General Dynamics Q1 2025 Earnings Call Transcript

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Operator

Good morning, and welcome to the General Dynamics First Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please note this event is being recorded. At this time, I would like to turn the conference over to Nicole Shelton, Vice President of Investor Relations.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics first quarter twenty twenty five 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 ks, 10 Q and eight ks filings.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

We will also refer to certain non GAAP financial measures. For additional disclosures about these non GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phoebe Novakovic, Chairman and Chief Executive Officer Kim Korea, Chief Financial Officer and Jason Aiken, Executive Vice President, Technologies. I will now turn the call over to Phoebe.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Thank you, Nicole. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $3.66 per diluted share on revenue of 12,200,000,000.0, operating earnings of 1,268,000,000, and net earnings of 994,000,000. These results compare quite favorably to the year ago quarter. Revenue was up 13.9%, operating earnings are up 22.4%, and net earnings are up 24.4.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

As a result, earnings per diluted share are up 78¢ or 27.1% more than the year ago quarter. The operating margin for the entire company was 10.4%, a 70 basis point improvement over the year ago quarter. While aerospace led the way with a 45.2% revenue increase, Each of the defense segments also enjoyed revenue increases. A similar pattern is true with respect to operating earnings. Aerospace led the way with a stunning 69.4% increase, and each of the defense segments contributed nice improvements to operating earnings as well.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

We have obviously opened the year with a very strong quarter. It is important to note that the comparative quarter in 2024 also showed very good growth in all respects over first quarter twenty three. We also beat consensus by 16¢ in the quarter. At this point, let me ask Kim Korea, our CFO, to provide detail on our order activity, solid backlog, and cash activity before I come back with segment observation.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

Thank you, Phoebe, and good morning. I'll start with orders and backlog. We had a solid quarter with over $10,000,000,000 of orders. Order activity was particularly strong in the technologies group with a book to bill ratio of 1.1 to one. Our overall book to bill ratio for the company was less than one times due in part to the 14% increase in revenue from last year.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

This resulted in total backlog being slightly down from year end to $89,000,000,000 at quarter end. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at a little over $141,000,000,000 Turning to our cash performance for the quarter, we expected a slow start to the year. In terms of timing, this year will look a lot like last year with cash building throughout. The buildup of inventory as we approach certification and entry into service of the g 800 impacted aerospace. And although technologies had a solid quarter, the defense businesses as a whole were impacted by a working capital buildup due to growth and timing.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

As a result, our free cash flow for the quarter was a negative $290,000,000. This was better than expected as our business units work to drive cash to the left. For the rest of the year, we expect modestly positive cash flow in the second quarter followed by substantially improving free cash flow in each of the third and fourth quarters. Now to discuss capital deployment activities. Capital expenditures were $142,000,000 or 1.2% of sales in the quarter.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year as we anticipate spending around 2% of revenue on CapEx investments in our businesses this year. Also in the quarter, we returned in excess of $980,000,000 to shareholders in the form of dividends and share repurchases. This included $383,000,000 paid in dividends and repurchases of approximately 2,400,000.0 shares of stock for $600,000,000 at an average price of just over $252 per share. In addition, in late March, we repaid $750,000,000 of notes that matured on April 1. As a reminder, we have an additional $750,000,000 of notes maturing in May.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

Although we ultimately intend to refinance those notes, the timing of when we do that may be influenced by market conditions. When you add it all up, we ended the quarter with cash balance of around $1,200,000,000 and a net debt position of 8,400,000,000. Our net interest expense in the quarter was $89,000,000 compared to 82,000,000 last year. The increase was due to utilization of commercial paper during the quarter. Finally, turning to income taxes, we had a 17.2% effective tax rate in the quarter, generally consistent with our full year guidance.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

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

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Thanks, Kim.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Now let me review the quarter in the context of the business segments and provide detailed color as appropriate. First, aerospace. Aerospace did particularly well in the quarter. It had revenue of 3,030,000,000.00 and operating earnings of 432,000,000 with a 14.3% operating margin. Revenue is 942,000,000 more than last year's first quarter, a 45.2% increase.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

To give you a little color here, the increase was driven by a 50% increase in aircraft deliveries, including 13 new g seven hundreds and higher services revenue at both Gulfstream and Jet Aviation. The 36 deliveries in the quarter are about as planned. Recall, however, that there were no g 700 deliveries in the first quarter of twenty twenty four. So this quarter really shows the robust revenue increase driven by the introduction of the g 700. In addition, we saw improved margins on our g 700 deliveries.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

In short, we expect revenue growth throughout the year, but at a slowing rate of growth because g 700 deliveries began in the second quarter of last year. As I indicated last quarter, the supply chain continues to improve and is performing better to both schedule and quality. We are finding fewer faults, and those we are finding are becoming easier to fix. In short, I am increasingly confident that we can meet this year's delivery plan. We are also pleased that the g 800 was certified by both the FAA and EASA on April 16.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

