Good morning and welcome to the General Dynamics Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Please also note, today's event is being recorded. I'd now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Rocco and good morning, everyone. Welcome to the General Dynamics third quarter 2020 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.

Thanks, Howard and good morning. Before I address the company's quite good performance in the quarter, let me briefly update you on COVID-19's continuing impact. As we discussed last quarter, we're working hard to protect our people. We adhere to CDC guidelines, encourage social distancing and have a mandatory mask policy. We continue to have lower infection rates in our surrounding communities. To date, of our 100,000 employees, we've had about 1,800 cases, 1,500 of whom have fully recovered and are back to work while many of the others are working from home during their quarantine. In short, the pandemic remains an issue, but we've dealt with the help of our workforce in an effective way and continue to do so. As we turn to our results in the quarter, I'll spend less time on quarter over year ago quarter and year-to-date comparisons that are well stated in Exhibits A and B to the press release, and instead focus my remarks on operations, the significant sequential improvement and meaningful development in the quarter. Regarding the company's third quarter performance, as you can discern from our press release, we've recorded earnings of $2.90 per diluted share on revenue of $9,430 million, operating earnings of $1.08 billion and net income of $834 million, all very significant improvements over the second quarter. As one would expect, revenue was down $330 million or 3.4% against the third quarter last year. Operating earnings were down $132 million or 10.9% and net earnings were down $79 million. For the defense businesses alone, the year-to-date revenue is up $98 million and operating earnings are down only $51 million. Overall, the defense business has been seriously impacted but is holding up and recovering well. As you will see in the details, most of the revenue and earnings shortfall this year to date has occurred in our aerospace segment, which saw significant write-offs last quarter associated with reductions in force at both Gulfstream and Jet Aviation. However, there's mostly good news for both companies this quarter, which I'll get into shortly. Before I get into the details of the operating level, particularly at aerospace and GDIT where we experience significant improvement, I want to spend a moment on the resilience and strength of the company's backlog. The total backlog of $81.5 billion is down $1.1 billion against the end of last quarter. Funded backlog at $60.2 billion is down only $950 million. However, total estimated contract of $132 billion is down only $336 million against the end of last quarter. While these numbers are down slightly, they represent a solid and enduring backlog.

Thank you, Phebe and good morning. I'll start with some comments on our cash performance in the quarter and our latest thinking on how the year is shaping up. Cash from operations in the quarter was $1.1 billion and our free cash flow was $903 million, 108% conversion rate. We ended the quarter with $1.5 billion of cash on the balance sheet and a net debt position of $11.9 billion, down almost $400 million from the second quarter. As anticipated when we started the year, the cash performance has stepped up markedly in each sequential quarter this year, and consistent with that original expectation, we have a big fourth quarter ahead of us. That said, our forecast for the quarter is right in line with what the fourth quarter has looked like in each of the past three years, so not an unusual task at this point. So with that backdrop, we continue to target free cash flow for the year to be in the 80% to 85% of net income range. The biggest variables in achieving that mark will be Gulfstream order activity and our ongoing efforts to support our supply chain as we settle on production and delivery rates for next year. You heard Phebe's remarks on that subject, so assuming things continue to trend favorably as we've seen of late, we've got a path to close on our cash target for the year. On the defense side, our Pentagon customer continues to lean forward with accelerated contract payments to support the industrial base, and we in turn continue to do the same for our supply chain. Through the end of the third quarter, we've received approximately $400 million of accelerated payments from our customers and advanced more than $1.7 billion to our suppliers. To the extent we eventually see additional relief from our U.S. government customer in the form of incremental contract funds to offset the ongoing impact of COVID to our business, we'll include the benefit of that relief in our results only when it's authorized and funds are made available. As I mentioned earlier, our net debt is down to just below $12 billion and our interest expense in the quarter was $118 million versus $114 million in the third quarter of 2019. That brings the interest expense for the first nine months of the year to $357 million, roughly unchanged from $350 million for the same period in 2019. At this point, we expect interest expense for the year to be approximately $480 million.

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

Absolutely. Today's first question comes from Ron Epstein with BoA. Please go ahead.

I'm sorry there'll be a bunch of questions on Gulfstream, so I'll just start with defense. Right, I'll leave those for other folks. In the naval business, I know there's been some discussions, some whispers about a III Virginia-class. What do you think of that? Is that a possibility? And what that means for you guys, if that happens? And then I have one follow-up after that.

