Good morning and welcome to the General Dynamics Fourth Quarter and Full Year 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics fourth quarter and full year 2021 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 on our Web site, investorrelations.gd.com. Now, I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Good morning, and thank you, Howard. Earlier today we reported fourth quarter revenue of $10.3 billion, net earnings of $952 million and earnings per diluted share of $3.39. The sales in most respect consistent with our previous guidance sell-side consensus. The results in comparison with prior periods are rather straightforward and set out in our press release. I'll go through some of that detail quite briefly, as I give you my thoughts on the business segments. As we indicated, it would be, the final quarter is our strongest quarter of the year in both revenue and earnings. In fact, earnings, operating margin, net earnings and return on sales improved quarter over the prior quarter throughout the year. It was a nice steady progression of sequential improvements. On a sequential basis, suffice it to say that revenue was up $724 million, operating earnings were up $106 million, and earnings per share up $0.32. So, all in all, a solid quarter with good operating performance. For the full year, we had revenue of $38.5 billion, up 1.4% from 2020; net earnings of $3.26 billion, up 2.8% and earnings per fully diluted share of $11.55, modestly better than consensus and up $0.55 over 2020. We ended the year with a total backlog of $87.6 billion and total estimated contract value of $127.5 billion. Our business was strengthened by significant growth in aerospace backlog to $16.3 billion. I'll have more to say about that when we get to the business segment comments. The total company book-to-bill is one-to-one for the quarter and the year, led by the powerful order performance of Gulfstream. Our cash performance for the quarter and the year is very strong. The conversion rates of the quarter is 136% of net income and 104% for the year. Jason will have more…

Thank you, Phebe, and good morning. The first thing I'd like to address is our cash performance for the quarter and the year. As you can see from our press release exhibits, we generated $1.3 billion of free cash flow in the fourth quarter or 136% of net income with strong cash performance across all four segments. That resulted in free cash flow for the year of $3.4 billion, a cash conversion rate of 104%. That was nicely ahead of our anticipated 95% to 100% of net income, and again reflective of solid performance across the company, but in particular, the strong order activity at Gulfstream. That strong performance enabled us to continue our balanced and robust capital deployment activities. To that point, capital expenditures were $385 million in the quarter or 3.7% of sales. That's up more than 10% from the prior year, and brings us to $887 million for the full year. Of course, Marine Systems continues to drive the elevated CapEx with facilities investments in support of the unprecedented growth the Group is experiencing now and for the next decade plus. The full year total for capital investments at 2.3% of sales is slightly below our original expectation of 2.5%. That's due strictly to the timing of the phasing of those projects. While our investments to support the Navy's submarine programs have peaked, we expect capital expenditures to remain somewhat elevated at about 2.5% of sales in 2022, slightly higher than 2021, before returning as we forecast for some time to our more typical 2% range in 2023 and beyond. We also paid $332 million in dividends in the fourth quarter, bringing the full year to $1.3 billion, and we repurchased 1.8 million shares of stock in the quarter, bringing us to just over 10 million shares…

Thanks, Jason. And with that, I will turn to your expectations for 2022. So let me provide our operating forecasts for '22 initially by business group and then a company-wide roll up. In Aerospace, we expect 2022 revenue to be around $8.4 billion, up around 4% over 2021 with about 123 deliveries, up from 119 last year. Operating margin will be around 4.8%. So, a little color here about what is driving this forecast. Well anticipated deliveries are up only 4 units from '21, production of completed aircraft is considerably more than in 2021. Last year, we produced fewer than 119 aircraft that were delivered. We delivered a number of test aircraft that were either produced and completed in prior periods as well as a few demonstrators all up about 11 aircraft. In 2022, production we are building some G700s and G800 test articles that will not deliver this year. Finally, our ability to ramp up further in '22 is limited by the wing supply issue I described earlier, which will be remedied for '23. This leads me to a quick look at '23 and '24. In 2023, we expect to deliver 148 airplanes, 25 more than in 2022 and have revenue of approximately $2 billion more than '22, with margin improvement around 200 basis points. In '24, we expect to deliver around 170 airplanes, up another 22 driving another $1.6 billion of revenue over '23 and another 100 basis points of margin growth. So, all up over that 2-year near-term timeframe, we expect to see $3.6 billion of revenue growth over '22 and 300 basis points of higher operating margins. Mind you, none of this is supported by heroic assumptions about continuing demand. We assume a book-to-bill of around 1 to 1 during the period, a notable reduction from…

Thanks, Phebe. 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.