This is expected to be a smooth entry into service, and we have some reason to believe that we can exceed our planned deliveries of g eight hundreds. I would be remiss if I failed to mention that Jet Aviation made a significant contribution to the quarter's results. Its revenue was up 8% and earnings up 22 over the year ago quarter on a 60 basis point improvement in operating margin. This business has become a real jewel. In summary, the aerospace team has had a good quarter.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

G 800 FAA and EASA certification is behind us, and we are improving our g 700 delivery cadence and operating margin. Turning to market demand, we had a point eight book to bill in the quarter even as aircraft deliveries increased by 50%. Orders are consistent with our internal plan at about the same number of units as the first quarter in twenty three and twenty four. We expect that the certification of the g 800, it's better than planned performance characteristics, and the early deliveries to customers will stimulate demand. We continue to see improved interest across all models in The US, albeit with cautious concern by customers about the macroeconomic environment and the impact of tariffs on their businesses.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Middle East activity remains strong. So let's move on to the defense businesses. Combat had revenue of 2,180,000,000.00, up 3.5% over the year ago quarter. Earnings of 291,000,000 are up 3.2%. Margins at 13.4% are consistent with the year ago quarter.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

It's interesting to observe that this year's revenue growth is on top of our first quarter twenty twenty four growth of almost 20%, so nice compound growth. The increased revenue performance occurred at Ordnance and Tactical Systems and European Land Systems. Land Systems held steady. We also experienced good order performance. Orders in the quarter drove backlog to 16,900,000,000.0, up 1,300,000,000.0 from this time a year ago.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Demand for combat system products continues to be robust with particular strength in Europe. Orders for wheeled and tracked vehicles are up, reflecting the heightened threat environment. In addition to several new combat vehicle starts, we are working closely with the US Army to accelerate Abrams modernization. In The US, we are rapidly increasing munitions capacity and production with the opening of our projectile facility in Texas and our load and assembly and pack facility in Arkansas. All in all, combat had a solid quarter and is off to a good start for the year.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Turning to marine systems. Once again, our shipbuilding units are demonstrating impressive revenue growth. Let me repeat the recent history that I gave you this time last year with respect to growth in this decade. The first quarter of twenty twenty was up 9.1% against q one nineteen. Q '1 '20 '1 was up 10.6% over q one twenty.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Q '1 '20 '2 was up 6.8% over q one twenty one. Q '1 '20 '3 was up 12.9% over q one twenty two. And q one twenty twenty four was up 11.3% over q one twenty three. And finally, this quarter is up 7.7% over q one twenty four. This has been a really nice rate of growth for the shipyards and the repair yards.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

This growth has come at significant cost for facilities and significant increase in hiring. The good news is we've been able to hire and train the people we require to support our growth. This particular quarter's growth was driven by Columbia class and Virginia class construction as well as an increase in DDG fifty one construction. Operating earnings are 250,000,000 in the quarter, up 7.8 from the year ago quarter. Operating margin is identical to last year's quarter.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

We have struggled to achieve operating leverage to go with our rapid revenue growth, but operating earnings have grown on a consistent basis as well. We continue to be impacted by delays and quality problems in the supply chain. Material and parts are late and sometimes exhibit quality escapes, and new shipbuilders continue to come down learning curves. We have more work to do, but we have made progress. In addition, one of the unions, the draftsman, a largely white collar union that converts engineering specs to drawing, has voted to authorize the strike.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

We are working closely with the navy and the new administration to continue to address the problems in the supply chain and look for opportunities to improve throughput and performance of the shipyard. The growth profile continues to look strong and demand has not abated. Our job is to continue to improve ourselves and to help the industrial base get stronger with the help of the government. The technologies group had a strong start to the year with revenue of $3,430,000,000. This was an increase of 6.8% over the first quarter of twenty twenty four.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Both businesses contributed to the growth in the quarter with GDFIT up 9% and Mission Systems up almost 2%. Operating earnings of 328,000,000 were up 11.2% over the year ago quarter on a 40 basis point improvement in operating margins from 9.2% to 9.6%. The operating margin improvement is encouraging given the top line shift toward IT services, which carry a lower margin than the defense electronics side of the portfolio. This reflects strong performance admission systems as the transition from legacy programs to new franchises continues. The group's order activity was also encouraging with a book to bill of 1.1 times for the quarter and trailing twelve months even against the strong revenue growth.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

