General Dynamics Corporation (GD) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. And welcome to the Annual Meeting of Shareholders Conference Call. At this time, it is my pleasure to turn the floor over to your host, Phebe Novakovic. CEO and Chairman. Ma'am, the floor is yours.

Good morning. Welcome to the 2020 Annual Meeting Shareholders of General Dynamics. I am Phebe Novakovic, the Chairman and Chief Executive Officer of your Company, and I will chair this meeting. In order to comply with the shelter-in-place requirements and CDC guidelines, we are holding this meeting virtually. We appreciate your forbearance at the virtual meeting format. Before I turn to the business at hand, let me take a moment to discuss General Dynamics' response to COVID-19 and its impact on us. We have been designated a national critical infrastructure company and, as such, are required to continue the full operations, which we have done. I am proud of our patriotic employees who have continued to work hard to fulfill their mission in support of our armed forces as we face this crisis together. Our men and women in uniform continued to serve and we must as well. Ensuring a safe work environment for our workforce has been and remains our top priority. We have 39,000 employees teleworking from home. Unfortunately, our large manufacturing sites cannot do that. At these sites, we follow CDC-recommended guidelines and practice social distancing where possible. We have increased shift work and the use of PP&E. We are conducting temperature screening where feasible. As additional screening and ultimately testing becomes available, we will aggressively implement those as well. Our leadership teams have been and will continue to be in the workplace, leading our people. Let me now introduce Greg Gallopoulos, the Senior Vice President, General Counsel and Secretary of your Company. He will serve as Secretary. After the formal meeting has been adjourned, we will provide time for questions. Only validated shareholders may ask questions in the designated field on the web portal. Out of consideration for others, please limit yourself to one question. Please note that the meeting is being recorded. I want to begin by acknowledging several people who are participating in today's meeting and are joining us by phone. First, the General Dynamics' Board of Directors. I will introduce each of them later in the meeting. I would also like to introduce James Raitt from the American Election Services to serves as the inspector of votes. Finally, [ Mike Vaduzi ] and [ Christi Tul ], partners of our independent auditor, KPMG, are present and available to respond to appropriate questions during the question-and-answer session following the official portion of the meeting. The agenda and rules of procedure for the meeting are available on the web portal. To conduct an orderly meeting, we ask that you please abide by these rules. If you'd like to ask a question during the meeting, please submit your question in the appropriate field on your screen. Questions regarding a matter to be voted on during the meeting should be submitted at or before the time the matter is considered. Thank you in advance for your cooperation. Our first order of business is to determine whether the shares represented at the meeting, either in person or by proxy, are sufficient to constitute a quorum for the purpose of transacting business. Greg, do you have a report?

Thank you, Phebe. Yes, I do. I have with me copies of the notice of meeting, the 2020 proxy statement, the 2019 annual report on Form 10-K and the affidavit of mailing. These documents, together with a certified list of shareholders as of the record date, which was March 9, 2020, will be filed with the records of this meeting. The notice of meeting, proxy statement, annual report and certified shareholder list are also available on the web portal during the meeting. The shareholder list shows that holders of 290,212,900 shares of issued and outstanding common stock of the corporation are entitled to vote at the meeting. We are informed by the inspector of votes that approximately 92% of all of these shares are represented in person or by proxy, which means that we have a quorum.

