General Dynamics Corporation (GD) Earnings Call Transcript & Summary

Good morning, and welcome to the General Dynamics Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Go ahead.

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Second Quarter 2026 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including 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 Phebe Novakovic, Chairman and Chief Executive Officer; Danny Deep, President; and Kim Korea, Chief Financial Officer. I will now turn the call over to Phebe.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. You may recall that at the outset of this remarks at the end of the first quarter, Danny described it as a very powerful quarter. This quarter is even better in almost all respects. Earlier today, we reported earnings of $4.24 per diluted share on revenue of $14.1 billion, operating earnings of $1.460 billion and net earnings of $1.160 billion. These results compare quite favorably to the year ago quarter as well as sequentially. . For example, against the year ago quarter, revenue is up 8. 1% Operating earnings are up almost 12% and net earnings are up 14.4%. And -- as a result, earnings per diluted share are up $0.50 or 13.4%. The operating margin for the entire company is 10.4%, a 40 basis point improvement over the year ago quarter. which coupled with the revenue growth led to very strong earnings growth. ilarospace and Marine led the way on revenue increases, each of the other 2 segments had revenue increases as well. With respect to operating earnings, Aerospace led the way with a 26.6% improvement followed by Marine Systems with a strong 17.5% increase. Sequentially, against a very good first quarter, revenue was up 4.5%. Operating earnings are up 2.8% and diluted earnings per share are up $0.14 or 3.4%. On a year-to-date basis, revenue of $276 million is up 9.1%. Operating earnings of nearly $2.9 billion are up 11.9% and and earnings per share are up $0.95 or 12.8%. We beat consensus to $0.28 in the quarter on more revenue, more operating earnings and better operating margins than is expected by the sell side. In short, it was a superb quarter and first half. Let me ask our CFO, Kim Karia, to provide some detail on our strong order activity, rapidly growing backlog and superb cash generation as well as other relevant financial data.

Thank you, Pei, and good morning. I'll start with our outstanding cash performance for the quarter. We generated $1.9 billion of operating cash flow, which when combined with the strong $2.2 billion from the first quarter, yields over $4 billion of operating cash flow in the first half of the year. Each of our segments contributed nicely, exceeding their planned cash flows and driving operating working capital down over $1 billion from the end of 2025. Capital expenditures totaled $234 million or 1.7% of sales in the quarter. Compared to the first half of 2025, capital expenditures were up nearly 30% to $437 million. We continue to expect capital expenditures between 3.5% and 4% of sales for the full year. You should expect the profile of our investment to grow significantly in the back half of the year as we continue to invest, especially in our shipyards to accelerate production and meet future demand. After capital expenditures, our free cash flow was $1.6 billion for the quarter, yielding a cash conversion rate of 142%. And $3.6 billion for the first half, a cash conversion rate in excess of 150%. Given our strong cash performance so far, we now expect a free cash flow conversion rate a little north of 100% of net income for the year, let's say, around 105%. That said, we will have a later second half than the first, which is due to higher planned capital expenditures, which I've already discussed, and 3 other factors I'll address now. First, pension. We have decided to contribute approximately $500 million to our pension plans. Given favorable market returns over the last few years, the funded status of many of our plants are near full funding and this contribution will allow us to derisk those plans and eliminate significant volatility going forward. Second, our cash taxes are weighted towards the back half of the year with over $500 million of payments expected. Third, we will be working down some advanced payments on new programs at European Land Systems during the second half. Now to round out the cash discussion. From a capital deployment perspective, -- in the quarter, we paid dividends of approximately $430 million and repurchased about $100 million of our common stock to cover dilution. Finally, we repaid $500 million of notes that matured in June. We have another $500 million of notes coming due in August that we anticipate repaying with cash on hand. At this time, we don't anticipate refinancing these maturities during the year, but we will continue to evaluate market conditions and potential borrowing needs as the year progresses. All in all, we ended the quarter with a cash balance of approximately $4.3 billion and a net debt position of $3.2 billion, down $1.2 billion from last quarter. Next, on to orders and backlog. We had another strong quarter with just shy of $20 billion of orders, yielding an overall book-to-bill ratio of 1.4:1 for the company. Book-to-bill in all 4 of our operating segments was greater than 1:1. In aerospace, our dollar-based book-to-bill was 1.5x. This is the strongest first half for orders for aerospace since 2022 and reflected very solid demand across the entire Gulfstream product line. In the Defense segment, book-to-bill was 1.4x led by the Combat Systems segment at 2.1x, which received several large contracts, including the production of new armored combat support vehicles ACS for the Canadian Armed Forces. We ended the quarter with a record level of backlog of $136.5 billion, up 32% from a year ago. Backlog was also a record high for each of our segments. Our total estimated contract value, which includes options and IDIQ contracts ended the quarter at $186.9 billion. Turning to interest. Our net interest expense in the second quarter was $49 million compared to $88 million in the respective 2025 period and $118 million for the first half of 2026 compared to $177 million in the first half of 2025. The decrease in our interest expense is due almost entirely to the interest we paid for commercial paper borrowings in 2025. We have not been in the commercial paper market in 2026. Further, our interest income increased in 2026 as we held higher cash balances. At this point, our expectation for net interest expense for the year is approximately $270 million. Finally, the effective tax rate in the quarter was 17.6%, bringing the tax rate for the first half to 17.7%. This rate is a little higher than our outlook for the full year, which remains around 17.5%. And Phebe, that concludes my remarks. I'll turn it back over to you.