As a result, the group's backlog is up almost 7% from a year ago, and their total estimated contract value is up more than 10% over the same period. Their focus on advanced technology enabling autonomous platforms, smart munitions, subsea warfare, and strategic deterrence as well as advanced AI, cloud, cyber, five g, and quantum solutions is driving demand for the group. Their pipeline of qualified opportunities remains strong at a hundred and 20,000,000,000, and their win and capture rates in the 80% range reflect the compelling value they're providing their customers. While this year is off to a strong start, a significant amount of uncertainty hangs over the market, particularly on the IT services side of the business as the administration establishes its own spending priorities. That said, our team has a great understanding of the government's emerging technology needs and is committed to innovating to solve the toughest technical challenges across the government at the best return for their customers.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

As you know, we never update guidance at this time of year. Apart from what I've already said about aerospace, I will continue with that practice. There is, however, no hiding from this quarter's performance and its implication for the year. Let me speak to tariffs for a moment. We cannot yet discern to what extent the defense businesses will be impacted over time.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

The more potentially impactful problem is in aerospace where we are a significant net provider of export revenue to The US. We do not know the scope and breadth of the tariffs issue at the moment and that will not for a while. Accordingly, anything I might say on that subject would be sheer speculation. So I do not intend to answer questions on the subject of tariffs because anything I say on that subject, given our lack of firm knowledge, will almost certainly be wrong. That's to share that we are working the related issues diligently.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

This concludes my remarks about a good quarter, and let me turn the call back to Nicole to take questions.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

Thank you, Phoebe.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?

Operator

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue.

Operator

We will take our first question from Peter Arment at Baird.

Peter J. Arment
Senior Research Analyst at Baird

Yeah, thanks. Good morning, Kim, Jason, Nicole. Nice results. Phoebe, maybe just given in the spirit of everything that's going on, GDI Technology segment had a really good bookings quarter kind of bucking the trend of the industry. Maybe could you talk a little bit about, I guess, any visibility or any discussions that GD is supporting kind of the GSA and their efforts?

Peter J. Arment
Senior Research Analyst at Baird

And just how are things looking from a bookings in a cost savings environment when with with with the current administration?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Yeah. Peter, that's a good question. I asked Jason to join us on the call to provide us more color for those of you who wanted some. So I'll turn that over to Jason.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

Thanks, Phoebe, and good morning, Peter. I think as you'd expect, along with a number of GDIT's peers that I'm sure you've heard from, you know, we've been in active conversation and actively working with the customer to identify, opportunities for for savings, for increased value, and so on from the services and the solutions that we that we provide. I think it's it's important to to as a reminder, that we are not strictly in the consulting business per se. We deliver mission driven solutions. We deliver solutions to the customer's most challenging technology issues.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

And but the fact is we are in the conversation. And as part of that conversation, we are going to partner with our customer, and we are going to find the savings that they're looking for. At this point, the only thing I could comment in terms of what we're seeing in our results is you saw you heard about the strong results in the quarter. First quarter was very strong, not only from a a revenue and earnings standpoint, but also the order, book, was healthy. So on the one hand, we're seeing a little bit of sluggishness in the in the solicitation and the and the, proposal and and award process.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

No different than the rest of our peers. But we'll have to see how that plays out, how long that sustains, and how much of that is just an impact of a new administration setting their priorities and no different than any transition we see with a new administration. So a lot still to be determined. Nothing to change yet. The outlook for the year remains the same, And I think we'll know a lot more by the midpoint of the year.

Operator

We'll move next to Jason Gursky at Citi.

Jason Gursky
Jason Gursky
Equity Research Analyst at Citigroup

Hey. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Jason Gursky
Jason Gursky
Equity Research Analyst at Citigroup

First question, Phoebe, maybe just get some comments from you and your take on the administration's desire to stand up, I don't know, office of shipbuilding inside the White House and all the efforts that we're seeing from them on supporting the industrial base here in The United States. We just love to get your your take on what you're hearing.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Yeah. So we've been in touch with

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

the office. We're very happy to

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

have the focus on on, shipbuilding, across the across the enterprise. So I consider that all all goodness, and, and we've had productive conversations, with multiple elements of the administration. And, we're working with them to see, in some cases, how we can accelerate throughput productivity, ensure up how we can shore up the industrial base, particularly on the on the defense side, and opportunities for for more commercial shipbuilding, where they may arrive. So I I I think attention on a on a subject of national import is is always beneficial.

Jason Gursky
Jason Gursky
Equity Research Analyst at Citigroup

Okay. Great. And then quick follow-up question would just be on the executive orders that hit last week about the potential for seems like a rewrite of federal acquisition regulation. I'm just would love to get your take on this administration's approach to procurement reforms. Seems like every administration comes in and wants to reform how acquisition is done.