Yes, so we've been talking to our Navy customer about the ability of essentially the supply chain and the facilities to ramp up production, and as you can imagine, we're developing plans to do that as well. But you'll note that in all of the recent discussions about U.S. National Security strategy and particularly the Navy's articulation of the criticality of the size of its fleet, submarines figure prominently in all of those conversations because they remain a national competitive advantage for the United States. So we'll continue to work with our customer, and we'll see where that takes us. At the moment, we're not planning for that increase, but if the nation needs it, we'll accommodate it.

And then my follow-up is kind of dovetailing in one of our comments. When you look at, there's been discussion, I guess Secretary Esper was talking about a 550-foot Navy, a portion of that is unmanned undersea vehicles. What opportunities does that present for General Dynamics?

Well let's think about it in two parts. In the first instance, it's the job of our shipyards to integrate those capabilities into the existing platforms, and we're very good, as you can imagine, at integrating mission payloads into our ships and our submarines. With respect to individual lines of business within the unmanned world, Mission Systems has a number of lines of business that have been very active for quite some time in the undersea domain and unmanned undersea domain, so I would imagine those continue to grow. It's all going to be about performance, and their performance throughout testing has been outstanding. So I think there's a lot more to come on that.

And our next question today comes from Cai von Rumohr with Cowen. Please go ahead.

The aerospace impact of $541 million of COVID. What do you base that on? Is that deliveries you plan to do that you didn't do? And then, given that it looks like the decremental margins on the revenue you missed were 22%, would the profitability value soon the profitability would have been even better if you've gotten most deliveries?

So think about what we did very quickly in response to COVID. We lowered our production. We did it in two respects. One, to better meet demand, but very importantly to allow the supply chain to catch up, so that is really what has driven the overriding factor that's driven all of the performance at Gulfstream. Now, within that, we've also quite predictably, and as we've told, right sized that business and we'll continue to do so so that we manage our margins and nearly push them to be as high as they can. So I think Gulfstream has done a remarkable job in bringing down its cost both for restructuring and then cost savings and productivity.

And then the last one, Jason mentioned he had $400 million at advances COVID cares related and yet you advanced a $1.7 billion to suppliers or so, so that's a delta or like a $1.3 billion when do you expect to recover that? When do you expect that to burn down to near zero?

So Cai, keep in mind that's a cumulative number that's been building throughout the year, and so that sort of phases in and then it gets phased out and paid in and phased out over time. That said, you'll note if you look at our cash flow statement and our exhibits, our receivables and unbilled receivables in the quarter, as well as payables and on the supply side, continue to be a bit of an OWC headwind for us, and that's really all attributable to a lot of that timing. So I think you'll see that phased out as this pandemic starts to abate and the customer sort of moves its payment practices back to normal and we'll in kind sort of move back to normal cadence from our perspective. In the meantime, our priority is to make sure that our supply chain, which is, we're all in a symbiotic relationship here and what's good for one is good for other, we've got to continue to support the elements of that supply chain that needed, particularly on the smaller business side, and so we're going to continue to do that as the impact of the pandemic continues.

And our next question today comes from Robert Stallard with Vertical Research. Please go ahead.

First of all, perhaps on GDIT. You had quite a few comments there, Phebe, about the demand environment, the bidding that this business has been doing. Have we finally turned the corner in this division? And can we expect revenues to accelerate from here and to hold onto this operating margin?

The operating margin - we'll take that in inverse orders was severely decremented last quarter by a loss that we had on a legacy GDIT program as well as the impact of COVID. And if you recall, we had a significant number of our workforce covered under the CARES Act, and Jason I don't know if you recall those numbers, but it was a lot of revenue that carried in the earnings.

About $150 million in the quarter.

So those are considerable headwinds. GDIT has from the very get-go had superior industry-leading, and not by a little, but by a lot EBITDA margins, and I would expect that performance to continue. Here's a predicate that we finally turned the corner. We can quibble over the predicate, but let me just give you some idea of what's going on the order front at GDIT. In the quarter, our overall win rate is in excess of 75%, our re-compete win rate was over 90% and I think it is really just a positive factor that in the third quarter with our largest quarter over 50% of the awards coming from competitive new work. And so I think that's an important indicator of this business on a going forward basis. We had a number of nice enduring wins in the quarter, and our performance has been very, very strong on our existing contracts. So I very much like where this business is, and again, they've continued to have outstanding cash performance.