Thanks, Kim. Now I will briefly review the financial performance for each of the groups and Danny will interject additional details. First, Aerospace. Aerospace had a very good quarter with revenue of $3.5 billion and operating earnings of $510 million with a 14.5% operating margin. Revenue is $463 million more than last year's second quarter, a 15.1% increase. To give you a little perspective here, the increase is attributable to 3 more deliveries and higher service revenue at both Gulfstream and Jet Aviation. The 41 deliveries in the quarter are somewhat more than planned. Operating earnings of $510 million are up $107 million, driven in part by the increased revenue, but most importantly, by 130 basis point improvement in operating margin. There are no unusual items of significant. As a result, the improvement quarter-over-quarter comes from a lot of measurable improvements across the entire business.

From an operational perspective, we are off to a strong start to the year. Phebe mentioned 41 deliveries in the quarter. This is 3 more than the year ago quarter and sequentially as well. We see durable productivity improvements on all new aircraft types with modestly improved margins both year-over-year and sequentially. We performed quite well across all service categories at both Gulfstream and Jet Aviation with improved operating earnings at each, both quarter-over-quarter and sequentially. You might note that the second quarter overall operating margins are down sequentially despite the fact that operating margins by line of business all improve. This is attributable to a slightly disadvantageous mix plus a modest increase in both G&A and R&D. Phebe?

Turning to market demand. Aerospace had a 1.5 book-to-bill in the quarter with 16 more airplane orders in the year ago quarter and 20 more than the first quarter of this year. The book-to-bill over the trailing 12 months is 1.3x. So we see very active interest across all models in the U.S. and Asia, but some cautious concern from customers in the Mid East, but they're still active in the pipeline. In summary, the aerospace team had a special quarter both operationally and in terms of order activity. So let's move on to the defense businesses. First, combat. Combat Systems had revenue of $2.3 billion, up marginally over the year ago quarter. Earnings of $318 million are down $6 million. Margins at 13.9% or down 30 basis points against the year-ago quarter due largely to mix. There was increased revenue performance at Ordnance and Tactical Systems and European Land Systems, offset by a decline in Land Systems. Sequentially, revenue is up modestly, but earnings are up 2.6% on a 30 basis point improvement in operating margin. The real good news story here is the order performance at 2.1:1 book-to-bill continues to build strong significant backlog. A large portion of the order activity in the quarter was at Land Systems. Demand for Combat Systems products is strong, primarily driven by U.S. allies. Orders for wheeled and tracked vehicles are up reflecting the increased threat environment. In addition, OTF continues to have particularly strong growth in munitions.

So I want to repeat what I said last quarter. because performance this quarter further demonstrates the strength and breadth of the combat portfolio, particularly with international vehicles as well as our munitions group. . It's encouraging during this period of transition and recapitalization to next-generation platforms for our U.S. land force customers that the overall group continues to provide a healthy growth outlook with very nice margins. You've seen the 2.1 book-to-bill in the quarter. We're confident there is more to come. Phebe?

So turning to Marine Systems. Once again, our shipyards are each demonstrating strong revenue growth. This quarter's growth of 10.4% was driven by the Columbia and Virginia class program, followed by NASCO and Bass essed in dollar increases. However, in growth expressed as a percentage of revenue, both NASCO and bath outpaced electric boat for the first time in my memory. Earnings improved 17.5% on a 40 basis point improvement in operating margin. We can point to clear and measurable productivity gains. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at Electric Boat. We will continue to invest as we go forward to support the additional demand we see in the national security interest of the United States. Turning to operating performance.

As Phebe mentioned, Momentum continues to build at each of our shipyards, and we are making good progress with our efforts to accelerate build rates. A great example of this is at Bath Iron Works, where our most recent DDG51 destroyer delivery was accelerated by almost 3 months versus plan due to the excellent performance of the Ship and in sea trial. . At Electric Boat on the Columbia program, we had a significant increase in the number of hours earned as compared to both the year ago quarter and sequentially. In the first half of this year, the hours earned are up 37% versus the same period last year. Material deliveries also continue to improve with a 65% increase in sequence critical material this quarter over the second quarter last year. Let me state the obvious. This is the segment, given its backlog and improving productivity where we can accelerate value for our shareholders as we accelerate delivery of submarines, surface combatants and auxiliary ships. -- continuous operational improvement has our undivided attention and focus. Back to you, Phebe .

