General Dynamics Corp Q1 FY2026 Earnings Call

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

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First Quarter 2026 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to 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 Danny Deep, President; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Danny.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. The first thing I'll note is that our Chairman and CEO, Phebe Novakovic, had a family illness that required her absence. So I'll be conducting today's call along with Kim. At the very outset of these remarks, let me share with you our view that this was a very powerful quarter in all respects. Earlier today, we reported earnings of $4.10 per diluted share on revenue of $13.5 billion, operating earnings of $1.420 billion and net earnings of $1.125 billion. These results compare quite favorably to the year-ago quarter, which in and of itself was a very good quarter. For example, revenue was up 10.3% and, importantly, operating earnings are up 12% and net earnings are up 13.2%. As a result, earnings per diluted share are up $0.44, or 12% versus a year ago quarter. The operating margin for the entire company was 10.5%, a 10 basis point improvement versus a year ago quarter, which coupled with the revenue growth led to very strong earnings growth. While Aerospace and Marine led the way on revenue increases, each of the other two segments enjoyed revenue increases as well. A similar pattern is true with respect to operating earnings. Each of the segments demonstrated better performance led by Marine Systems with a 26.4% increase from improved operating performance across all of our shipyards coupled with the revenue increase. We beat consensus by $0.43 in the quarter on more revenue and better operating margins than the sell side expected. In short, this performance exceeded our own expectations. We also had a terrific quarter from a cash flow perspective together with strong order intake, which led to a larger backlog, which Kim will discuss in greater detail in a moment. From our perspective, we have opened the year on a very positive note. At this point, let me ask Kim Kuryea, our CFO, to provide details on our superb cash flow, order activity and solid backlog before I come back with segment observations.

Thank you, Danny, and good morning. Let me start by addressing our outstanding cash performance during the first quarter. The first quarter was a very strong start to the year with operating cash flow of $2.2 billion. We got out of the gate with our business units overwhelmingly exceeding their planned cash flow and driving operating working capital down. Compared to the first quarter of 2025, capital expenditures were up over 40% to $203 million. While capital expenditures were around 1.5% of sales in the quarter, 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 each quarter as we continue to invest, especially in our shipyards to accelerate production and meet demand. After considering capital expenditures, our free cash flow for the quarter was just shy of $2 billion, yielding a cash conversion rate in the quarter of 174%. We continue to expect a free cash flow conversion rate of 100% of net income for the year, but the strong cash acceleration into the first quarter results in a profile that will look a little different than what I provided in January. We now expect the first quarter to represent the largest quarter of free cash flow with positive cash flow in each of the remaining quarters, supporting our continued efforts to drive cash to the left. Also in the quarter, we paid dividends of approximately $400 million and repurchased about $200 million of our common stock to cover dilution. After adding it all up, we ended the quarter with a cash balance of $3.7 billion and a net debt position of $4.4 billion, down $1.3 billion from last quarter. Moving now to orders and backlog. Our order activity and backlog continued to be a strong story and a highlight for us in the first quarter. We received over $26 billion of orders achieving an overall book-to-bill ratio of 2:1 even as revenue grew by over 10% from the year-ago quarter. The robust demand across our portfolio resulted in total backlog of $131 billion, an impressive 48% increase over last year and 11% higher than just a quarter ago. Total estimated contract value, which includes options and IDIQ contracts, ended the quarter at another record level of $188 billion, a 33% increase from last year. Now some final items in my area to address. We have $500 million of notes coming due in both June and August 2026 for a total of $1 billion. Our plan assumes that the $1 billion will be refinanced, but this is something that we will continue to evaluate throughout the year. Turning to interest, our net interest expense in the quarter was $69 million compared to $89 million in the respective 2025 period. The decrease is due almost entirely to the interest we paid for commercial paper borrowings in the first quarter of 2025. Wrapping up with income taxes, our effective tax rate in the first quarter of 2026 was 17.8%, generally consistent with our full year guidance of 17.5%. Danny, that concludes my remarks. I'll turn it back over to you.