Okay, and then on the aerospace division. I was wondering if you could give us any clarity on the order intake in terms of whether any differences by model or by region that were notable in the third quarter.

Well, I think I noted in my remarks that the 650 led the order book. That has been an extraordinarily successful airplane and continues to endure and successfully endure. So internationally, we saw more of a pickup. I was pretty, I think, fulsome in my remarks about the demand environment. But we saw good order activity internationally.

And our next question today comes from Carter Copeland with Melius Research. Please go ahead.

Phebe, I wondered if you might talk a little bit about the performance at EB. I'm pretty intrigued by the margins given the COVID cost that you've outlined year-to-date. I mean obviously those come through the reimbursement of those, the treatment there, just implies you guys have found some performance efficiencies there. I wondered if you could speak to that.

So Electric Boat had continued to find and will continue to find performance improvement as well as cost cutting. This is a very efficient yard that's getting better and better at what they do. So I expect their performance to continue, and as I noted in my remarks, we're all of that top line growth we're going to push for margin expansion. We're going to see bottom line growth that the more that we can accelerate that bottom line growth, the better, and that's all about productivity and efficiency at Electric Boat and they've done a superb job in the last four quarters even within this environment of driving productivity improvements. If you think about it, and this is just not with respect to the shipyard, but across all of our operating divisions. The COVID has amplified the underlying strength of the operations in this business to the extent that they're driven by disciplined, continuous improvement that help manage any crisis including this pandemic. So we're continuing to see each and every one of our businesses improved their bottom line performance on the operating side. Now we've long talked about that the strong operations are the key to financial success that and good contract bidding. So I think you'll continue to see this march toward productivity improvements in Electric Boat is leading the win. More to come.

Okay, great. Thank you for the color.

And our next question today comes from Richard Safran with Seaport Global. Please go ahead.

Phebe, just a quick. You discussed portfolio shaping in your opening comments, so I wanted to get your thoughts on future portfolio shaping. Are you considering any further divestitures or additions to the portfolio? Do you think that there are any holes in the portfolio right now that you need to fill? Just any color you can provide on just how you're thinking about it right now?

Richard, I know how much you like that, but I think portfolio shaping is only effectively discussed after the fact. So we're always looking for opportunities to improve and focus our activities. But it's really no comment in the moment. There's really nothing on our horizon at the moment. We're sticking to our operations doing what we do best.

Okay, and as a follow-up at mission. You noted expansion into naval air and electronic systems. I want to know if you could elaborate on that a bit more versus share gains, new contract wins versus expansion into new markets, just any color you could provide there.

These are really within our four that we've had continuing contract wins, and that is a business where we've done a fair amount of portfolio shaping because they've got some nice growth looking at in front of them. I talked about those cyber defense, tactical communications we have, a decades-long history and expertise in the nuclear triad that will continue to grow and missile fire control as well as short position navigation and timing. In a world where on the battlefield GSP reliability is questionable, that's a key and critical factor. That we have developed over quite some time and very strong expertise, and so I think it's important when you see these really critical important franchises that you divest yourself of non-business, and that's exactly what we've done.

Our next question today comes from Doug Harned with Bernstein. Please go ahead.

Phebe, you mentioned earlier about leveraging the breadth of GD of a corporation for opportunities and there were some things that really stood right into that like unmanned, undersea. But when I think of General Dynamics over the long history, I thought of the units operating very independently driven by numbers within the unit. Does this suggest that you're thinking differently about how you manage from the corporate center?

So look, I believe in centers of excellence at the business units in which they concentrate on the really value creation levers at their disposal. That said, we have a long history of our units working together and Mission Systems in particular. They've heavily embedded in combat systems platform within the Marine group and within GDIT. So we're moving increasingly in response to the market, I might add, increasingly working on joint activities between those two businesses, and they worked well together, they blend well together. So there's no fundamental change in how we see our business across our portfolio. I really do think people excel when they stick to what they know, but when we have opportunities to augment that value creation through partnerships across the units, we've done so for over 20 years.

One of the opportunities could be in the area of 5G, and you've won contracts both at GDIT and at Mission Systems related to that. Is this something that we should expect to see as a strong growth area, and when might we see, if that's the case?