So finally, technologies. This group is also experiencing growth in revenue and earnings, albeit not at the pace experienced by aerospace and marine systems. Revenue of $3.6 billion is an increase of 4.1% over the second quarter of 2025. Both businesses contributed respectable growth, but Mission Systems led the way. . Operating earnings of $339 million or up 2.1% over the year ago quarter. Operating margin decreased 20 basis points from 9.6% to 9.4%. The group's order activity was also encouraging with a book-to-bill of 1.1x for the quarter and 1.3x for the trailing 12 months.

Growth admission systems came from across the portfolio, but most notably in land and air systems and in their international portfolio. The international portfolio was up more than 35% since 2024 and and we expect that to continue to be a key driver of growth for the year and beyond. In IT services, we've discussed elongated procurement cycles and that continues but a real bright spot has been GDIT's success capturing programs under agile contracting mechanisms such as other transaction authorities or OTAs. GDIT has submitted and won more OTAs in the first half of 2026 than for all of last year.

So let's turn to guidance for the rest of the year. At the outset, I want to review what we've told you today. In January, we told you to assume an EPS range of $16.10 to $16.20. In April, our updated guidance for 2026 was an EPS range of $16.45 to $16.55. With that as a predicate, let me proceed to provide our operating forecast for the remainder of '26 with some specifics around our outlook for each business group and then a company-wide roll-up. . For 2026, we now expect Aerospace revenue of around $13.8 billion. Gulfstream will still deliver about 160 airplanes. There is some potential upside delivering large cabin aircraft and some risk on the 280 deliveries for obvious reasons. We anticipate a 14.7% operating margin for the year. The third quarter operating margin will be about the same as this quarter with a better fourth quarter. In Combat, we expect revenue of about $9.8 billion, coupled with a 13.8% operating margin. As noted earlier, the Marine Group has been on a remarkable growth journey. Our outlook for the year now anticipates revenue around $18 billion with an operating margin for the year of 7.4%. In Technologies, we expect revenue of $14.1 billion and an operating margin of 9.4%. So for 2026 company-wide, we expect to see revenue of approximately $55.7 billion and operating margin of 10.5%. The -- you've already heard Kim's commentary about our estimates for cash flow for the year, tax rate and interest expense. All this rolls up to an increased EPS forecast of $16.80 to $16.90 for the year. To wrap up, as we go into the second half coming off a very strong first half. We feel very good about the potential for the second half and the full year. Nicole, back to you.

Thank you, Phebe. As a reminder, we ask participants to ask 1 question and 1 follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue. .

[Operator Instructions] Your first question comes from David Strauss from Wells Fargo. .

Five, -- maybe if you , with the backlog increase that we saw this quarter at Aerospace, could you talk maybe in terms of years of production, how far out that extends and how much you could take production up from kind of current levels to start to eat into that backlog?

So you followed us long enough to know that some time ago, we ceased giving you the details about model and years out. That became a very competitive issue. But look, we will -- the supply chain has stabilized for getting coming down our learning curves on all of our products. . We're still working through some of the challenges on completions. So it's just a question of pace. So we'll take all of this into due consideration and give you some real clarity next year what to expect.

Okay. And a quick follow-up on marine. It's consistently exceeded kind of expectations and the growth outlook that you've outlined. And it looks like for the rest of the year, you're forecasting kind of minimal growth in the second half of the year. Maybe if you could just talk about kind of the longer-term trajectory here? I mean I know it's law of large numbers at this point. But -- is there a reason to believe that marine growth meaningfully decelerates kind of from the levels that we've seen?

Yes, I think -- let me take that one. I think the the second half as compared to the first half is really just a function of material receipts stuff that we received in the first half that we're actually now installing. And as you know, it's important to reflect that we've increased sales for 2026 over 2025, almost $1.3 billion, which exceeded even what we thought. I think we'll see it continue to grow. Maybe not quite at that pace, but certainly, we're getting up into, as you said, the law of large numbers. But we don't have any expectation that it will slow down much because there's just volume out there that we have to execute on. But it's natural tail off in the second half of the year compared to the first.

Your next question comes from Ron Epstein from Bank of America Merrill Lynch.

So on Marine, just following up on Marine, where are we on build rate on Virginia class now? Right? I mean are we still like 1.3 a year 1.4?re--canyou maybe something around that? .