Jason Gursky
Jason Gursky
Equity Research Analyst at Citigroup

Just curious if you think this one's gonna be any different, kind of, you know, potential opportunities and risks as we go through this process for the industrial base writ large. Thanks.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So I think that, acquisition reform is always laudatory. And I think the extent to which it succeeds is understanding what works in the acquisition process and what and what doesn't. So I think that part of the dialogue we're all having is here here's the good things, because there are an awful lot of good things, within the process. They hear all the impediments, the cost drivers, the elements that tend to slow down or build bureaucracy. So I think that's a, I think those are good conversations, and and we've always been supportive of acquisition reform.

Operator

We'll move next to David Strauss at Barclays.

David Strauss
David Strauss
Managing Director - Aerospace & Defense Equity Research at Barclays

Thanks. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Hi, David.

David Strauss
David Strauss
Managing Director - Aerospace & Defense Equity Research at Barclays

Phoebe,

David Strauss
David Strauss
Managing Director - Aerospace & Defense Equity Research at Barclays

has there been a change in kind of the order activity or customer interest? Any any noticeable change that you've seen at, at Gulfstream, you know, post, all the tariff announcements in early April? Any any any slowing or anything?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

The pipeline remains good. I'd say everyone's a little bit cautious, figuring out to the extent to which the tariffs will impact any one of their businesses. But the pipeline remains strong across the portfolio of products. So, so far so good.

David Strauss
David Strauss
Managing Director - Aerospace & Defense Equity Research at Barclays

Okay. And a follow-up on the Marine side. Could you give an update on getting the money, the significant funding that was in the CR under contract and maybe progression on the larger Block six Virginia class contract?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So we're working with the administration on, getting the, supplemental funding, in the CR under under contract. And so we've had, very productive conversations, and and we'll continue those. So I don't think it's appropriate to talk anymore about that. But to the extent to which that we get those funds into the shipyards into wages and additional throughput capacity, that's all beneficial in in the big conversations that have to happen around block six and, the second build of Columbia. So, the Navy intends for those to happen this year, but I think we need a lot of, building blocks before we get there, including getting the supplemental under contract and and starting to execute there.

Operator

Next, we'll move to Robert Stallard at Vertical Research.

Robert Stallard
Partner at Vertical Research Partners

Thanks so much. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Robert Stallard
Partner at Vertical Research Partners

Steve, you said some positive things about the aerospace supply chain that you've experienced in the last couple of months. But was wondering if in recent weeks, this whole tariff thing has shifted the landscape here, particularly with regard to engines.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So, let's just be clear about the supply chain. They've made very good progress, and but the problems are not all behind us. And so we continue to work out of station work and continue to find some issues. I think it's a little thin to tell, within the supply chain, the extent to which we've got, real concerns, and their suppliers have real concerns. I would say that a lot of what we consume, internal consumption material, has a a significant amount of US content.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So how all of this plays out is is remains to be seen here.

Robert Stallard
Partner at Vertical Research Partners

Okay. Thanks so much.

Operator

We'll go next to Christine Liwag at Morgan Stanley.

Kristine Liwag
Kristine Liwag
Executive Director at Morgan Stanley

Good morning, everyone.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Kristine Liwag
Kristine Liwag
Executive Director at Morgan Stanley

Jason, I want to focus on technologies a little bit. You mentioned that you're working on savings that you can provide the customer. It seems like GSA the GSA was disappointed with the initial proposals from the industry about cost savings.

Kristine Liwag
Kristine Liwag
Executive Director at Morgan Stanley

So can you talk about what's the potential size of savings you could provide with the new approach? And if we could size the potential effect on your revenue stream as this materializes, that'd be great. Thanks.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

Yeah. I'm afraid I'm gonna give you an answer you're not gonna be happy with, Christine. The point is, you know, as I said, we are in a in a a good healthy active discussion with that customer. We are identifying savings. Some of that, as you might imagine, is from a conversation that's been discussed quite a bit around shifting to fixed price and outcome based type contracts, which we very much welcome.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

We have a good healthy portion of that in our backlog and portfolio already. But the fact is it's an ongoing dialogue with with the customer. And so, I I think it'd be inappropriate to to get out ahead of that, in a public conversation and get ahead of them on that.

Kristine Liwag
Kristine Liwag
Executive Director at Morgan Stanley

Great. Thank you. And then, Phoebe, if I could, have a follow on on Gulfstream. I mean, you now have the g 800 certified, and you had previously had the g 700 as well. At this point, with the new products for Gulfstream coming out, it looks like there's a little uptick on the older G600s coming to market.