Well, I think the department is still working through how to operationalize 5G? It is an enormous capability advantage for our Warfighter, and we have been a part of both their planning and thinking at our customer levels for some time. And the way we define how we operate both in the moment and gloom for to how to meet our customer needs so as their need and the clarity around its use, with respect to 5G in this instance gets increasingly clear. We'll be there to work with them.

And our next question today comes from David Strauss with Barclays. Please go ahead.

Thanks for the color on Gulfstream as you looked out to 2021 deliveries. With regard to that, I think you're forecasting $1.13 billion in EBIT in 2020. Would you still expect some Gulfstream EBIT growth in 2021 despite lower deliveries?

Well, let us continue to work that. But in addition to efficiency, the number of airplanes delivered really drive EBIT. So we've got a long way to go in determining what the final plan is. But I try to be very specific in my remarks about how to think about the delivery plan that we have at least at its current notional level. It's really the 550 has gone away and we're not able in this demand environment to replace it with new airplanes. But our new airplane models that we have anticipated. So the production is going to be very similar on our existing fleet, with a little bit of decrement on the mid-sized cabin. So I think that's all we can say in the moment about any specificity around the future.

Okay, and as a follow-up I guess Jason on free cash flow as we think about next year. How much potentially could that conversion number bump up? I mean is 100% conversion next year out of the question at this point?

I don't want to say anything is out of the question, David. I think what we're focused on is growing free cash flow year-over-year, and obviously the two major muscle movers there that have really been all part of the operating working capital side of that story on the one, the combat systems international program we've told you, I think a good bit about that throughout this year, and this is on a trajectory, it sort of set on a path with timing to eventually unwind that working capital over the next three years, and then the other side obviously is Gulfstream with the inventory build that really is largely associated with three different aircraft models with test aircraft and the unwinding of that both those test aircraft as well as just general inventory build into the new aircraft models is all going to be predicated on the macroeconomic recovery and when that production rate gets back into full stride and starts to unwind that. So I don't want to put too many caveats around it. But I think the most important takeaway is we expect to see growing free cash flow year-over-year and we'll work out the details as to whether we get to 2% or above 100% as we were projecting before the pandemic.

And our next question today comes from Robert Springarn with Credit Suisse. Please go ahead.

Two quick ones, Phebe for you. I know you talked about Gulfstream demand but I just wanted to ask from one other angle. Has the customer mix lately since COVID changed between the number of high net worth individuals versus corporate buyers, so that's the first question on Gulfstream?

Well, let me address that. I talked about that in my remarks. That I think there's a lot of uncertainty with respect to the economy, political uncertainty and then we still have highly restricted travel restrictions across the world. So that is an issue. That's going to affect corporate buyers, but as I also noted, we're seeing international pickup is nice and high net worth individuals continue to be in the market. So as the economy's recovery, we'll see a diminution in inflection rate. We'll see a pickup in all of that.

Okay, and I had a quick one for Jason and that's just on Mission Systems and applied margin in Q4. It sounds like the guidance holds in the mid-14, so just what's driving that fourth quarter?

I think what you're looking at there is mostly a mix issue for that business. As Phebe talked about as well with some of that portfolio shaping some of that is to get out of non-core businesses, and by association in many cases, some less than desired margin businesses, so that has an uplift effect as well. So I think they're expecting to see a little bit of rebound and some pent-up demand that they've experienced over the past several months that will drive some of that product flow through which will bring some strong mix-based incremental margin in the quarter.

Thank you, and our next question today comes from George Shapiro with Shapiro Research. Please go ahead.

A couple of quick questions was the book-to-bill of the 650 in the quarter above one?

Well, let's not parse that out for you, but it was quite wholesome. As I said, that's a spectacular airplane that continues to be in demand.

Okay, and then just one for you Jason, can you clarify a little bit the impact on the free cash from the $400 million that you received and you gave out $1.8 billion. I mean if I look at the balance sheet in Q3 it looks like between the working capital would have been $410 million worse with receivables and unbilled receivables and etc., and so I'm just trying to reconcile what the actual impact on the cash in a quarter was from your earlier comment.