Thanks, Kim. Now I'll review the financial performance for each of the groups. First, Aerospace. Aerospace did very well in the quarter. It had revenue of $3.3 billion and operating earnings of $493 million with a 15% operating margin. Revenue was $253 million more than last year's first quarter, an 8.4% increase. To give you a little perspective here, the increase was driven by two more aircraft deliveries and higher services revenue at both Gulfstream and Jet Aviation. The 38 deliveries in the quarter are exactly as planned. Operating earnings of $493 million are up $61 million driven in part by the increased revenue, but most importantly by a 70 basis point improvement in operating margin. The comparison with last year's first quarter is particularly instructive. The number of deliveries is similar, but up by two in the quarter; neither quarter was significantly burdened by tariff costs and neither has any unusual items of significance. 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 and, as I mentioned, with 38 deliveries in the quarter, that happens to be the highest number of deliveries for any first quarter in Gulfstream history. We see durable productivity improvements on the G700 and G800 in both manufacturing and completions. Performance on the G800 has been a particular standout. This quarter, they delivered with very good gross margins. In fact, it was better than the G650s that it replaced, which delivered in the first quarter of 2025, quite remarkable given how recently G800s have entered into service. In fact, we will deliver only our 25th G800 this coming quarter, so very positive given how early we are in that program. Turning to market demand, we had a 1.2 book-to-bill in the quarter with 17 more airplane orders than the year-ago quarter. We were on our way to a spectacular quarter, but numerous transactions slowed at the end of the quarter as a result of the conflict in the Middle East. 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., but some cautious concern for some customers in the Middle East. We are also off to a solid start in the first month of this quarter. In summary, the aerospace team had a special quarter operationally. So let's move on to the defense businesses. First, Combat Systems. Combat Systems had revenue of $2.28 billion, up almost 5% over the year-ago quarter. Earnings of $310 million are up 6.5%. Margins at 13.6% are up 20 basis points against the year-ago quarter. The increased revenue performance was at Ordnance and Tactical Systems and European Land Systems. We also experienced good order performance at a 0.9:1 book-to-bill given the third and fourth quarters of 2025 book-to-bill of 2x and 4.3x, respectively. In fact, on a trailing 12-month basis, the book-to-bill has been 2.1x. Demand for Combat Systems products is strong, driven primarily by U.S. allies. Wheeled and tracked vehicles are up, reflecting the increased threat environment. In addition, ordnance and tactical systems continue to lead this group's growth with particularly strong growth in munitions. What is encouraging for Combat during this period of recapitalization and transition to next-generation platforms for our U.S. land force customers is the breadth of this portfolio with both international vehicles as well as our munitions group that continue to provide a nice growth outlook with very solid margins. Turning to Marine Systems. Once again, our shipbuilding units are demonstrating strong revenue growth. Revenue has continued to increase to reflect increased demand and, importantly, increased throughput across all of our shipyards. This quarter's growth of 21% was driven primarily by the Columbia and Virginia class programs, followed by the oiler at NASCO. Repair volume has also increased at both our East and West Coast repair yards. Of significance, earnings improved 26.4% on improved productivity in each of our shipyards. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at Electric Boat, and we will continue to invest as we go forward to support the additional demand we see. Turning to operating performance, momentum is building at each of our shipyards. At Electric Boat on the Columbia program, we have seen a 29% increase in the number of hours earned as compared to first quarter 2025. And while we still have areas in the supply chain where we need an increased cadence, we have seen a marked improvement versus first quarter a year ago. For sequence-critical material, we have seen a 52% increase in the number of items received as compared to this time period last year. At Bath Iron Works, the DDG51 program continues to improve in both efficiency and schedule. And at NASCO, we'll deliver the final expeditionary sea-based ship this summer with capacity to support additional TAOs or other auxiliary or commercial programs. And finally, Technologies. This group also experienced growth in revenue and earnings, albeit not at the pace of the other segments. Revenue of $3.6 billion was an increase of 4.2% over the first quarter of 2025. Both businesses contributed to the growth, with Mission Systems led the way with an 11.7% increase. Operating earnings of $339 million were up 3.4% over the year-ago quarter. Operating margins decreased 10 basis points from 9.6% to 9.5%. The group's order activity was also encouraging with a book-to-bill of 1.3x for the quarter and 1.2x for the trailing 12 months. This segment continues to compete very well in its markets with win and capture rates between 80% and 90%. For GDIT, we're seeing strong demand for our AI and cyber capabilities. Q1 orders exceeded our internal plans across the portfolio with particular strength in defense. And despite elongated procurement cycles and fewer customer adjudications, GDIT ended the quarter with a 5% increase in the backlog as compared to year-end 2025, which is encouraging given their near-record revenue this quarter. Mission Systems had a strong quarter from an operational standpoint with a 50 basis point expansion in margins as compared to a year ago, driven by a favorable product mix and their broader transition away from legacy programs to highly differentiated systems. So to wrap things up, while we historically have not updated our guidance after the first quarter, given our strong start, we thought it would be prudent to revise our EPS guidance to reflect our performance thus far and its implication for the full year. As a reminder, in January, we told you to assume an EPS range of $16.10 to $16.20. Our updated guidance for 2026 would be an EPS range of $16.45 to $16.55. Looking at the year from a quarterly perspective, the first and fourth quarters would represent the high points, favoring the fourth quarter given its typical increased volume with the second and third quarters trailing a bit on expected mix. As is our long-standing practice, we will refresh our internal forecast in detail during the second quarter and elaborate more on the specifics by segment on the July call. Nicole, back to you.

