The operator welcomes participants to the General Dynamics third quarter 2023 earnings conference call and outlines the format of the call. Nicole Shelton, the Vice President of Investor Relations, introduces the speakers and reminds listeners of the risks and uncertainties associated with forward-looking statements. Jason Aiken, the Executive Vice President and CFO, and Bill Moss, the Vice President and Controller, will be leading the call in place of the CEO who is unable to attend.

The company reported its quarterly earnings, showing an increase in revenue but a decrease in operating earnings and net income. However, the results were better than the previous quarter and beat consensus expectations. The company also had strong cash flow and order performance in all segments. The aerospace segment had a 13.2% operating margin and generated $2.03 billion in revenue and $268 million in operating earnings.

In the third quarter, revenue and operating earnings at Gulfstream were down compared to the same period last year due to supply chain constraints. However, there was sequential improvement with an increase in both revenue and operating earnings. Gulfstream is on track to deliver over 60 aircraft in the fourth quarter, but there is uncertainty due to the possibility of FAA certification delays. The demand for aircraft remains strong, with a book-to-bill ratio of 1.4 to 1 for the aerospace division and 1.5 to 1 for Gulfstream. However, it may be difficult to reach a 1 to 1 ratio in the fourth quarter due to the expected high number of deliveries. The backlog for aerospace continues to grow, with a book-to-bill ratio of 1.7 to 1 in 2021, 1.5 to 1 in 2022, and 1.3 to 1 year-to-date in 2023.

In the third quarter of 2023, the market for the company's products grew by over 70%, indicating its strength. The G700 flight test and certification program is nearing completion, with certification expected in the fourth quarter of this year. Due to supply chain issues, the company plans to deliver 10-12 fewer aircraft than originally forecasted, but expects higher service revenue. In combat systems, revenue increased by 24.4% and earnings were up 10.7%, but margins decreased due to mix and new program starts. The company has taken on contracts to increase artillery production capacity at lower margins, but expects this to result in higher production and margins over time. The company is also working closely with the government to accelerate munitions production and has plans for further capacity expansion.

In the combat systems division, there was an increase in revenue and earnings due to new international vehicle programs and higher volume on various vehicles. The book-to-bill ratio was strong, indicating a high demand for munitions and combat vehicles. In the marine systems division, there was impressive revenue growth, driven by the construction and engineering of the Columbia-class. However, operating earnings were down due to unfavorable EAC adjustments and late deliveries causing disruptions. The company is working with the Navy to address this issue.

Bath has shown signs of improved productivity but it has not yet translated into financial performance. The marine systems division had a strong quarter with a large backlog. The technologies division had a strong quarter with growth in both GDIT and mission systems. GDIT is seeing strength in defense and federal civilian portfolios due to technology investments. Mission systems saw strength in cyber and naval platform markets. The production and delivery cadence has stabilized but supply chain fragility remains. The group is on track to achieve increased sales forecast for the year. Operating earnings and margin have increased, and this trend is expected to continue in the fourth quarter. Backlog at the end of the quarter was $12.7 billion and the book-to-bill ratio for the first nine months was 1 to 1.

In the defense sector, the company saw significant growth in revenue and earnings, with a qualified funnel of over $125 billion in opportunities. The book-to-bill ratio was 1.4 to 1, leading to a record backlog of $95.6 billion. Total estimated contract value was just shy of $133 billion. Operating cash flow was over $1.3 billion in the quarter and $3.5 billion year-to-date. Free cash flow was $1.1 billion in the quarter and $2.9 billion year-to-date, or 126% of net income.

The company achieved a high cash conversion rate due to Gulfstream orders and strong performance in technologies. They aim to maintain a cash conversion rate over 100% of net income for the year. Capital expenditures were at 2.1% of sales and they aim to be slightly below 2.5% for the full year. The company also paid dividends and repurchased shares, repaid debt, and ended the quarter with a net debt position of $7.9 billion. The tax rate for the quarter was 15.6% and is expected to be 17% for the full year. The company is holding at $12.65 for the year-end guidance.

The operator reminds participants to only ask one question and one follow-up. A participant asks about the certification and delivery timelines for Gulfstream's G700 aircraft. The company hopes to achieve certification in December, but if it is delayed, it may affect the planned deliveries for this year. The company will discuss next year's outlook in the coming months, but any delays this year will likely push deliveries into 2024.

The speaker discusses the current state of supply chain issues and how they may impact the company's outlook for 2024. They mention that it is too early to declare victory and that more time is needed to see the net impact. They also mention that they will have a better understanding of this when they provide guidance in January. The speaker then addresses a question about the growth of the marine and combat businesses, stating that there has been a significant increase in throughput this year, but the overall growth outlook remains the same.

The speaker discusses the backlog in marine systems and its potential impact on the upcoming year's revenue. They also mention the unexpected increase in combat systems revenue due to a change in the threat environment. They do not anticipate this to negatively affect future revenue and do not see any impact from the updated IRS guidance on R&D.

The speaker, Jason Aiken, is discussing Gulfstream's expected delivery numbers for the G700 and G280 aircrafts. He confirms that the company is still aiming for 19 deliveries of the G700 this year, but this is dependent on certification timing. He also mentions a slight decrease in 2023 deliveries, mostly due to G280s, but assures that the planned deliveries for this year are in hand. The impact of current events in Israel on 2024 deliveries is uncertain.