Kristine Liwag
Kristine Liwag
Executive Director at Morgan Stanley

I know you mentioned that there hasn't been significant change in demand, but I was wondering if you could provide color regarding customer behavior and how the deliveries of these newer jets are affecting, the older pieces and how you expect that to play out regarding pricing.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

You know, it's interesting. Old is relative. He's a brand new airplane. So I gotta take your point and but with with, you know, a little bit of humor here. The the interest in the 506 continued to to be very strong.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Each one has its market segment, fulfills different missions. Just so you know, an older airplane, again, though, from relative point of view, is the six fifty. I think we deliver the last six six fifties, this quarter, so that's kind of a seminal end to a really an extraordinary airplane, and I would say a real market changer, for the last twelve, fifteen years. So, but demand remains good. The deliveries are are on cadence, largely on cadence.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

But, again, we still have some, perturbations from the supply chain. And, but we'll hopefully get some of those behind us as supply chain more fully recovers. I hope that answers your question.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

Next, we'll move to Ken Herbert at RBC Capital Markets.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Hi, Phoebe and everybody. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Nice Gulfstream deliveries in the first quarter, Phoebe. Sounds like supply chain is getting better. It sounds like maybe there's some incremental upside to full year expectations. But can you provide any commentary on cadence of deliveries as we think about second quarter and second half of the year from Gulfstream?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

I'm pretty consistent. We'll have some mix changes quarter over quarter like we typically do, but pretty consistent. And we're sticking with our with the estimate that we gave you, on the last call. We as you all know, we never, I think, once in the last twelve, thirteen years, have we once or twice have we ever updated in the second quarter. Or in the first quarter.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

We always wait till the second quarter. So we'll give you more clarity to the extent that there are any changes in the in that second quarter update.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Okay.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Great. And and just as a follow-up, you called out Middle East good order activity there. Are you, seeing anything else geographically, maybe any areas of softness or anything else that sticks out, in terms of of customer activity on Gulfstream?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Pretty much consistent with what we've seen recently. The US is strong, and, Middle East is strong. So so far, I I haven't seen any systemic changes here.

Operator

We'll move next to Scott Micas at Melius

Operator

Research.

Scott Mikus
Vice President - Equity Research at Melius Research LLC

Morning.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Morning.

Scott Mikus
Vice President - Equity Research at Melius Research LLC

Phoebe, quick question on marine. General Cotton of US Strategic Command recently stated that the Columbia program of record may need to be increased given today's elevated threat environment. Considering the Navy's fleet of 14 Ohio class submarines carry two eighty SLBMs, but each Columbia is only designed to carry 16 SLBMs. Is there interest from the DOD that you've heard about increasing the Columbia program to maintain a one to one replacement of SLBM launch capability?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

You know, that's an interesting question. That has been a national security question on and off, I'd say, for the last fifteen years or so. So I haven't heard anything new particularly on that subject, but it's it's it's frequently a, a question that comes up, or a subject that comes up in in extended conversations. So I'm sure it is on people's minds.

Scott Mikus
Vice President - Equity Research at Melius Research LLC

Okay. And then turning to Gulfstream, deliveries were very good this quarter. Were there any customers that tried to accelerate the deliveries to get ahead of the tariffs?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Not that I'm aware of.

Scott Mikus
Vice President - Equity Research at Melius Research LLC

Okay. Thanks very much.

Operator

We'll go next to Gavin Parsons at UBS.

Gavin Parsons
Gavin Parsons
Director - Aerospace & Defense Equity Research at UBS Group

Thanks. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Gavin Parsons
Gavin Parsons
Director - Aerospace & Defense Equity Research at UBS Group

Phoebe, you mentioned the improvement in the G700 margin. Was one q better than your plan, and do you still expect a step down in the February and three q margin?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Yeah. We're holding consistent for a whole series of reasons that including mix among others in the second quarter. Pretty much the progression that we gave you last last call in January. So, again, if that if that will if that changes, we'll update you at the end of q two. But so far, that's still our plan.

Gavin Parsons
Gavin Parsons
Director - Aerospace & Defense Equity Research at UBS Group

Okay. Appreciate it. And you mentioned you expect g 800 certification to drive a a step up in orders there. Did you book any g eight hundreds in the first quarter?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

We've had the yeah. I'm almost certain we did. And we've had certainly, additional interest since the since the certification. It's a popular airplane. Let's recall that airplane is the replacement for the six fifty.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Six fifties, as I noted, leave, you know, that that's out of out of production at the end of this quarter. It's already out of production actually largely, and we're in the delivery mode. So the last delivery will be this quarter. So that'll be an an additional, I think, stimulant to demand.

Operator

And we'll move to our next question from Seth Seifman with JPMorgan.

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

Hey. Thanks very much, and good morning, everyone.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning, Seth. Good morning. I wanted to

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

ask, in marine, just, you know, starting off with the 7% margin kind of slightly higher, than what was initially expected for for the year and potentially, you know, bringing those last two Block five boats under contract well, hopefully bringing those boats under contract this year, we'll see about the rest. Does that create maybe a little bit less risk when we think about the margin outlook for Marine versus the past, two years?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

I think to the extent that we can, continue to, stimulate throughput productivity in the supply chain as well as at the shipyard, that is always a risk reduction. So I think every time that we can we can facilitate that, that is a good thing. I will recall I'll just note on the 7% margin. We had a charge in the fourth quarter last year that didn't revisit, and that was some mix driven. But we're stated but you didn't ask this question, but I'll answer it anyway.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

You but we'll stick with as we stand today with our we're gonna hover in the upper upper sixes, in margin. But yes. And as I said, any any act any action on the part of the government to stimulate, productivity always takes risk out of the out of the profile.