We take our first question from Ron Epstein from Bank of America. Please go ahead.

Yes, good morning, Phebe and .

Hi, Ron.

I know you're going to get bombarded with Gulfstream questions. So, I'm not going to go there. I'll let everybody else do that. I just wanted to jump in -- yes, how about that. Maybe on Land Systems at first, right. I mean, the Ukraine and everything going on with Russia has been in the headlines, what does that mean for your international Land Systems business, particularly in Eastern Europe?

Well, for some time now, the Eastern European demand for combat vehicles has been at elevated level. But I have to tell you that speculation about the considerable tension in Eastern Europe and any subsequent impact on budgets is just still advised given the high threat environment. So, we are hopeful for a peaceful resolution. But that is a national security issue for the U.S and its allies.

Got it. And then maybe my follow-on question, if I can. And I shift back a little bit towards Gulfstream.

Sure.

You mentioned in your prepared remarks, you've got a little bit of a bottleneck in wing production. Have you thought about re-outsourcing wing? Or do you look at the wing as to something you guys want to keep? Because it's a key part of the plan.

Outsourcing, you sort of add a question given the problems in the supply chain on wings, which then drove us to internally source. And frankly, our wing production efficiency is not equal by any. This is just simply a question of expanding a wing facility just to touch and we need another set of tools. But we are very good at wing production. So, I think that that's a capability set that reduces a lot of risk and frankly, provides opportunity for the program.

The next question comes from Cai von Rumohr from Cowen. Please go ahead.

Yes. Thanks so much, and congratulations on the good results. So, Phebe …

Thank you, Cai von.

… net R&D was up $50 million in the fourth quarter. What do you expect it to be up going forward? And as I look out there, the 100 bps margin uptick I haven't calculated exactly looks like less than a 25% incremental margin. So how come it's not better as we get out to 2024?

Well R&D, we expect to be about $100 million for next year, but let Jason give you a little bit of color.

Yes, so as Phebe said, roughly $100 million increase in the Gulfstream R&D for 2022 as we continue to progress, as you'd expect to the flight test program on the G700. If you normalize for that delta, margins for next year would be roughly 14% for the Aerospace group. So that really does kind of answer the question on incremental margins I think from our perspective. Otherwise, we do continue to see, as you'd expect, the incremental profit from in-production airplanes 500 and 600 in particular, continuing to be additive to the group's margin. So …

Sure. And the last one …

It is a pretty good margin in the out years.

They are. R&D credit, how big are you assuming?

So, as I said, we're looking without the R&D credit deferral, meaning assuming existing law persists, we'll be in the call at 100% plus conversion range. If the R&D credit is deferred -- current law is deferred, we're talking more in the 110% range. So that kind of gives you a size on what we're expecting.

The next question comes from George Shapiro from Shapiro Research. Please go ahead.

Yes. Phebe, the four higher deliveries in '22 that you spoke about, are they G700 or what's the status? Because I know, you thought that you deliver some G700s in the fourth quarter.

What we said I think is that we expected the certification in the fourth quarter with -- but I think the way I have, as I noted in my remarks, we're going to have some prebuild, about the 700s and the 800s, which we'll deliver shortly thereafter, the 700s little shortly thereafter the certification.