During an earnings call, Robert Stallard asks Jason Aiken about the state of the company's supply chain. Aiken clarifies that while there have been some challenges, they are seeing improvements, particularly in the aerospace sector. He mentions a specific issue with G280s, but overall things are trending in the right direction. Stallard then asks about supply chain and labor issues in mission systems and marine, to which Aiken responds that they have made progress but the supply chain remains fragile.

The speaker believes that the team at mission systems has adapted well to the new supply chain reality caused by the pandemic, and this will lead to a more stable and predictable future for the company. In terms of labor, there has been a faster than expected stabilization in both attraction and retention, which will drive margin improvement in the shipyard over time. For aerospace, the focus should be on the G700 mix, less out-of-sequence work, the learning curve on G700, and R&D leveling off or decreasing. The resolution of supply chain issues will also be a major factor in improving margins.

Gulfstream has been working towards improving efficiency in their operations with their new family of aircraft. This includes building facilities and increasing commonality between airplanes to allow for more efficient servicing. However, the timing of supply chain issues may affect their progress. R&D expenses are expected to decrease slightly as they finish up current projects, but there are still future projects in the pipeline. Overall, they expect to see continued improvement in margins and revenue in the coming years. Most major company-funded growth capex projects will be completed this year, but there may be some ongoing costs related to capacity expansion at Electric Boat.

The Army is investing in artillery and the company expects their capex level to trend back towards 2%. The president's $106 billion supplemental request includes $3.4 billion for the submarine industrial base, but this does not change the company's timing. The supply chain remains fragile and any additional funding would be helpful. The company's focus is on delivering two submarines per year plus Columbia. There have been no changes in contracting terms with the customer and long-term margins are uncertain.

The speaker, Jason Aiken, discusses how the current state of the industry has been reflected in their contracting with customers. He mentions the recent DDG multi-year contract and expects margins to improve in the fourth quarter and gradually over time. He also mentions that shipbuilding is a challenging endeavor and their expectation is to reach 8% to 9% margins. In response to a question about the third quarter margin in the marine sector, Aiken says there were no significant negative EACs (estimated at completion) and discusses changes in supply chain at Electric Boat.

The company is still experiencing pressure from delayed materials in the supply chain, which is affecting Electric Boat's schedule and delivery. This, along with reduced margin rates from earlier adjustments, is driving the margin rate seen in the quarter. However, as efficiency improves, the company expects to see improvement in margins starting in the fourth quarter. The supply chain changes are being incorporated into new contracts, taking into account factors such as increasing costs of skilled labor. The EPS outlook remains unchanged despite some changes, and this is based on the new Gulfstream delivery outlook of 60-plus in Q4. If the G700 is not certified this year, it could affect the delivery of double-digit G700s.

In the paragraph, Jason Aiken discusses the updated EPS reaffirmed at $12.65, which is mostly impacted by reduced numbers from the G280s. He also mentions some factors that balance out the impact, such as improved customer service revenue and lower interest expense. Regarding the 700 outlook, Aiken explains that there is uncertainty due to the lack of a specific date for FAA approval, but they expect to reach it in early to mid-December. The next question is about Electric Boat and the backlog, which has built up significantly. Aiken mentions that the Navy wants two VCS deliveries per year, but they are currently at 1.2. He is asked about potential scenarios for reaching the desired rate, but he does not provide a specific answer.

Jason Aiken discusses the range of outcomes for the Virginia-class program, which was on track to reach two per year prior to COVID. He mentions factors such as the maturing of the new workforce, investments from the Navy, and strategic sourcing initiatives that will help them get back to that level. However, he cannot give a specific timeline for when this will happen. Doug Harned asks about the impact of the Columbia class on the VCS ramp, and Aiken responds that it is in a different stage but shares an overlapping supply chain.

Jason Aiken, speaking on behalf of Columbia, stated that it remains the Navy's and DoD's top priority and will not hinder the goal of producing two Virginia class submarines per year. The first boat is on schedule for completion, but resources are focused on Columbia. The company is still aiming for $12.7 billion in technologies, and despite beating revenue expectations in all defense sectors, the fourth quarter may not be as strong. An update on revenue expectations for the year and potential growth for next year was requested.

In the fourth quarter, there is upward pressure on defense revenue, but it is not expected to be significant. This year, there will be a more steady revenue pattern in technologies and combat, as opposed to the traditional seasonal uptick in the fourth quarter. Marine has already seen strong volume and is expected to continue at a stable rate. Overall, all three defense segments are expected to show growth going into next year.

The speaker is discussing the potential for growth in the defense business in the next few years. They mention that the Israel-Hamas conflict and a recent request for $106 billion from the President could lead to increased demand for artillery, with the company working to increase production capacity. The speaker also praises the combat systems group for their handling of the surge in demand for land systems.

The speaker discusses the success of the company's handling of supply chain issues and predicts continued growth in demand for their product. They then shift the focus to GDIT, another division of the company, and discuss the potential for achieving double-digit margins and the integration of mission and GDIT. The speaker expects the group to reach low double-digit margins in the near future and acknowledges that a faster growth of GDIT could be a potential headwind.

The speaker discusses the integration of two symbiotic businesses and explains why they are kept separate. They highlight the benefits of having them together in the same group, such as efficient and effective investments and a joint capability to bring to customers. The speaker also mentions the different leadership, priorities, and investment theses required for each business. The call concludes with a reminder to refer to the General Dynamics website for the third quarter earnings release and highlights presentation.

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