. Marine systems revenue of $3.45 billion is up $394 million, almost 13% against the year-ago

quarter. Columbia class construction and engineering volume drove the growth, while Virginia-class

and DDG-51 revenue also increased nicely.

Operating earnings are $245 million, up $10 million over the year-ago quarter with a 60-basis-point

decrease  in  operating  margin.  Margins  were  impacted  by  continued  delays  to  EB  from  the

submarine  industrial  base,  partially  offset  by  improvement  in  DDG-51  performance  at  Bath  and

continued  steady  performance  at  NASSCO.  Sequentially,  revenue  increased  3.7%,  and  earnings

improved 5.6% in Q2, driven by volume at EB as we saw some quarter-over-quarter improvement in

supply chain deliveries to the yard and continued positive performance at NASSCO. Year to date,

Marine revenue of $6.8 billion is up 12.1%, and earnings of $477 million are up 7%.

As  I  noted  a  moment  ago,  although  the  supply  chain  is  improving  in  places,  EB  continues  to  be

impacted  by  late  deliveries  from  the  supply  chain,  which  both  delay  schedule  and  impacts  costs.

Out-of-sequence work on multi-ton modules is time-consuming and expensive. Our strategy, as you

know, has been to increase our productivity to somewhat offset that impact. To that end, throughput,

a significant measure of productivity, continues to improve.

Hiring  is  good,  and  attrition  is  lower,  so  all  good  signs.  In  summary,  we  are  starting  to  see  some

momentum build in our shipyards to meet the delivery and repair requirements of our customer, the

U.S.  Navy.  We  anticipate  that  all  of  our  yards  are  now  well-positioned  for  slow  but  steady

incremental margin growth over time with fewer perturbations.

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Finally,  technologies.  The  group  had  another  good  quarter  with  revenue  of  nearly  $3.3  billion,  up

2.5%  over  the  year-ago  quarter,  and  operating  earnings  of  $320  million,  up  13.1%  on  a

90-basis-point improvement in margin. This nice improvement in operating performance was across

both  businesses.  GDIT  margins  increased  40  basis  points,  and  mission  systems  margins  were  up

130  basis  points  as  they  continue  to  recover  from  supply  chain  impacts  experienced  in  2023  and

before.

Sequentially,  revenue  was  up  $81  million  or  2.5%,  and  operating  earnings  are  up  8.5%  on  a

50-basis-point  improvement  in  margin.  And  the  story  is  much  the  same  for  the  year  to  date  with

revenue of $6.5 billion, up about 1%, and operating earnings of $615 million, up 5.7% against the

first six months of last year. As a result, margins for the group were up 40 basis points year to date

to 9.4%. So all relevant comparisons this quarter show revenue and earnings growth and a margin

expansion at both businesses, positioning them well going forward.

In  short,  GDIT  is  holding  its  industry-leading  margins  while  consistently  delivering  year-over-year

growth, while mission systems is delivering nice margin expansion as it transitions from sunsetting

legacy programs. The group received $3.3 billion in orders in the quarter, bringing the total of $7.2

billion for the first six months. That results in a book to bill for the group of 1.0 for the quarter and 1.1

for the year to date. Total awards for the group in the first half were up 30% compared with the first

six months of 2023.

This  is  on  the  strength  of  win  rates  consistently  around  80%  for  the  group  and  capture  rates  at

roughly 65%, both very strong for this industry. Backlog was down slightly from the end of the first

quarter due to the removal of backlog associated with an international divestiture in the quarter but

was  up  almost  $200  million  from  a  year  ago.  As  importantly,  the  qualified  pipeline  remains  very

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robust at over $120 billion. So the group is well-positioned to continue its growth trajectory.

Let me now turn the call over to Kim.

Kimberly A. Kuryea -- Chief Financial Officer

Thank you, Phebe, and good morning. I'll start with orders. We had a solid quarter from an orders

perspective  at  $10  billion  with  an  overall  book-to-bill  ratio  of  0.8-to-1  for  the  company.  This  was

achieved  in  the  quarter  when  revenue  grew  18%  over  last  year,  and  there  were  no  significant

shipbuilding contracts awarded.

Aerospace had a book to bill of 0.9-to-1, while revenue grew over 40% sequentially with the initial

deliveries  of  the  G700.  On  the  defense  side  of  the  business,  combat  systems  did  particularly  well

with a book to bill of 1.5-to-1, and technologies was 1:1. We ended the quarter with backlog of $91.3

billion,  essentially  even  with  where  we  were  a  year  ago.  Our  total  estimated  contract  value,  which

includes options and IDIQ contracts, ended the quarter at nearly $130 billion.