And a little more color on that, George. I mean, just to think about it, obviously, we talked about, as Phebe said, fourth quarter certification and EIS of the 700. But there's also obviously with 2021, you have 500 -- excuse me, 550s that were delivered in the early part of the year that doesn't replicate. So, the incremental four is an offset of that decline as well as the test airplanes that Phebe mentioned that we delivered last year and some demonstrators, but otherwise steady increases in all of the in-production models, particularly 600 and 500. So, I think overall, if you look at in-production airplanes 650, 600 and 500, 280, we're looking at somewhere in the 15% year-over-year increase in production in those models. So that should give you some color on what's driving that increase.

Okay. And then one follow-up. There's a $211 million difference between when you have this gross orders, and effectively just the net orders. Now were there any cancellations, there reflecting the fact that some customers are getting the planes later than they would like to get or …?

No, I don't think there was any particular driver. We have, I think three cancellations, but for no particular reason other than idiosyncratic customer issues.

The next question comes from Myles Walton from UBS. Please go ahead.

Thanks. Good morning. Phebe, could you comment on the …

Good morning, Myles.

… price environment for building out the backlog and I imagine you're now coming pretty close to lists on all of your programs. And maybe give us an impression of the skyline or the lead time for the large cabin miles at this point? Thanks.

So, we've enjoyed some pricing pressure or some pricing increases and that's all good and wholesome, and we are quite comfortable where prices are. And our lead times within all production aircraft are well within the 24 or 18 months -- more than 18 months to 24 in that range that we like to see.

Okay, great. And 500 versus 600, can you just give a color on the two differences in demand there. And one might be particularly accretive on the 600, given the assembly commonality with the platform.

Yes, so just to give you a little bit of background there, the 600 were the parade in the fourth quarter, followed by the 650 and the 500. The 600 margins are obviously quite nice and 500 are improving. And of course, 600, we've always enjoyed good or 650, we've always enjoyed good margins. So, we're seeing some very nice operating margins at the gross margins at the airplane level.

The next question comes from Robert Stallard from Vertical Research. Please go ahead.

Thanks very much. Phebe, maybe you can touch on some other issues. I just wonder if you can maybe give us some more clarity on the supply chain at this point and some of the obstacles you've been facing across the company whether they're getting any better.

So, let me go group by group. In Combat, we haven't had seen any particular supply chain issues. At Gulfstream, we've managed the supply chain, and I think they were benefited by our reduction in production last year. So, we're quite comfortable with where they are. We reported pretty fulsomely on the Mission Systems challenges that they had with chip shortages and other key product material. And Electric Boat, in particular, we've seen some challenges in the submarine supply chain, largely manifests in Virginia scheduled variants. So, we’ve pretty widely reported that, but we're continuing to work with the Navy and to kind of shore up that supply chain, so we can get normalized Virginia schedules.

Okay. And then maybe a follow-up to Myles's question on the Aerospace lead times. I think you just said 24 months is what you're seeing, in some case. That sounds a bit longer than what we've maybe heard in recent years. Are you seeing any customers, essentially saying that's too long, and maybe going somewhere else to get their jets?

No, we haven't. And as I said, 18 to 24, but 24 is only a handful of cases. But we haven't had any customers say well, I'll go elsewhere, because we're in the backlog, I'm going to go elsewhere cancel my order because I want my airplane faster. And frankly, we're ramping up production to accommodate that demand, that backlog and what we see is a nice solid demand going forward. So, we're quite comfortable where we are in our lead times.

The next question comes from Robert Spingarn from Melius Research. Please go ahead.

Hi, good morning.

Good morning.

Just sticky -- Phebe, sticking with supply chain and labor, can you frame the risk to entry into service for the three new aircraft programs, the 700, 800 and the 400? And how we should think about potential slippage or whether you've got that covered at this point?

Well with respect to labor, we've seen some wage increases in engineering forced at Gulfstream, but we have covered those with some increasing prices to offset that. But we don't see any labor issues with respect to the delivery of these airplanes. And as I say the supply chain has been pretty stable here .

On labor affecting or clearances affecting technologies at all, is it limiting growth?

