General Dynamics Corporation (NYSE:GD) Q1 2023 Earnings Call Transcript
General Dynamics Corporation (NYSE:GD) Q1 2023 Earnings Call Transcript April 26, 2023
General Dynamics Corporation beats earnings expectations. Reported EPS is $2.64, expectations were $2.59.
Operator: Good morning, and welcome to the General Dynamics First Quarter 2023 Earnings Conference Call. . Please note that this event is being recorded. I would now like to turn the conference call over to Howard Rubel, Vice President of Investor Relations. Please go ahead.
Howard Rubel: Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First Quarter 2023 Earnings 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 the reconciliations to comparable GAAP measures, please see the press release and slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phebe Novakovic, our Chairman and Chief Executive Officer; and Jason Aiken, Executive Vice President, Technologies and Chief Financial Officer. With the introductions complete, I turn the call over to Phebe.
Phebe 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 $2.64 per diluted share on revenue of $9.9 billion, operating earnings of $938 million and net earnings of $730 million. Revenue is up $489 million or 5.2% against the first quarter last year. Operating earnings are up $30 million and net earnings are flat against the year ago quarter. This increase in operating earnings was offset by a $31 million increase in the tax provision. Recall that the first quarter 2022 tax provision was only 14%. Nevertheless, earnings per share are up $0.03 as a result of the stronger operating earnings and a lower share count. The operating margin for the entire company was 9.5%, 20 basis points lower than the year ago quarter.
This reflected lower operating margins in Aerospace and Marine, which I will address in some detail later in these remarks. Revenue was $489 million better than first quarter '22. All of the defense units were up and Aerospace down slightly, less than 1% on fewer aircraft deliveries. We beat consensus by $0.05 per share. We have roughly $550 million more in revenue than anticipated by the sell side and lower-than-anticipated margins, leading to operating earnings basically consistent with expectations. The earnings per share beat was largely attributable to below the line items. As Jason will amplify, cash from operating activities and cash after CapEx was very strong. This is particularly impressive following a very strong cash performance in '22 and not at all typical for us in the first quarter.
Obviously, we were off to a very good start from a cash perspective. This is an important respects, a strong quarter, a good foundation for the year, subject to some supply chain issues that I will try to eliminate as we discuss the business segments. At this point, let me ask Jason to provide detail on our order activity, solid backlog and very strong cash performance as well as commentary about the Technologies group in the quarter.
Jason Aiken: Thank you, Phebe, and good morning. We had a solid quarter from an orders perspective with an overall book-to-bill ratio of 0.9:1 for the company. Order activity was particularly strong in the Combat Systems group, which had a book-to-bill of 1.5x. We ended the quarter with total backlog of $89.8 billion, off 1.4% from the end of last year, but up 3% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at more than $128 billion. Turning to our cash performance for the quarter. It was another exceptional start to the year, with operating cash flow of $1.46 billion, representing 200% of net income. This very strong cash flow was heavily loaded in the last few weeks of the quarter.
After capital expenditures, our free cash flow for the quarter was $1.3 billion, a cash conversion rate of 178%. While we continue to enjoy strong cash performance in Aerospace & Technologies, the Combat Systems group, in particular, delivered outstanding free cash flow this quarter. As expected, the U.K. resumed payments on the AJAX program. This coupled with the ongoing progress payments on our other large international vehicle program drove the group's cash performance. This is consistent with our expectation for the year of a cash conversion rate in excess of 100%. Now turning to capital deployment. Capital expenditures were $161 million or 1.6% of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year.
Also in the quarter, we paid $345 million in dividends and repurchased approximately 400,000 shares of stock for $90 million at just over $220 per share. We ended the quarter with a cash balance of over $2 billion and a net debt position of $8.5 billion, down nearly $800 million from year-end. As a reminder, we have $750 million of debt maturing in the second quarter and we are in a position to pay that down with the cash on hand following the receipts at the end of the first quarter. Our net interest expense in the quarter was $91 million compared to $98 million last year. Benefiting from the debt repayment in the fourth quarter of 2022. Finally, we had a 17% effective tax rate in the quarter, consistent with our full year guidance. Now turning to operating performance in Technologies.
We're off to a solid start. Revenue in the quarter of $3.2 billion was up 2.5% over the prior year, modestly ahead of our expectations for the start of the year. The measures implemented at Mission Systems to overcome what seems to be the new normal in the supply chain are taking effect, which gives us confidence about their outlook for the balance of the year. And GDIT had their highest quarterly revenue and earnings in 4 years as they continue to deliver on their year-over-year growth trajectory. Operating earnings of $299 million were consistent with last year, yielding a margin of 9.2%. As we discussed in January, margins will continue to be driven by the mix of IT service activity and hardware volume. Backlog grew during the quarter with the group achieving a book-to-bill ratio of 1:1 on strong order activity in IT services that included some important wins not yet factored into the backlog.
This includes the Army's flight test school training support services contract valued at $1.7 billion. And Air Force IDIQ with a total potential value of $4.5 billion between 2 awardees for security support services, and a pair of IDIQ contracts with the EPA with a potential value of $380 million to support the agency's environmental and climate initiatives. In fact, GDIT booked the highest orders they've seen since the second quarter of 2019. And their pipeline remains robust with $19 billion in submitted bids awaiting customer decision and another $84 billion in qualified opportunities identified. Now let me turn it back to Phebe to review the other business segments.
