GENERAL-DYNAMICS Earningcall Transcript Of Q2 of 2024
executive officer; and Kim Kuryea, chief financial officer. Page 1 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 Page 2 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. Page 3 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. Page 4 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 Page 5 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. Page 6 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 Page 7 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 Page 8 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. Page 9 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. Page 10 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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