Thank you, Greg. The meeting is convened. The next order of business is a description of the proposals to be voted on at today's meeting. The first proposal is the election of 12 directors to serve until the annual meeting of shareholders in 2021. The Board recommends the election of the individuals whose nominations are in the proxy. I'm pleased to introduce the nominees to you. Jim Crown. Jim is the Chairman and Chief Executive Officer of Henry Crown & Company and has served on our Board since 1987. Jim has been elected by the Board to serve as its lead director. Rudy Deleon. Rudy joined our Board in 2014. Rudy is a senior fellow with the Center for American Progress and previously served as the Deputy Secretary of Defense. Cecil Haney. Cecil joined the Board in 2019. Cecil is a retired U.S. Navy Admiral and served as Commander of the U.S. Strategic Command from 2013 to 2016. Mark Malcolm. Mark joined our Board in 2015, Mark is the Former President and Chief Executive Officer of Tower International. Jim Mattis. Jim joined our Board in 2019, having previously served on our Board from 2013 to 2017. Jim is a retired General in the U.S. Marine Corps. and has served as the United States Secretary of Defense. Howard Nye. Howard joined our Board in 2018. He is the Chairman, President and CEO of Martin Marietta Materials. Bill Osborn. Bill is the Former Chairman and Chief Executive Officer of the Northern Trust Corporation. He joined our Board in 2019. Catherine Reynolds. Catherine Reynolds joined our Board in 2017. She is the Chairman and Executive -- Chief Executive Officer of EduCap. Laura Schumacher. Laura is the Vice Chairman, External Affairs and Chief Legal Officer of AbbVie. She joined our Board in 2014. John Stratton. John joined our Board earlier this year in February. He is the Former Executive Vice President and President of Global Operations of Verizon Communications. Peter Wall. Peter is a retired British Army General and served as Chief of the General Staff from 2010 to 2015. Peter joined our Board in 2016. Together with me, these are the nominees for election to the Board. Are there any questions regarding the election of directors? Next is an advisory vote on the selection of KPMG as the company's independent auditor for 2020. The proposal appears on Page 35 of your proxy. Are there any questions regarding this proposal? Your Board recommends a vote for this proposal. The next order of business is an advisory vote to approve executive compensation. The proposal appears on Page 38 of the proxy. Are there any questions regarding the executive compensation proposal? Your Board recommends a vote for the proposal. The next proposal is a shareholder proposal regarding special shareholder meeting. It appears on Page 75 of the proxy. I believe the proponent is on the -- is present by phone. We have allocated 3 minutes for the presentation of the proposal. Operator, please open the line from Mr. Chevedden. Mr. Chevedden?

Hello. This is John Chevedden. Can you hear me okay?

We can. Thank you.

This is proposal 4, make shareholder right to call special meetings more accessible. Shareholders ask our Board to take the steps necessary to abandon our bylaws and governing documents to give the owners of a total of 15% of our outstanding common stock the power to call a special shareholder meeting. Special shareholder meetings allow shareholders to vote on important matters, such as electing new directors that can arise between annual meetings. A more accessible ability of shareholders to call a special meeting could give shareholders greater standing to improve the composition of our Board of Directors. For instance, James Crown was lead director in spite of 32 years long tenure. Mr. Crown received the highest negative votes of any General Dynamics director in 2019. Independence can be the most important attribute in a lead director. Mr. Crown is also on 2 important Board committees. This proposal topic received 40% support at General Dynamics in 2018, in spite of rigorous management opposition to it. This 40% support may have represented 45% to 51% of the shares that had access to independent proxy voting advice. The current ownership threshold of 25% can mean that more than 50% of shareholders must be contacted during this prescribed short window of time to simply call a special meeting. Plus many shareholders, who are convinced that a special meeting should be called, can make a small paperwork error that will disqualify them from counting towards the 25% ownership threshold that is needed for a special meeting. Any claim that a shareholder right to call a special meeting can be costly may be moot. When shareholders have a good reason to call a special meeting, our Board should be able to take positive responding action to make a special meeting unnecessary. With retired military members on the Board of General Dynamics, the Boeing 737 MAX crisis is a cautionary example of a person with military background becoming complacent on a Board of Directors. A retired admiral with Boeing 737 MAX safety responsibility at Boeing was rejected by 35% of Boeing shares at the Boeing annual meeting last week. Please vote yes, make shareholder right to call a special meeting more accessible proposal 4.