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

Okay. Okay. Thanks. And then just as follow-up on, the, capital deployment and, balance sheet. With with the share repurchases in in the first quarter, I guess, you know, will affect the share count for the year.

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

I think, Kim, you mentioned maybe waiting potentially to refinance some of the debt that's due in the second quarter. Should we think about some incremental interest expense at all this year that maybe offsets some of the goodness from share repo? How do I guess, do those two things kind of net out? And then, you you know, Phoebe, I think you you said over time that you're typically opportunistic on share repo, and this was, you know, a bigger quarter than than we're used to seeing. And so, you know, what was kind of the thought process around that?

Kimberly Kuryea
Senior VP & CFO at General Dynamics

Sure. I'll start with, just to clarify, I didn't necessarily say we were waiting. We're just watching what's happening in the market in terms of the rates, related to the refinancing of the debt. So just wanted to clarify on that. And as you stated, we did, you know, have significant share repurchase in the first quarter, and we continue to look at share repurchase, you know, throughout the rest of the year depending on the facts and circumstances as they present themselves.

Kimberly Kuryea
Senior VP & CFO at General Dynamics

And so I would say that we will likely have, you know, slightly more interest expense, predicted for the rest of the year.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

And, I would say too, our our general attitude about capital deployment is unchanged and our and our share repurchases are up, are up opportunistic, but the stock was a good buy, a lot of instances this quarter.

Operator

We'll take our next question from Andre Madrid at BTIG.

Andre Madrid
VP - Equity Research at BTIG

Good morning, everyone.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Andre Madrid
VP - Equity Research at BTIG

Given all the recent tension around trade, do you think there's a reluctance moving forward for allies to work with U. S. Contractors? I mean, you saw several Northern European nations kind of coming together and saying that they were intending to collectively buy a competing infantry combat vehicle. Like do we expect stuff of this magnitude kind of moving forward?

Andre Madrid
VP - Equity Research at BTIG

And, yeah, like I said, do we expect trade to kind of linger and and weigh on, you know, allies dealing with with contractors like GD?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

I think that we have to see how all that plays out, but but we I I I think you know that we are a little bit different. And this is largely talking about combat systems because that's our preeminent business in Europe. But this is a European business run by Europeans with manufacturing facilities in Europe, sourced in Europe almost exclusively. So these are long standing thirty year, in some instances, companies in in in their home countries. So I think we're a little bit different.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

I would say that the demand on the first quarter for European made sourced GD products was certainly there. And and European Land Systems has a superb portfolio of of products to offer. And we have seen increased demand, and increased spending. So that bodes well from our perspective for for the for these businesses.

Andre Madrid
VP - Equity Research at BTIG

Got it. Got it. That's helpful. And then, if I could just squeeze in one more. I think some of your peers pointed out a slower pace of contract awards in the first quarter.

Andre Madrid
VP - Equity Research at BTIG

Did you see anything of this nature? Could you provide more color there?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Yeah. I'll ask you. Not on not in majority of the portfolio, but, Jason, go ahead.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

Yeah.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

I think as it as it relates to the technologies group, as you saw in the results, it was actually a very encouraging quarter from an orders perspective. On a pretty meaningful uptick in revenue, we had a book to bill greater than one to one. So, so far, we're not seeing an impact through the end of the first quarter. And as Phoebe said, the pipeline for the business remains very strong. The issue that I think most people are talking about, and we're seeing, frankly, the same thing, is what I would refer to as perhaps a sluggishness, if you will, in the cadence of solicitations and award activity.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

But as a reminder, that's not necessarily something new for this business. In the GDIT side, in particular, we've talked for some time about dealing with these types of issues of of protracted and drawn out adjudications and and award activities, protests, and other things that sort of extend that order cadence beyond what would be a a regular order. So while this is something we're tracking and something everybody's talking about, I don't necessarily think it's something aberrationally different than what we've been used to dealing with in the past. And so we'll just have to see how it plays out as we go forward.

Operator

We'll take our next question from Sheila Kahyaoglu at Jefferies.