So, GDIT, particularly in the tech industry, any company that got large exposure to tech here, experts has certainly have their challenges and mobility, but I will say GDIT is holding up very nicely, attrition is at pre-pandemic levels. So, we're holding our own, but very mindful, this is a valuable workforce and coveted by many.

Okay, thank you.

The next question is from Doug Harned from Bernstein. Please go ahead.

Good morning. Thank you. At the Gulfstream, when you described a pretty high-class problem here in terms of demand. And when you get out to 2023 and 2024, though, you have a pretty diverse set of programs at that point. How do you look at this in terms of both your operations and the supply chain, just to manage that complexity?

So, one thing that Gulfstream -- one of the many things that Gulfstream has been quite good at is managing its operations and having very strong operating leverage. And we have brought the supply chain along with us. So, all of our estimates that we're giving you fully accounting for what we expect the supply chain to be able to manage as well as our own operations. So, we're quite comfortable that we do not have an operating challenge.

So, no, you're not really seeing any additional issues with this mix when you get out in that timeframe.

No?

The next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, guys. Thank you. Phebe, I'll take a question …

Hi, Sheila.

… in 24 months. I'll wait for it. Hi. So, I'm going to ask about Aero because it is a lot of the EPS expansion we have between '21 and '24. So, you've been so generous with your comments, but I can't quite square away Aerospace margins for 2022. And I was wondering if you could help a little bit with that just given pricing should be a tailwind. And I think mix improved from '21. You have a 500, 600 going up the curve. And I think you previously talked about the G700 being accretive to margins right away. So maybe, can you talk about what's changed? And how do we think about that improvement into '23 and '24? And I know you already guided, but if you could square it away a little bit more?

Yes, I mean, I think you've got a lot of the basic building blocks, we probably have to compare spreadsheets to see what's driving the ultimate outcome. I think the single biggest issue is probably the period-to-period fluctuation in our net R&D expenditures, right, between supporting the development programs and the net offsets that we get from time-to-time from suppliers. As I mentioned before, we've got about $100 million increase in R&D from -- in '22, relative to '21. So that if you normalize for that you're up from 12 -- 12.7 in 2021 to 14% plus in 2022. There's other puts and takes within that, as you know, pricing is a little better, the improvements along the manufacturing lines for 500 and 600 continue to get better growth in service business, obviously, which continues a pace year-over-year, while at good margins does come at margins that are in an aggregate dilutive to the overall group margin and certainly to new aircraft production margins. And so that's really the story I think, in terms of the puts and takes going into 2022. I think we can get into your details or your question maybe after the fact on '23 and '24. But I think 200 basis points improvement in '23 and another 100 basis point in '24. That kind of gives you that trajectory that we've talked about for some time about returning to the mid to high teens margins for the group. When you combine that with pretty significant top line growth that Phebe described, I think it's a pretty -- I think it's a pretty compelling story.

Can I just ask the follow-up on the R&D? Obviously, it peaks for G700 this year. When do we see that for the 400 and the 800? So, obviously, the 800 comes in -- into play shortly after the 700. So, you should kind of expect to see that following a similar pattern. I think we said the 400 enters service in 2025. So, keep in mind the 400 is an airplane that benefited significantly from commonality with the 500 and 600 in the way those airplanes were designed and engineered. So, we won't necessarily see as much of a blip associated with that, but all of this fits over time within the profile of our ongoing commitment to R&D and roughly 2% of sales for R&D. Again, it can fluctuate from quarter-to-quarter and year-to-year, but that's how you ought to see it play out.

The next question is from Peter Arment from Baird. Please go ahead.

Yes. Good morning, Phebe, Jason. Nice results. Phebe, I wanted to ask you a question about Marine. How are they doing in terms of battling kind of the labor shortages out there. I know Pratt yesterday talked about having a shortage of welders, maybe what you could give some commentary how you're seeing that?