Thank you, Mr. Chevedden. For the last 20 years that I've been associated with shareholders' proposals, I've respected your right to submit proposals. What I have just been dismayed over is your ad hominem vitriol on topics that I do not believe are relevant. I would take umbrage with you again on your citation of both the military members who serve our Board and Mr. Crown. Mr. Crown represents our largest shareholder, and we have long believe that the alignment of shareholder interest is best served by having our largest shareholder on our Board. With respect to our military members who have served with great dignity, I think that you are greatly misinformed, every single senior military officer, I have known, has been an independent thinker. It is required fought by our U.S. military and the military of our allies to have independent thoughts, creative thought. These are strong people with individual views and strategic guidance that is very helpful to this company. So I'd appreciate in the future if you would limit your proposals to those subjects at hand. Your Board of Directors recommends a vote against this shareholder proposal. The polls are now open and you may submit your votes through the website. If you have previously voted, you do not need to vote today unless you want to change your vote. [Voting]

The polls are now closed at 9:13 a.m., May 6, 2020. Greg, can you please give us the preliminary voting report?

Yes. This is the preliminary report, and it is subject to final verification. The nominees for election to the Board of Directors have all been duly elected. The proposal on the selection of KPMG as the company's independent auditor has been approved by a vote of approximately 99% in support. The proposal on executive compensation has been approved by a vote of approximately 82% in support. The shareholder proposal regarding special shareholder meetings has failed. The vote was as follows: approximately 40% for approximately 59% against and less than 1% abstaining. Again, as a reminder, these are preliminary voting results. The inspector of votes will furnish to the company a written report of the final vote count. The final vote report will be publicly disclosed on a Form 8-K, which we will file with the SEC.

Thank you, Greg. And thank you for attending today's meeting. The formal part of the meeting is adjourned. We'll now address shareholder questions submitted through the web portal. We will answer as many questions as possible in the allotted time, given that we have the important meeting of the Board of Directors following this meeting.

So the first question that comes that I've noticed here is from the Carpenters' Union with respect to our share buyback authorization that the Board gave us in March. And let me give you a little bit of perspective on that share buyback. It was our view in early March that we would like additional authorization for share buybacks over time. As the prices emerged, we became increasingly of the mind that it was best in this environment to preserve liquidity and to ensure that we had sufficient resources on hand to invest in the additional PPE and other cleaning requirements and other COVID-related expenses that may accrue. So we have said on several occasions that we intend to hold pat at the moment. So I hope that, that answers your question. Okay. How many shareholders are attending this meeting? Greg, you want -- first of all, the number is 24. And Greg, do you want to address how we -- and the other part of that question is then how do we -- what method is used for tracking?

Yes, Phebe. So we are using the Broadridge system to discuss this virtual shareholder meeting. And in the Broadridge system, shareholders must register and enter the virtual meeting room. Broadridge's system tracks the number of entrants into the meeting room, and that is how we track and report. We are relaying the Broadridge report.

Okay. One of the questions is does management commit to an in-person annual meeting in 2021? If COVID-19 is no longer a dispositive factor. And I will tell you that I have a personal preference, we do have a personal preference for in-person meetings. But I will also note that there are some shareholders who have preferred or who have registered a preference for virtual meeting. So I think that -- and it tells you the balance that we'll need to make. But personally, I prefer in-person. Okay. So one of the questions is, will the COVID-19 crisis affect your ability to get payments from our government on a timely basis as well as change the course of your projects going forward? And do you see any foreseeable consequences from the coronavirus? Well, let me give you a little context on that. The U.S. government and our defense department customer has been very mindful of the need to pump liquidity into the defense industrial base in this time of great uncertainty. And this is particularly true -- the need for liquidity is particularly true for those who are smaller companies. So what they have done is they have accelerated payments to the big primes, including us, and we, therefore, have been -- have, in turn, accelerated payment down to our supply chain in order to keep the supply chain working. And Jason, I think as of a week ago, you want to give us some context on the numbers?

I think at this point, we're in the range of just in excess of $100 million paid accelerated basis from our customers and in excess of $300 million paid on an accelerated basis to our supply chain.