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

Good morning, Phoebe, Kim. Phoebe or Kim, maybe two follow ups, if I can, both on margins, one on aerospace and one on marine. On aerospace, can you just update us on how we think about the last six fifteen being delivered in this quarter as the g 800 ramps and how we think about the different blocks with g 700 progressing throughout the year?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So we're continuing to improve, g 700 margins. We are not, however, at what I would call a normal cadence yet. And so once we hit that, then we will begin to progress margins even further. The six fifty, will deliver at high margins, and the 800 will come in at higher margins than the 700 because it's not carrying as much burden of r and d as the seven hundreds did for a slot of seven hundreds. So these are all, I think, beneficial to us.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

And you had a question on the marine margins?

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

Yes, please. Yeah.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Particular?

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

I

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

just thought your prepared remarks mentioned the government and working with them a lot more. So was wondering over the last quarter or two, you know, what's really changed, whether it was the hiring cadence, the investment required from GD, or or is the government customer working closer with you to support, the marine build out?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So that that's This is Margie's.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

I'd say there's a, step up in in engagement on on the civilian side of of the government with us on building that cadence, getting the throughput up, getting productivity increases, ensuring that we can continue to hire the workers that we have been hiring, that the wage structure is appropriate, and that the investments take us to the next level. And I suspect that the next series of investments, you'll see some investment in resiliency, a lot in in, again, additional productivity and throughput with increased automation, even more increased automation. We have quite a bit that we've spent, you know, the last decade, and recently, putting it in in the shipyards. And then, additional fixtures for additional throughput so that we can really get get our pace to where it needs to be to deliver what the nation needs. And then, again, continued efforts on the part of the of the government to support the supply chain and get the supply chain stabilized.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

It's better in places, but we've got a ways to go.

Operator

We'll move next to Ron Epstein at Bank of America.

Mariana Pérez Mora
Mariana Pérez Mora
Director at Bank of America Merrill Lynch

Good morning, everyone. This is Mariana Perez Mora on for Ron today.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Good morning.

Mariana Pérez Mora
Mariana Pérez Mora
Director at Bank of America Merrill Lynch

So I

Mariana Pérez Mora
Mariana Pérez Mora
Director at Bank of America Merrill Lynch

wanted to do a follow-up on combat systems. Could you mind discussing what what is the pipeline of opportunities in Europe, especially because we continue to see headlines on, like, increased commitment to build up their defenses.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So we've seen, increased, discussions, and really throughout Europe, the, Eastern Europe as well as, Central Europe now, and and those conversations have accelerated. I think they started in earnest, with the invasion of Ukraine, and that they have picked up even more as each one of those governments has allocated an increasing amount of its resources to defense spending. So I would say it's across the board.

Mariana Pérez Mora
Mariana Pérez Mora
Director at Bank of America Merrill Lynch

Thank you. And my follow-up is gonna be on Aero. What are your expectations for especially in this macro environment or evolving, uncertainty, What are your expectations for book to bill on Gulfstream for for the full year?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So we are close to one to one for the year. Think we're actually at point nine, but why pigments?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

That's pretty close to one. So we continue to see that as as achievable in the moment. Should that change, we'll let you know in q two.

Operator

Next, we'll move to Miles Walton at Wolfe Research.

Myles Walton
Managing Director at Wolfe Research LLC

Thanks. Phoebe, I I realized you can't put precision on the tariffs from the step in the landmine here.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Oh, you're right about that.

Myles Walton
Managing Director at Wolfe Research LLC

I know. I know. So so your confidence that you you alluded to in the full year outlook, is that encompassing your assessment of of what you're gonna, see? Just wanna make sure your office

Myles Walton
Managing Director at Wolfe Research LLC

is correct.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Don't think the defense guys get hit much. There will be some, Gulf Stream impacts, and nothing we see so far is extraordinary. But we had a long way to go, and I think a lot of the supply chains have to assimilate, these changes and see the impacts to the extent that they have them, on them. But, that's all I can give you. If if I were any more specific, the one thing I could assure you is it would be wrong, and you all would be highly irritated that I gave you a wrong number.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So, I'm giving you really how we see it from our foxhole moment.

Myles Walton
Managing Director at Wolfe Research LLC

Alright. And then the follow-up, you you we talked to through the call about the administration's fingerprints on the Marine business with the Shipbuilding Act and technologies with some of their initiatives on government services. Is there anything you're seeing as it relates to your combat business and their view on the role of the Army and maybe the XM30 and M10 as being, prioritized or deprioritized in the framework?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

So, you know, one of the things that, is a truism about Washington that is now a truism on steroids is that, rumor is rampant. So I wanna see what the budgets actually show. But the CR did fund Stryker and Abrams at a lesser rate. I think the army's plan had been one full brigade of Abrams, third brigade of Strykers, and they cut that request by about a third. So we need to find a little bit more stable, like, funding profile, particularly for the supply chain.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

That really perturbates the supply chain badly. There is a great interest on the part of the army, and we are working daily with them to accelerate the next generation Abrams. So we consider that a a very positive step in army recapitalization and modernization.