Photo by Thisisengineering Raeng on Unsplash
Phebe Novakovic: Thanks, Jason. Now I may review the quarter in the context of the other business segments and provide detailed color as appropriate. First, Aerospace. Aerospace held its own in a very difficult operating environment. It had revenue of $1.9 billion and operating earnings of $229 million with a 12.1% operating margin. Revenue was $11 million less than last year's first quarter despite the delivery of 4 fewer aircraft. The fewer aircraft deliveries were almost completely offset by higher ball stream services, debt aviation volume and special missions work at Gulfstream. The 21 deliveries in the quarter are 3 fewer than planned, two 280s did not deliver because of late engine deliveries. The other plan, a large cabin for an international customer didn't deliver because of simple bureaucratic registration delays in the owner's country.
Importantly, this is the first quarter in which we have missed an airplane delivery as a result of supply chain issues. Up until now, we have managed to work around late to schedule parts delivery. Operating earnings of $229 million or $14 million behind last year's first quarter as a result of a 70 basis point degradation in operating margin. Operating margin in the quarter was under pressure as a result of fewer new airplane deliveries, a less attractive mix, severe supply chain issues, some modest cost increases from suppliers and the prebuild of G700. Let's take a look at some of these elements in greater detail. The shortage of parts to schedule from the supply chain, especially from Honeywell has created significant out-of-station work, which is inherently less efficient.
We have a young, well trained and capable workforce. They have, however, never previously been exposed out of station work. They are doing well. I am pleased to report, but it had an impact. The other impact of latest scheduled parts deliveries, apart from cost growth is that we cannot increase our build rate until the supply of parts is more predictable. The good news is that there is light at the end of the tunnel. We see the vast majority of this problem resolving early in the third quarter, but for 2 large suppliers who will take a little longer to resolve. As most of you know, we plan to deliver a considerable number of G700s in the third and fourth quarters. To do that, we must build them now and incur some period costs without the related revenue.
This has impacted the first quarter and will impact the second quarter, but relief is in sight as deliveries commence. Aerospace had a decent quarter from an order perspective with a book-to-bill of 0.9:1 in dollar terms and 1:1 in units. The quarter was looking quite good until the 2 regional bank failures in early March. This created a pause in the market for about 3 weeks. I am pleased to report that normal activity has resumed. Strong sales activity and customer interest is evident in this quarter. The U.S. has been strong and the Middle East as well. China remains slow. The G700 flight test and certification program continues to progress well. The aircraft design, manufacture and the overall program are very mature. We continue to target certification of the G700 for late summer this year.
Gulfstream remains committed to a safe and comprehensive certification test program. Production of customer G700 is well underway, and we are preparing for entry into service. We will deliver a mature, high-quality aircraft. Looking forward to the next quarter, we expect to deliver 26 aircrafts with rapid increases in the third and fourth quarter deliveries, as we have previously indicated. In short, the Aerospace team did a good job under difficult circumstances. Next, Combat Systems. Combat had revenue of $1.76 billion, up 4.8% over the year ago quarter. Earnings of $245 million are up 7.9% and margins at 14% represent a 40 basis point improvement over the year ago quarter. So we saw a strong operating performance coupled with a nice revenue uptick.
At Land Systems, Increased revenue came from the MPF ramp-up, Stryker SHORAD and new international vehicle programs for Poland and Australia. At European Land Systems, we had higher Parana volume and OTS enjoyed higher artillery program volume. So we saw increased revenue performance at each of the businesses. Here's a little additional color on Combat Systems revenue results. Foreign exchange fluctuations negatively impacted Combats revenue in the quarter due to the strength of the dollar versus the Canadian dollar, Euro and the British pound. But for the FX headwind, Combat Systems revenue growth would have been up 7.1% over the last year rather than the 4.8% we have just reported. We also experienced very strong order performance at Combat.
Orders in the quarter are at their highest level in more than 8 years, evidencing the strong demand for munitions and international combat vehicles. There is clear upward pressure on our forecast for Combat Systems revenue and earnings in the year. Turning to Marine Systems. Once again, our shipbuilding units are demonstrating impressive revenue growth. As an aside, let me repeat a little recent history. The first quarter of 2020 was up 9.1% against the first quarter of '19. The first quarter of '21 was up 10.6% over '20 and first quarter 2022 was up 6.8% over '21. Finally, this quarter revenue of almost $3 billion is up 12.9% over 2022. This is an impressive growth ramp by any standard. This quarter's growth was led by Columbia class construction and engineering, DDG-51 construction and some T-AO volume.
Operating earnings are $211 million in the quarter, exactly the same as a year ago, but with a 90 basis point decrement in operating margin. The primary driver of lower margins during the quarter was a charge on the Virginia program to reflect cost pressure within our supply chain and efficiency impacts at electric boat as a result of late material deliveries. This was partially offset by Colombia margin improvement. Other modest margin impacts included an earnings decline at Bath as a result of a onetime pickup in the year ago quarter and cost inflation reimbursement that does not carry profits. Overall, earnings are what we expected, but revenue was higher, resulting in lower margins. We anticipate that this will improve as we progress through the year.
As you know, we never update guidance at this time of the year. I would say, however, that our quarterly progression differs from prior years and that the second quarter will be our lowest quarter because of mix and volume across the business. Nonetheless, we look forward to very strong third and fourth quarters. We will give you a comprehensive update at the end of next quarter as is our custom. This concludes my remarks with respect to what was a challenging but in many respects, rewarding quarter.
Howard Rubel: Thanks, Phebe. . Operator, could you please remind participants how to enter the queue?
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