So, we have worked for many years with our state and local governments to provide them pretty robust training programs that are still up and running. We are hiring this year at an accelerated rate over what we had anticipated, largely because of the backlog. In terms of hiring in COVID, obviously constrained. These are hiring levels for '22 at levels we have seen before and executed before. So, the question is all about the efficiency of your training programs. And we're pretty comfortable that once we get these people in the door, we can get them trained and have them go as new shipbuilders. They've got learning curves, obviously, as they get more proficient and become veterans, but we factored all of that in our thinking.

Appreciate that. And just as a follow-up to some -- just on Aerospace. It sounds like the customer base continues to expand, how would you kind of characterize it? Is it a lot of the corporates that are renewing? Are you seeing just a complete expansion during this kind of COVID -- post-COVID period?

So, to give you a little bit of additional color on that, demand was quite good in the United States and also increased throughout the rest of the world we saw as we had begun to see earlier, a return to the Fortune 500 as well as private companies as well as smaller companies. So, it's pretty robust across the portfolio and the kinds of both individuals that we see, but also companies that we see. But I don't see any structural change here, if that's kind of what you're poking at in terms of .

The next question …

Go ahead, I’m sorry.

The next -- apologies, the next question comes from Seth Seifman from JP Morgan. Please go ahead.

Hey, thanks very much …

Hi, Seth.

… and good morning. Maybe if I could dig in for a couple of more Aerospace details. There any comments you could give about the services assumptions underlying the guidance, and also the CapEx impact and timing of completion of the additional wing capacity?

So, I'll answer those in the inverse order, almost negligible CapEx. So, this is just simply a timing of -- timing issue of expanding an existing building somewhat and getting in place the tools and fixtures to effectuate the increased production. On the service side, we expect '22 to see some nice service growth at Gulfstream as well as Jet Aviation which have a nice year as well. And we expect service volume quite naturally to grow with the expanding fleet. And we have included those assumptions on a going forward basis.

Great, thanks. And just as a follow-up, definitely heard earlier and appreciate the commentary about the multiyear outlook being conservative. I guess any other sort of support you can give to that characterization would be great. If we look at, I guess, if the backlog remains stable at about $16 billion, looking at like 1.3x coverage out in 2024. And if that's kind of what you're aiming for, and any other color that kind of gives you confidence in the conservatism of the outlook?

Yes, so think about it this way. What I wanted to explain is that the guidance that we are giving you for '23 and '24, was based on a 1 to 1 book-to-bill. Clearly, if it's better than that, we'll increase production accordingly. But for planning purposes, that's what we have assumed and I think that's prudent planning.

The next question comes from David Strauss …

So maybe just -- go ahead.

David?

The next question comes from David Strauss from Barclays. Please go ahead.

Okay. Phebe, can you hear me?

Yes. Loud and clear.

Okay. So, you give us a little bit of a longer-term outlook for Gulfstream. I want to ask about Marine and Combat. I think, Marine, you'd previously said expect kind of $400 million to $500 million in incremental revenue a year. Last year, you were at the high end of that, this year you're forecasting a little bit below that. So maybe if you could update us there on kind of the longer-term thinking. And then on Combat, I think you had said kind of low growth over the next couple of years. Now you're talking about a decline. So, what's the longer-term view, I guess, on Combat? And how much could the fiscal '22 budget that still yet to be decided, but it looks pretty good for you guys how that might influence things?

So, let's talk about Marine. We have for some time said that we expected revenue growth in the $400 million to $500 million range. We still expect that. Next year is a little bit later, a $300 million increase and that's largely just workload timing. When I go to Combat -- so I think what we are anticipating is some decrease in pressure on the army budget. Look, we're in '23, in particular, so we're pretty early on in the budget for that fiscal year. We don't have full OMB or tax back. But I think that the pressures on the army budget have been very well articulated. And while we expect that ultimately the funding levels for our platform programs will be sufficient and relatively stable, we will see some rather dramatic drop offs in O&M funded accounts, like maintenance, for example. So, we are factoring all of that into what I see is that increased army pressure. We're factoring all of that into our estimate for between 1% and 3% lower growth this year, but we anticipate growth returning as a number of these international orders come in a couple of years as well as new army start. So, I think we have given you a balanced and realistic view of combat.

