General Dynamics held a conference call to discuss their second quarter 2023 earnings, with Phebe Novakovic, the Chairman and Chief Executive Officer, and Jason Aiken, Executive Vice President, Technologies and Chief Financial Officer, in attendance. The company reported earnings of $2.70 per diluted share on revenue of $10.2 billion, operating earnings of $962 million and net income of $744 million. They also took a moment to acknowledge the passing of long-time Board member and Lead Director, Jim Crown.

This paragraph discusses the revenue and earnings increases for the company in the second quarter and first half of the year. Revenue increased by $963 million or 10.5%, while operating earnings were down by $16 million and net earnings were down by $22 million. Sequentially, revenue was up by $271 million and operating earnings were up by $24 million. Orders were strong in the quarter, resulting in a large backlog, and cash from operating activities and cash after capital expenditures were at a very good pace.

In the quarter, the Company had a strong book-to-bill ratio of 1.2:1 and Combat Systems and Aerospace had book-to-bills of 1.4 and 1.3 times respectively. Operating cash flow was $731 million, yielding a cash conversion rate of 123% for the first half of the year. Capital expenditures were 2.1% of sales for the quarter and dividends and stock repurchases totaled $648 million.

General Dynamics reported that they have repurchased 1.8 million shares for $378 million, paid off $750 million of debt, and have a cash balance of over $1.1 billion. Their net interest expense was $89 million and the effective tax rate was 16%. Operating performance in Technologies was strong with revenue of $3.2 billion, each business growing year-over-year, and Mission Systems implementing measures to overcome supply chain issues. Operating earnings were $283 million with a margin of 8.8%.

In the Aerospace segment, revenue was up from the previous year due to additional aircraft deliveries and higher Gulfstream service center volume, partially offset by less volume in Jet Aviation's completion center. There have been supply chain issues, but they are improving and the suppliers are more predictable. Operating earnings of $236 million are slightly less than the previous year due to a 60 basis-point reduction in operating margin.

Operating margin decreased due to supply chain issues and higher R&D expenses, though Aerospace revenue and operating earnings increased sequentially. The demand environment was strong, with a book-to-bill of 1.3:1 in dollar terms and even higher for Gulfstream aircraft alone. The 700 flight test and certification program is progressing, though certification is now expected in the fourth quarter. 27 aircraft will be delivered in the third quarter, with a rapid increase in the fourth quarter deliveries. However, 5-6 fewer aircraft will be delivered than initially forecast, but more service revenue is expected.

Combat Systems saw a 15.5% increase in revenue year-over-year, with growth in each of the business units. Earnings rose 2.4%, but margins decreased 170 basis points. Marine Systems also experienced impressive revenue growth of 15.4%, driven by Columbia-class construction and engineering volume. Operating earnings increased $24 million, but operating margin decreased 30 basis points. Both Combat and Marine Systems experienced strong order performance and are well positioned for slow but steady incremental margin growth.

The company has reported a good quarter and first half, and has updated its forecast for the year. Aerospace revenue is expected to be down $200 million due to fewer aircraft deliveries, but stronger service activity. Combat Systems will have higher revenue due to new programs and increased threat, while Marine Systems revenue should be up $900 million to $1 billion due to improved efficiency. Technologies revenue will be $100 million to $200 million better than previously forecast, but operating margin will be 10 basis points lower. Overall, the company expects annual revenue of $12.7 billion and operating earnings of $1.2 billion.

Howard Rubel has announced his intention to retire from General Dynamics later this year and has received words of congratulations from the speaker. Nicole Shelton will be taking over the mantle for the next earnings call. The speaker concluded his remarks and opened the question-and-answer period of the call. Howard thanked the speaker for his kind words and expressed his gratitude for the opportunity to work with General Dynamics. He also mentioned that he and Nicole will be working together to ensure a seamless transition.

Phebe Novakovic explains how they intend to meet the Aerospace guidance they have given, which includes 27 deliveries in the third quarter and 140-ish for the year. She explains that they have facilitized for increased production, and that the higher-margin airplanes will provide significant uplift. Seth Seifman then follows up with a quick question.