So you can see that our customer has been responsive, and we have been even more responsive, because we know that our success depends on our partners and our supply chain. And I should have introduced Jason in a more formal manner. Jason Aiken is our CFO. Okay. Let's see. Will robotics increase at General Dynamics going forward? So we have implemented the use of robots in many of our manufacturing and research and development facilities. But some of our assembly and construction activities, particularly shipbuilding, is a labor-intensive activity, where robots simply cannot take the place in these small spaces and with the kind of work that needs to be done of people. So we have been fairly forward-leaning, even early on, early adopters of the robotic technology. And we'll continue to do so where we see opportunities that are cost effective. So one of the questions is the corona pandemic presents unprecedented challenges to public health workers and communities as well as the economy. Can you please describe the role of the Board in oversight of the corona pandemic and its effort to ensure that the actions of the company is largely or is taking -- the actions that the company is taking to protect the safety and health of its workers? And by the way, this is on a screen that is a little bit removed from me. So I'm squinting. So I apologize for any difficulty in reading the questions. So we have reported weekly to the Board since the on-slot of this crisis, and I will tell you the entirety of this Board meeting is devoted to the company's response to COVID across every single line of our business and in every single functional jurisdiction to get the guidance and wisdom and input from our Board. I will tell you this is a very active Board. Management has made a commitment to them early on to be transparent, truthful in all things, and we have shared in our -- in its entirety, our responses as a company to this crisis. So you can rest assure that, that will continue. Let's see, how many employees have contracted COVID-19? I think we have so about 180, and the vast majority of whom are back at work and have worked through their illness. I will tell you, the President of one of our largest businesses was an early victim to COVID. He was out 5 days and was back running our shipyard. This is Kevin Graney at Electric Boat, back running our shipyard within 5 days and showing the kind of leadership that you would expect from the people in this company. We are always at the front lines in front of our troops. I will also tell you that the rate of employees returning to work has, as of last week, exceeded the number of new identified cases. Let's see. I think we have time for 1 or 2 more. Some of these are rather long. So let's see. One of the questions talks about cash flow, and it says essentially the bottom line, given the company's priorities for the use of cash, since the 2013, why wasn't more of the $13.3 billion used in investing in the business, raising the dividend and pursuing M&A activity? So our philosophy on capital deployment is very simple. It is that the dividend is the one element of capital deployment that is sustainable, achievable, dependable, repeatable. Year in, year out, you will expect a dividend from us and a dividend increase to the extent that the company is in a position to fund that dividend increase, but we have done so for the last 23 years. With respect to investing in the business, we have done so across all elements of our business where we believe that we can get a good return, fulsome return on that investment. And finally, the last element of capital deployment, share repurchases, we do on a tactical basis. We don't take out debt for it. We buy shares when we believe the market has undervalued our shares, and we've been quite judicious in that share repurchase. So I think you will find that we have invested heavily in this company. If you look at our investments since 2013, we have invested in new products and facilities at Gulfstream. We have invested heavily in our shipbuilding business, particularly the submarine business as we prepare to -- as we have increased submarine production and prepared to begin construction on the replacement for the ballistic missile submarine. That is a 40-year program for just General Dynamics. And finally, we invested in an IT services business that gave heft to the existing business that we've had for 20 years. And the reason we like that business has got superb cash flow performance, quarter in, quarter out well in excess of its drive net income, and it's got great return on invested capital. So both measures and return on invested capital and cash are critical to our investment prism through which we make our investment decisions. When is the next earnings call? It looks definitely in July, and I don't know that we have a exact date yet, but it should be in -- about the third week, we will -- of July, but we will certainly post that and let you all know. And so that is the preponderance of our questions. I appreciate the time that you all have allowed. I appreciate your investment in General Dynamics. You should know this leadership team is heavily invested in General Dynamics. We have very strict stock guidance, and we stock sales guidance. And as a result, we have a vested stake in this company, and we have always believed that, that is the best mechanism to align our shareholders with management decisions because we look through every decision we make in terms of building and creating long-term value. Thank you all very much for your patience and your participation. And we'll see you next year.

Thank you. This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time. And have a great day.