Turning to our cash performance for the quarter. We generated $814 million of operating cash flow.

After  capital  expenditures,  our  free  cash  flow  was  $613  million  for  the  quarter,  yielding  a  cash

conversion  rate  of  68%.  Technologies  led  the  segments  with  strong  cash  flow  generation  in  the

quarter.

When you consider the free cash flow through the first half of 2024, we are slightly positive at $176

million and about $250 million ahead of what we had planned. After the planned slow start in the first

half, we expect significant second-half growth. With the majority of the cash generated in the fourth

quarter,  we  are  still  planning  a  cash  conversion  rate  around  100%  for  the  year.  So  you  may  be

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wondering what's driving cash to be so backloaded this year.

It's apparent from our balance sheet that we have been building up working capital in the first half of

the  year  which  we  expect  to  substantially  unwind  in  the  second  half.  One  obvious  driver  of  this  is

Gulfstream  with  the  ramp-up  for  the  certification  and  deliveries  of  the  G700.  The  planned  G700

deliveries  in  the  second  half  are  significant  which  will  reduce  working  capital.  Another  large

contributor to the growth in working capital has been combat systems.

They have several programs that pay at delivery. Thus, we are buying material in the first half of the

year that result in product deliveries and cash in the second half of the year. Combat is also subject

to the timing of deposits on international programs, and the first half of the year has been a period of

liquidating deposits received in prior periods. Now turning to capital deployment.

Capital  expenditures  were  $201  million  or  1.7%  of  sales  in  the  quarter.  Similar  to  last  year,  you

should expect capital expenditures to be somewhat higher in the second half of the year and slightly

above 2% of sales when the year wraps up. Also in the quarter, we paid $389 million in dividends

and  repurchased  approximately  119,000  shares  of  stock  for  $34  million.  Through  the  first  half,  we

repurchased only a modest number of shares for a total of $139 million, driven largely by our 2024

cash profile.

We ended the quarter with a cash balance of approximately $1.4 billion and a net debt position of

$7.9  billion,  down  over  $300  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.

Our  net  interest  expense  in  the  quarter  was  $84  million,  compared  to  $89  million  last  year.  That

brings the interest expense for the first half of the year to $166 million, down from $180 million for

the same period in 2023 on lower debt balances.

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At this point, our expectation for interest expense for the year remains unchanged at approximately

$320 million. Finally, the effective tax rate in the quarter was 17%, bringing the tax rate for the first

half  to  17.2%.  This  rate  is  a  little  lower  than  our  outlook  for  the  full  year,  which  remains  around

17.5%. For the second half of the year, we expect the rate to be lower in the third quarter and then a

bit higher in the fourth due to typical timing items.

Phebe, that concludes my remarks. I'll turn it back over to you.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

All  right.  Thanks,  Kim.  Let  me  move  on  to  give  you  updated  forecast  for  the  year.  The  figures  I'm

about to give you are all compared to our January forecast, which will be posted along with today's

guidance on our website.

In  aerospace,  we  are  sticking  with  our  same  earnings  estimate,  but  we'll  get  there  with  higher

revenue and about a 100-basis-point drop in margins for all the reasons I mentioned to you a few

minutes ago. We are still holding to our delivery estimate of about 160 airplanes. With respect to the

defense  businesses,  combat  will  have  revenue  of  about  $200  million  higher  than  previously

projected as a result of continued demand. So look for total revenue of about $8.7 billion.

Margin should be about the same. All in, operating earnings will be up $30 million over the previous

forecast. Marine systems revenue should be up $1 billion at Electric Boat and somewhat at Bath, so

we  will  have  annual  revenue  between  $13.4  billion  and  $13.8  billion  with  an  operating  margin

around  7.4%  with  operating  earnings  up  around  $45  million  over  the  January  forecast.  For

technologies, we are not changing our earlier guidance to you.

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On  a  companywide  basis,  we  see  annual  revenue  up  about  $2  billion  with  overall  margins  down

about  30  basis  points,  so  total  revenue  of  $47.8  billion  to  $48.2  billion  and  operating  earnings  up

modestly. All up, that indicates EPS guidance of $14.40 to $14.50, $0.05 over prior guidance. I will

note that, normally, this time of year, we have solid insight into revenue and margin. In this growth

environment, the upside has been difficult to predict with equal clarity.

Should anything materially change in Q3, I will give you another cut at guidance. That concludes my

remarks, and we'll be happy to take your questions.

Nicole Shelton -- Vice President, Investor Relations

Thank  you,  Phebe.  [Operator  instructions]  Operator,  could  you  please  remind  participants  how  to

enter the queue?

Questions & Answers:



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