Thank you, Danny.

We'll take our first question from Robert Stallard at Vertical Research.

Danny, I was wondering if you could comment on the supply chain situation. You seemed to have touched on it a little bit in marine, but I was wondering how you're getting on across the broader group, whether there are any tight points that you're trying to address?

Yes. Broadly speaking, as it relates to the supply chain for the whole Marine Group, we have seen an increased cadence on time; deliveries are up. We're not seeing the same number of quality issues that we saw in the previous year. We still see some areas in the supply chain where we need to get the cadence up, and those problems tend to be where we have complex components or complex systems where there are single sources of supply. But broadly speaking, we are seeing improvements.

Okay. And then a quick follow-up. It looks like the Ajax program is back in testing again in the U.K. Maybe for Kim, I was wondering if there had been any accounting or financial implications of the stoppage there and the restart?

No, they have not. Everything is business as usual from an Ajax perspective.

We'll move next to Kristine Liwag at Morgan Stanley.

When we look at the fiscal '27 budget request from the White House, there's a fairly large step-up in shipbuilding dollars. You guys have talked about the tightness in labor historically and the supply chain issues in marine. But I was wondering, as you look at the significant step-up in opportunities, are there things that General Dynamics could do to capture more of this growth sooner? It seems like there's more of an urgency to rebuild our Navy.

Yes. As you can imagine, the lead times for producing these ships are pretty extensive. I think what we see in the budget is good support for the programs that are already in work and certainly it helps the volume. But we don't anticipate that any of these awards are going to change dramatically the number of ships that we have to produce in the immediate term.

And then also when we look at that fourth projection by number of shifts, you've got your traditional programs, but then there's also some of these smaller surface vehicles and smaller unmanned undersea vehicles. I was wondering, can you talk about the opportunities for that and is there a way for you to capture more of that smaller end market, especially if we're looking at higher volumes?

We have been investing in the unmanned undersea platforms for a number of years with our Mission Systems group through Bluefin. So I think we're poised well to participate in the growth in that market. As far as smaller ships on the surface combatant side, we don't really see that as a focus. We'll concentrate on what we do at NASCO, with oilers and sealift and sub-tenders, and at Bath Iron Works with DDG51s and the next destroyer. We don't anticipate moving into the smaller surface ship market.

Next, we'll go to Peter Arment at Baird.

Danny, maybe if you could give some comments on any impacts you've seen out of the Middle East, whether it's affecting Gulfstream or whether you've had any other impacts more favorably on the munitions side of things. Maybe just some overall color of any early feedback from Middle East operations.

Sure. Let me focus on aerospace initially. As I said in our comments, we were having a strong quarter from an order standpoint across the U.S. and the Middle East. As the conflict began, we saw some slowing in order intake in the Middle East, so it certainly impacted order activity, albeit the activity remained fairly robust. From a supply side, some of what we get from that part of the world is impacted, and it's really a labor force issue. All of the airplanes that we delivered in the first quarter of 2026 were actually in inventory ready for completion prior to the conflict. We're watching the situation, but world events could impact supply there. From a demand side on the defense side, it's a little early. We're in discussions with a number of customers where we've had long-standing relationships, but we haven't matured those opportunities to the point where I can comment definitively that we see increased demand. A lot will depend on how long this goes and what sort of demand we see to refill inventories.

I appreciate that. And just a quick follow-up. You mentioned Columbia construction is progressing. Can you just give us the latest on where you are on the first hull and where things are progressing otherwise?

Sure. There's really positive momentum on Columbia. All the major modules were received by the end of last year, and so we're in the process of integrating and assembling those in one of our larger yards. We expect to hit a real key milestone by the end of this year and are on a path to deliver that first boat by the end of 2028. So excellent progress in the last six to nine months on the Columbia program and on the path to deliver.

Our next question comes from Seth Seifman at JPMorgan.

I wanted to ask about Aerospace. And I know you said you weren't refreshing guidance within the segments. But the first quarter came in nicely ahead of the expectation for the year on margin rate. The reasons for that that you mentioned seem to be fairly enduring. Are there particular things we should be watching for that would be pushing margin down going forward? Or has Gulfstream, in particular, maybe aerospace more broadly, gotten over the hump with regard to some of these supply chain challenges and margin headwinds that you faced?