Yes. We don't typically give the exact build rate, we leave that to the Navy. But as you know, we're trying to get to 2 Virginia class and 1 Columbia in the early 2030s time frame. And we're on that path, and we're actually where we expect to be at this point in the process.

Okay. So you're making strides with the supply chain. My understanding that, that was 1 of the hurdles? .

Yes. I mean we have seen significant improvements in their pace and the cadence of delivery. I mean there are still some challenging areas, as I think we mentioned in the last call, where we have single sources of supply. But generally, the supply chain is improving, and it will -- and we're counting on it to continue to improve.

Great. And then Phebe, 1 for you. How are you thinking about the budget process now as we go into fiscal '27? You probably know the budget process better than anybody in Washington. How are you thinking about it? Like how should we think about it? It seems like there's so much volatility in terms of there's going to be reconciliation. There isn't. There's a baseline, there's not, there's midterm. So kind of broadly, how do you think about it?

Yes. So I would say that there are a lot more today influencing the budget than there have been historically. But from our perspective, a lot of our programs are funded in the base budget. But the reconciliations because if you stop and think about it, weapons production has been on very low rate production or fairly minimally sustaining production for quite some time. And in order to gear up production to meet the current threat environment we need additional funds that the entire industry does. And so this is, as I think, from a national security perspective, meritorious. So -- there are a lot of moving parts on all of this, and we'll continue to support our customers and the Congress as best we can.

Your next question comes from Myles Walton at Wolfe Research.

Phebe, I was wondering if you can maybe talk about the M&A backdrop, which you haven't been as active in the last several years, but I'm curious if there's any interest in reengaging given obvious balance sheet strength. The DoD is relatively negative view on share repurchase overall -- what is your M&A pipeline look like? What kind of properties would even be attractive to you at this point?

Look, this is something we always look at and something we never talk about. I just think that's imprudent, then it's always on our mind. So you can rest assured about that. You want to ask another question?

Would you say there's any shift in the way you look at it, even if you can't speak to it .

We've consistently looked at it this way. When we have the -- when we have met some of our other obligations with respect to CAF or if there's a particularly attractive bolt-on out there. But we are doing what we always have done and understand the marketplace and see what, if anything makes sense. But Gale, we just never talk about it. .

Okay. Maybe 1 that maybe, Dan, you can talk to or Pion the missile framework agreements. Have you seen in combat within OTS, much of that coming your way on second source solid rocket motors, particularly with some of the interest of aggressive dual sourcing?

Yes. So we are a subcontractor both at OTS and Mission Systems to a number of the missile prime, and we have some content on all of the missiles for the most part with things like actuators and motor cases at OTS and guidance systems and other components at Mission Systems. So the framework agreements that the primes have signed up to, we have mirrored agreements with them to ramp up. And so we're, again, a part of the supply chain, but certainly not a prime there.

Your next question comes from Robert Stallard of Vertical Research.

This is it for you Phebe or for Danny. But it sounds like the supply chain across the group is getting better. I was wondering if you could confirm that. And if there are any areas of concern that still exist as you look forward to the rest of the year?

Yes. I would say, broadly speaking, when we look across the areas that we highlighted in the past that were causing some difficulties, there has been a noticeable improvement in the cadence. Areas of concern haven't really changed, where we have single sources of supply for large complex components and that can be somewhat of a pacing item. But when we look across the entire enterprise and each of the operating units, there has been a noticeable improvement in the supply chain, and that's a really good thing.

Okay. And a quick follow-up. There was some news overnight about the Virginia-class submarine Block VI being approved by the sector of the Navy. I was wondering if you could give us some sort of preliminary thoughts on how the next block of submarines could differ from Block V in terms of contractual terms or accounting or something like that? .

So we saw that as well. We're told that contracts will be coming soon. And when we get those, let's give you the clarity that you're seeking here. I think that's best done after the awards are granted.

Your next question comes from Doug Harned from Bernstein. .

Good morning. Thank you. On Combat, you've gotten some really, really good increases in backlog. And as we had looked at this before, we saw a lot of the growth coming from European Land Systems. But now these awards are much outside of Europe. When you go forward, how do you see growth now across geographies? Do you have more optimism in a sense about growth coming from the U.S.?

So I think what we expect to see is double-digit growth continuing at European land systems given the threat environment and the demand for combat support vehicles as well as other systems. OTS because of artillery missile components 155 and then within in Land Systems, 155, this is a transition period, as we talked about before, but the double-digit growth at the OTS and ELS ought to drive high single-digit growth for the group going forward.

And then switching over to Gulfstream. You're in a great demand situation, certainly working on the supply chain. But as you go forward, you soon have the full portfolio of [indiscernible] out there. How do you think of having that portfolio of aircraft with commonality which customers does that portfolio breadth particularly appeal to? And does it give you some margin opportunities ahead in pricing?