Operator

Next, we'll go to Noah Poponak at Goldman Sachs.

Noah Poponak
Noah Poponak
Research Analyst at Goldman Sachs

Hey. Good morning, everyone.

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Morning.

Noah Poponak
Noah Poponak
Research Analyst at Goldman Sachs

I just wanted to go back to technologies, Jason and or or Phoebe. And it's interesting you mentioned engagement with the customer and and that this dialogue back and forth dialogue is going on. And I I wondered how much are they just asking for reductions versus how much are you showing them capability that can help them gain efficiencies while adding revenue to to your business? And then, additionally, I'm curious how much discussion is there around contract structure and and how how that could impact margins whether positively or negatively?

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

Yeah. Look. In short, I'd say it's all of the above. Not to mince words, they are looking for reductions across the board, and and we are actively participating that in that and making recommendations to help them solve, you know, the problem they're trying to solve. But to your point, there are opportunities down the road because the fact is when you look at the types of efficiencies they're trying to drive, the type of headcount reductions they're looking for, it is absolutely the very types of things that we provide in terms of these technology solutions and digitization and so on that enable those types of reductions.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

So there's going to be a period where, it's a shorter term conversation, and then it's going turn to a longer conversation. And and to your point about, about opportunity in that, I think, you know, look. We talked about fixed price slash outcome based type contracts. And, again, I mentioned we're comfortable with that. We have a good bit of that in our portfolio, and that should bring an opportunity for us.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

The fact is it's no different than any other contract geometry, fixed price versus cost plus. When you take on more risk, there should be an opportunity for a little better margin. But all of it comes at a better a better price and a better outcome for the customer. I I guess if I were to add one other thing to watch out from a risk standpoint, we need to be careful from a mission perspective that if there's dueling priorities of significantly reducing workforce within the government and at the same time, on a meaningful level, insourcing this type of work to the customer, that can come at great peril. We need to be mindful of that in these conversations and make sure we don't compromise any mission capability.

Noah Poponak
Noah Poponak
Research Analyst at Goldman Sachs

I appreciate all that detail, Jason. And just one, quick one. Kim, what's your updated, thinking for full year free cash flow and then income conversion?

Kimberly Kuryea
Senior VP & CFO at General Dynamics

I I think we're, you know, we're sticking with the, the forecast that we gave you, in January at this point in time. We're obviously always trying to improve upon that, but at this point in the year, we're gonna stick to that forecast.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

Okay. Audra, I think now we have time for just one last question.

Operator

And we'll take that question from Gautam Khanna at TD Cowen.

Gautam Khanna
Gautam Khanna
Analyst at Cowen

Yeah. Thank you, guys. Jason, I wanted to just follow-up on the prior question. Have you actually seen doge or or whatever we wanna call this, debook a lot terminate contracts with, GDIT? Has that happened?

Gautam Khanna
Gautam Khanna
Analyst at Cowen

And if so, can you quantify what that aggregates to?

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

Yeah. I'm sure if you look at at the public information around those, they list all the contract actions that they've, that they've taken action on, and we have been a part of that. There have been some stop work orders, some partial stop work orders, and so on. In terms of impact of that, I'm not going to quantify that for the year. As I said, the outlook for the year for the business remains the same.

Jason Aiken
Jason Aiken
Executive Vice President at General Dynamics

If anything, I think I would remind you that historically the way General Dynamics puts contract value into backlog is materially different and more conservative than most of GDIT's peers. We're very rigorous about that. And so from a color standpoint, I think I'll I'll put it that way. But but we're those things are going on, and and it's gonna be part of the part of the conversation.

Gautam Khanna
Gautam Khanna
Analyst at Cowen

Gotcha. And it's factored in. Okay. And then just to follow-up on Gulfstream, Phoebe, could you remind us what percentage of the pipeline of opportunities on the large cabin side are with non US customers? Like, a rough percentage, is it half?

Gautam Khanna
Gautam Khanna
Analyst at Cowen

Is it a quarter?

Phebe Novakovic
Phebe Novakovic
Chairman and CEO at General Dynamics

Yeah. No. I it's less than half. I think it typically runs $60.40, something like that. 60 US.

Nicole Shelton
Nicole Shelton
VP - Investor Relations at General Dynamics

Great. Well, thank you everyone for joining our call today. As a reminder, please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have any additional questions, I can be reached at (703) 876-3152.

Operator

And this concludes today's conference call.

Operator

Thank you for your participation. You may now disconnect.

Executives
    • Nicole Shelton
      Nicole Shelton
      VP - Investor Relations
    • Phebe Novakovic
      Phebe Novakovic
      Chairman and CEO
    • Jason Aiken
      Jason Aiken
      Executive Vice President
Analysts
Earnings Conference Call
General Dynamics Q1 2025
00:00 / 00:00

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