I think you'll see some mix movement in the second and third quarters as expected, and then you'll see a really strong fourth quarter. From a delivery standpoint, we should expect that the second quarter will be very similar to the first quarter and then the third and fourth will be our highest, and that's per plan. Those elements give us optimism about where we are in aerospace in terms of margins and, to use your word, durability.

Okay. Excellent. And then maybe in combat, if you could talk a little bit about the facility in Mesquite. I know the release talked about some goodness in artillery and you mentioned ordnance and tactical systems in your comments. There has been some customer concern expressed about Mesquite and the ramp-up there. How should we think about the risks and the opportunities around that facility?

We've reached agreement with the Army customer on the path forward for that facility. We're very well aligned. We expect that we will be in production next year and producing artillery rounds for them and for the foreseeable future. So we have a very good path forward with the customer, and we're well aligned. Think about that happening and coming online next year.

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

I just wanted to follow up on the aerospace comments. It sounds like, Danny, when you think about some of the production coming out of Israel on some of your programs, how has that been impacted and is that a potential risk as we think about the next few quarters?

As I mentioned, all of the airplanes that we delivered in Q1 were received earlier and completed over the quarter, so we weren't impacted this quarter. We could see a small impact the longer the situation goes on. They are still producing airplanes ready for us to complete, but we could see some minor impact. As you know, that primarily affects the G280.

Great. And then maybe, Kim, really nice cash generation in the quarter. Can you give any comments around any one-time advances or other items that could have supported some of the upside in the quarter and how we should think about specifically the progression into the second and third quarter as cash steps down relative to the strong first quarter?

Sure. First, it was really outperformance against our expectations across the business units. If you think of our 10 business units, I think they all exceeded expectations. When I think about customer advances specifically, they come with the business and there wasn't anything of material significance from that standpoint. Anything we got from advances was planned. So this was more outperformance against our expectations for the quarter, which does mean moving some of the cash from the second quarter into the first quarter. As I mentioned, cash will be positive in the remaining quarters but down versus Q1. We're certainly looking at the cash conversion rate for the year in terms of whether we could exceed 100%, and we'll see where we go there too.

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

Danny, a quick question. We've seen the administration putting pressure on some contractors to make investments for the promise of future volume. Have you seen that? Have you guys had to make some investments upfront? How are you handling that, particularly in the munitions and the defense consumable area?

In particular for munitions, we have been investing. We've been investing in artillery capability, solid rocket motors, energetics and some of the down components to support the missile primes. We have been doing that and are continuing to do that, and we're fully committed to making sure that we're part of the solution as it relates to the munitions issue. On the marine side, we've been investing for a number of years and anticipate continuing for several years. I wouldn't necessarily say we saw pressure from the administration; we've been investing because we see the demand and the need and the threat environment dictating it.

Got you. And then maybe just shifting to marine. There's been discussion about a new class program. When would you expect some more details on that, a possible down select or timing as outsiders looking in, when do you think we could learn more about it?

We're in the very early stages of that. We're working with the partner on doing some of the detailed design now. The administration wants to move as quickly as possible, but it's a little early for us to define exact timelines. We're part of the process today, but it's early.

We'll take our next question from David Strauss at Wells Fargo.

I wanted to ask about Mission Systems. Dan, I think I heard you say it was up around 12% in the quarter. The business has been flat to down for quite a while. What was driving the growth there? And maybe touch on the growth outlook from here and what that might mean for margins overall for Technologies.

Mission Systems has done an excellent job transitioning from legacy programs into highly differentiated systems that are in demand. They've invested and focused over the last several years in areas aligned with administration priorities: strategic deterrent, unmanned systems, proliferated and contested space, encryption, modernization, next-generation command and control, and precision munitions. Given that alignment and where Mission Systems has focused, it bodes well for the future. They had strong operational performance and margin expansion driven by favorable product mix and the move away from legacy programs to differentiated systems. We remain bullish about where they can be.

Okay, great. And Kim, in terms of the CapEx step-up this year, your updated thoughts on your ability to recover that through working capital over the near term?

As we continue to invest throughout the year, it certainly impacts cash flow, and that's what we're evaluating quarter by quarter. We're driving to get our working capital off the balance sheet to offset the increase in CapEx.

We'll move next to Myles Walton at Wolfe Research.

Danny, you mentioned Q1 representing the highest output for aerospace in terms of deliveries in a first quarter. Where does capacity currently fit for large cabin production on an annual basis? I noticed in Q4 of last year you had a step-up in CapEx. I imagine you're expanding capacity. Maybe update us on the trajectory to get to the capacity you're targeting?