Phebe Novakovic explains that the supply chain is increasing its transparency and reliability, leading to the expectation of catch-up in the fourth quarter for deliveries. She also notes that the company's service business is expected to increase as the fleet of new airplanes increases, and that flying hours have not been impacted. Lastly, she attributes the increased demand for combat systems to the world becoming a less safe place.

Phebe Novakovic answered David Strauss's question about how many G700s to expect in the fourth quarter by saying that the number of deliveries will be lower due to other airplanes, not G700s. Cai von Rumohr then wished Howard Rubel well and asked how many G700s were expected in the fourth quarter.

Phebe Novakovic and Cai von Rumohr discuss the timing of the certification of the G700s and the potential impact on deliveries. Jason Aiken then explains the progress payments associated with aircraft orders and deliveries, and that the majority of the cash receipts are in-house before an airplane is delivered.

Phebe Novakovic reported that demand for Aerospace orders in the second quarter was similar to the first quarter, despite a three-week banking crisis hiatus. She also noted that the backlog is holding up well and that activity in the third quarter is good. Howard Engle is retiring and will be sending postcards from his travels.

Phebe Novakovic and Jason Aiken discussed their respective pipelines and customer types. The United States has been strong in the Fortune 500, while the Middle East and Asia have been good. High net worth customers have stayed the same. Jason Aiken reported that there will not be a fundamental change in margins for the IT services and hardware side, though there may be some perturbation between the two businesses.

Jason Aiken discussed the expected growth of General Dynamics' Mission Systems and General Dynamics Information Technology (GDIT) businesses. Mission Systems is seeing strong support in their Navy platform support and cyber portfolio, while GDIT is seeing growth in all three of their customer segments. GDIT has also made selective technology investments to accelerate their growth, which are starting to take hold.

GDIT and GD Mission Solutions are teaming up to bid on the Army's CHS-6 $8 billion recompete, which is expected to be announced soon. Their investments in artificial intelligence, machine learning, hybrid cloud, and Zero Trust have already resulted in hundreds of millions of dollars of award wins and organic growth. GDIT is expecting to see continued results in the second half of the year and beyond. Phebe Novakovic believes that when the supply chain normalizes, the margin target should be in the higher teens, with potential for upside. Jason Aiken believes that joint bids between IT and Mission could become more common and provide a strategic advantage, potentially helping to return the Technologies segment to mid-single-digit growth.

GDIT and Mission Systems are expecting to benefit from the synergies of working together, as customers are requiring end-to-end solutions. CHS-6 is an example of this, as the program has shifted from high-end, customized, ruggedized hardware to a combination of that and more traditional off-the-shelf catalog-type products. GDIT and Mission Systems believe they are best suited to serve their customer in this program. Long-term growth rates are expected to remain low- to mid-single digit, with GDIT and Mission Systems hoping to get some juice out of that over time. Despite Defense growth being up 5% for the year in 2023, there is no operating leverage with a 40 bps margin contraction and flat operating profit.

Phebe Novakovic explains that the Marine Group had supply chain challenges, but they expect slow quarter-over-quarter margin growth with occasional perturbations. Growth in the quarter was driven by increased volume and additional throughput, and revenue came in faster than expected. Columbia and the oiler program are both performing well.

Electric Boat has seen improvements in its deck plate, but this has yet to translate into financial performance. The Virginia supply chain was hit hard by the impacts of COVID, including workforce disruption and the Columbia prioritization, making it difficult for the supply chain to get back on track. Phebe Novakovic of Combat stated that the munitions portion of the business will remain at about 27% of the mix, and that the supply chain in the Combat group has been less of an issue.

Howard Rubel and Phebe Novakovic answered a question from George Shapiro about defaults and payments on aircraft orders. Phebe mentioned that customers forfeit some of their value when they cancel and she wasn't aware of any defaults of note. Jason Aiken then added that they had received additional payments on schedule and the arrears from a Canadian international program had been paid down, leaving them with a normal run rate of operating working capital.

Howard Rubel has concluded the conference call, and he has reminded participants to refer to the General Dynamics website for the second quarter earnings release and highlights presentation. He also encouraged participants to reach out to him if they have further questions.

This summary was generated with AI and may contain some inaccuracies.