Just to clarify George, I think the numbers you're quoting from the cash flow statement are pretty much on point as it relates to the impact of OWC in the quarter. The numbers on the payment advances and accelerations from our customers and to our suppliers, keep in mind, that's not accumulative $1.3 billion of implied pent-up cash on the balance sheet as of the end of the quarter. As we're accelerating, this is what I was trying to get into on an earlier question. As we're accelerating cash to suppliers, we're helping keep them going on an ongoing basis from month-to-month and quarter-to-quarter. So if they've got implicit receivables that are due 60 days from now and we're accelerating that to paying immediately, well 60 days later that payment was due, and so that kind of comes off the balance sheet naturally. But cumulatively, we've been accelerating over time for call it the past five, six months in excess of $1.7 billion to those suppliers. So you've got to reconcile that with the in-the-quarter what was the net billed of OWC which speaks to the numbers you were speaking to coming off the cash flow statement. So that's kind of how you reconcile those two concepts.

And our next question today comes from Joseph DeNardi with Stifel. Please go ahead.

Phebe, it wasn't too long ago that you used to provide kind of backlog duration by platform at Gulfstream. Would you be willing to provide that now just given some of the changes in build rates that you're seeing? Thank you.

That was appropriate when we had all existing long-term airplanes that had been in the backlog for some time. This is a whole new fleet and we're not going to start that until these have been in our production for some time. It is a material difference in the kinds of airplanes that we have; these are all new models, and frankly, as you all know, we are the only airplane manufacturer with - we are truly clean sheet airplanes, and it's best just to focus on how well we're doing in selling those. I think it is an important indicator that by the end of the fourth quarter, we're going to have 90 of these 500s and 600s in customers' hands, and let's not forget also we've got over 450 G650s out in the fleet. It's pretty impressive, if you ask me.

Okay, yes understood. And then just on GDIT. I think the traditional metric that folks look at to kind of understand growth is book-to-bill, and book-to-bill there, for you all, is okay, is that expected?

On revenue. I think it's quite nice.

Okay, so that's what you expect from that business going forward. There's not an expectation that book-to-bill improves materially there?

We're going to have some variances over the quarter. But you know look, there's - I wouldn't say that we don't expect book-to-bill to stay the same in perpetuity. It's all going to depend on the win rates in any given quarter and when the customer starts deciding all of this enormous pent-up backlog proposals they've got in front of them. And as you can well imagine the velocity in which these contracting decisions are made on the part of the contractors or the part of the customers have slowed down by COVID. So we'll get through all of that, and the key areas for us to win more than our fair share, and this business is doing I think quite well in that regard.

Operator, we'll take one more question, please.

Absolutely, and our final question today will come from Seth Seifman with JP Morgan. Please go ahead.

Phebe, I wonder if you could talk a little bit. I know you don't give multi-year guidance. But maybe in kind of a qualitative way, thinking about the growth in marine that's going to be driven by Columbia, just so we have maybe some way to size the magnitude of that in the coming years and have some guardrails around it and are aware of the timing of any kind of occasionally we see, picks up and growth as programs move from development to production and kind of when those happen. Any additional color around that?

So I think the way to think about the future—and while this will be somewhat lumpy on a going forward quarterly basis—the fact that 50% of our growth this year has been in Columbia. I think it's a nice indicator of what this is going to mean to us in the future. Electric Boat alone size will be double in the next five to six years. It's already quite a large business and it will continue to grow. This is a—as we've been talking about for some time—an enormous program of critical national importance, and we've geared up to both the to support it as well as prepared all of our manufacturing processes to support it. I'll give you one little note to give you a sense of what's going to propel this growth. We go into production on Columbia with 80% of the construction drawings done compared to 43% on Virginia, and Virginia was the most successful program the department has ever seen. So that tells that all of the growth that's embedded in those current budget numbers and future year budget numbers within the Department of the Navy are going to be able to be capitalized by us in nice, nice top line growth, and then as I noted, we'll continue to work on margin expansion. So we'll give you a sense of what next year looks like, and over time as we really get into the— in the fourth quarter call, and over time if we really get into full-rate production on Columbia. You'll get also a lot of clarity on what the future looks like.

I'll turn the call back over to Mr. Rubel.

Thank you very much for joining our call today and as a reminder, please refer to the General Dynamics website for the third quarter earnings release, highlights presentation, and outlook. If you have any additional questions, I can be reached at 703-876-3117. Thank you very much.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines and have a wonderful day.