From a demand and backlog standpoint, we certainly have enough to increase production on the long-range and ultra-long-range family of airplanes. The key issue is the supply chain and their ability to ramp up. We're putting capacity in place because demand is there; it's a matter of when the supply chain can ramp up to support that.

Okay. And on the tariff outlook, are you still contemplating approximately $40 million or north thereof after the Supreme Court and 232 and all the other changes that have taken place?

When you referenced the $41 million, you're talking about what we reported in Q4 of 2025. As we mentioned, when you compare Q1 2025 to Q1 2026, neither quarter had material tariffs. We only assumed very modest recovery in Q1. Going forward with respect to these tariffs, we haven't assumed anything materially different.

Next, we'll move to Sheila Kahyaoglu at Jefferies.

Danny, really strong start across the businesses. Is it fair to say that the roughly 2% EPS raise is primarily related to aerospace and the 15% margins versus the 14% guidance? And maybe how much of that came from G800 accretion versus services or any one-time items with fuel?

The increase in guidance reflects what we see today. The contribution came from more than aerospace; marine and technology also contributed. We'll have more fidelity in the second quarter to share segment-level specifics.

Okay. And then sticking to Aerospace, two business jet OEMs have called out supply chain issues. Should we expect any cadence changes to deliveries for the rest of the year for these jets?

For us specifically, expect Q2 to look a lot like Q1 from a cadence and delivery standpoint. Q3 and Q4 will be higher, with Q4 our strongest both from a mix and a margin standpoint. From a supply chain perspective, they are keeping up for us.

Next, we'll move to John Godyn at Citi.

First, Marine Systems alignment with the budget is clear. Can you elaborate more on Combat Systems and Technologies in light of the priorities proposed in the budget?

It's clear where the Marine programs sit in the base budget, and we're encouraged by that. For Combat, there's good support for the munitions space. Combat vehicles are in a period of transition for the Army and Marine Corps. There's significant development activity underway. During this period, and speaking specifically to next-generation main battle tank efforts such as M1A3 development, we'll see some lower volumes on the current version of the tank while development proceeds. Regarding Stryker, rates are down versus historical highs, although the platform remains versatile. Those rates won't replace what we had seen historically, but there is support from an RDT&E standpoint for programs we're pursuing, including next-generation tank efforts and advanced reconnaissance vehicles for the Marine Corps. From a technology standpoint, we see good alignment in the budget for areas like cyber and space and other Mission Systems priorities.

Great. And changing gears on capital returns and appetite for buybacks, what is your view on buybacks if you continue to execute well this year and the stock lags the market?

Share repurchases are a sensitive subject in the current environment, so we continue to be cautious. As Kim mentioned, we only acquired shares to address dilution from our compensation programs. Regarding dividends, we remain committed; we've increased the dividend for 29 straight years and view it as part of our value proposition. We'll continue to be cautious as we move forward.

Next, we'll go to Doug Harned at Bernstein.

In Marine, you had a large increase in revenues, which you attributed mainly to Virginia Class and Columbia Class. Can you separate what items led to that growth, such as mix, pricing, throughput improvement, additional labor funding or specific milestones? How should we think about where that growth is coming from?

Think of it primarily as a throughput story. Growth has been driven by both labor output — more earned hours — and material. There are always mix changes quarter-to-quarter, but throughput, both labor and material, is what's driving the growth.

When you look at throughput now, how do you see progress toward the goal of two Virginia-class deliveries per year? That target has been difficult historically.

We are progressing toward that goal. I won't get into specific current production rates on this call, but production is up significantly over last year and the path to two Virginias and one Columbia per year is being pursued. I can't predict exact timing, but we are on the way.

So Audra, I think we have time for one more question.

And that question will come from Scott Mikus at Melius Research.

Danny, very nice results. Just a couple of quick questions on Columbia Block II and the Virginia Block VI contract. When are you expecting those to be awarded? Also, going back to Rob's question earlier on the supply chain, is there any change that you or the Navy could dual source the steam turbine on the Columbia program to improve supply chain resilience?

As it relates to Block VI and Columbia Block II, we've been in ongoing detailed discussions with the Navy, and we'll update you when we have something to report; we assume they will come in due course. Regarding dual sourcing the steam turbine, the Navy has been active over the last several years on adding capacity to build turbine generators. Some challenges exist with single-source suppliers, and that's an area critical to the success of the submarine enterprise. The Navy has been working on increasing capacity for some time.

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

This concludes today's conference call. Thank you for your participation. You may now disconnect.