Okay. A quick follow-up, what are you assuming for CR this year in terms of what's -- what you're baked into your defense guidance?

So, for this particular CR, given our portfolio and the prior year funding levels, we don't see a material impact of all, almost nothing.

The next question comes from David Strauss from Barclays. Please go ahead.

You already got me. Thank you.

You’ve already got David. I need to get .

My apologies. We have Matt Akers from Wells Fargo. Please go ahead.

Hi, guys. Thanks for the question. There was some commentary around the budget discussions about potentially going to the three a year on Virginia class. Could you comment on how feasible that is and sort of what further investments required? What kind of time frame that might be possible?

So, we've been talking to our navy customer and clearly, some investments would be required. But I think, too, at the moment, we need to get the supply chain stabilized on the two-a-year cadence before we actually think about really ramping up to three. It is doable. We just need some time for that supply chain to adjust from the ravages of COVID.

Great, thanks. And I guess a couple of details within the cash flow outlook for '22. Can you say how big the impact of that prebuild is that you discussed at Gulfstream and then also can you just update what's the latest on the large international receivable? And is that meaningful as an impact for 2022?

Yes. I think on the Gulfstream side, while we are having, as Phebe mentioned, the ramp-up on the 700 and the prebuild on the 800, that's not a material impact that we see in terms of the headwind. Gulfstream wants to be a nice producer of cash again this year. Obviously, not quite to the extent that last year, we -- as we mentioned, we sold off the inventory, in particular, in the test airplanes. So, it won't have quite the trajectory it did last year, but it will still be a nice contributor on cash. So, don't see that as a headwind. On the international side, the international Canadian vehicle program we've talked about for some time remains on track. That program is in a great position, both in terms of the vehicle and the performance of the production line, and we continue to receive payments as scheduled for the renegotiated extension of that contract that occurred back in 2020. So, all in a good place in that regard.

Operator, we will take one last question. Please go ahead.

Thank you. So, our final question then comes from Richard Safran from Seaport Global. Please go ahead.

Hi. Good morning, Phebe, Jason and Howard. How are you?

Good morning.

So, on Technologies, I was impressed by that $32 billion comment that you made. What percent of that is adjudicated in '22? Is it all of it? And would you be able to tell me how much of that is recompetes? And I asked because I'm assuming that recompetes come with a bit of a higher win probability.

Those are largely new work in the $32 billion and the customer adjudicates that as they get to it. But I think we've recognized as well that not only is the customer decision cycle, but it's also their protests that affect the timing of any of these wins, and they're significant.

Yes. And just as a very quick follow-up here. Jason, I heard your opening comments about what you were going to do with debt. And I wanted to know, just to be clear, your fourth quarter maturities, is that the extent of debt reduction this year? And if you would, longer term, could you just tell me what your overall debt reduction target is? And when do you think you might be able to get there?

Yes. The $1 billion that matures in November of this year is the only maturity this year. So, you've got that right. In terms of the longer term, we will obviously play that out as it goes. We've indicated that we have a reasonable debt laddered out over the next several years that offers us the opportunity to continue to step down the debt in, call it, $1 billion to $1.5 billion increments over time. That said, we've never indicated we were going to go back to the essentially zero net debt that we had before the CSRA acquisition. So somewhere in that period with flexibility remaining open, we will decide where the right point is to settle out on that. And frankly, if there's an overarching sort of guiding light that we have around that, it's continuing to target and try to sustain a mid-A credit rating. And obviously, there's a lot of factors that go into that, but that's really sort of the compass that we have around the debt trajectory.

Well, thank you all for joining our call today. And as a reminder, please refer to our website for the fourth quarter earnings release and our highlights presentation, which will now include our outlook. If you have any additional questions, I can be reached at 703-876-3117. Thank you. Katie?

Thank you all for joining. This now concludes today's call. You may now disconnect your lines.