General Dynamics Corporation 2026 Q3 Earnings Call

Please go ahead. Thank you, operator, and good morning, everyone.

Welcome to the General Dynamics Third 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 Kuryea, Chief Financial Officer. I will now turn the call over to Phebe.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. For those of you who were on our second quarter call, you may recall that we described it as a superb quarter, better than a powerful first quarter. Well, this quarter's even better. The quarter-over-year-ago quarter results, the sequential results, and the year-to-date results are all very good, as you will learn from these remarks and the charts attached to our press release. Now, let's proceed to the more prosaic. We reported earnings of $4.49 per diluted share on revenue of $14.57 billion, operating earnings of $1.527 billion, and net earnings of $1.229 billion. Against the year-ago quarter, revenue is up 12.9%. Importantly, operating earnings are up 14.7%, and net earnings are up 16.1%. As a result, earnings per diluted share are up $0.61, or 15.7%.

The operating margin for the entire company is 10.5%, a 20 basis point improvement over the year-ago quarter, which, coupled with the revenue growth, led to the very strong earnings growth. While Marine Systems led the way on revenue increases, each of our other three segments had revenue increases as well. With respect to operating earnings, Aerospace and Marine Systems led the way with strong double-digit increases, as each of our shipyards has steadily improved its throughput and productivity. Sequentially, against a superb second quarter, revenue is up 3.3%, operating earnings are up 4.6%, and diluted earnings per share are up about 6%. On a year-to-date basis, revenue is up 10.4%, operating earnings are up 12.9%, and earnings per share are up 13.6%, benefited by a 30 basis point improvement in operating margin.

In short summary, we enjoyed double-digit increases in revenue, operating earnings, net earnings, and diluted EPS on both a quarter-over-quarter and year-to-date basis. We also beat consensus by $0.37 in the quarter on more revenue and operating earnings than anticipated by the sell side. In short, it is a splendid quarter. Year-to-date figures leave us in a place where we need to adjust our forecast for the year. I will do that later in these remarks. Let me ask our CFO, Kim Kuryea, to provide detail on our strong order activity, rapidly growing backlog, and continued efficient cash generation, as well as other relevant financial data.

Thank you, Phebe, and good morning. I will start with orders and backlog, where we had a truly historic quarter. Nearly $99 billion in new orders drove our backlog to a record $220 billion, doubling the level of a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at $271 billion. These results reflect the strength of demand across our businesses. The Marine Systems segment led the way with significant contracts awards at Electric Boat, including $29.5 billion for five additional Columbia-class submarines in Build II, and $42.1 billion for nine additional Virginia-class submarines in Block VI. In our Technologies segment, book-to-bill was a strong 1.4x, and Combat was just shy of one-to-one following a very strong second quarter. Overall, the Defense segment book-to-bill was 8.5x. In Aerospace, our dollar-based book-to-bill was 1.4x, and even higher for Gulfstream alone.

To give you some perspective, new aircraft orders in the first nine months of 2026 were up over 30% from last year, demonstrating sustained demand across the entire Gulfstream product line. Turning to cash, our performance continues to be outstanding. We generated $1.7 billion of operating cash flow, which, when combined with the strong $4 billion from the first half, yields over $5.7 billion of operating cash flow in the first nine months of the year. Each of our segments contributed nicely, exceeding their planned cash flows and driving operating working capital down nearly $1.7 billion from the end of 2025, despite an increase in revenue of over 10%. As I mentioned on the July call, we contributed $500 million to our pension plans in the quarter.

With this voluntary contribution, our frozen plans are essentially funded, and we are now in a position to de-risk the plans and eliminate significant volatility going forward to control the pension costs flowing to our contracts. Capital expenditures were $481 million in the quarter, more than the total amount in the first half of the year. In the first nine months of 2026, capital expenditures were 2.2% of sales. We continue to expect capital expenditures between 3.5% and 4% of sales for the full year, so you should expect a fourth quarter of significant growth as we close out the year and continue to invest, especially in our shipyards, to accelerate production and meet future demand. Even with this ramp-up in investment and our pension contribution, our free cash flow performance has been exceptional.

We generated $1.2 billion for the quarter, yielding a cash conversion rate of 100%, and $4.8 billion for the first nine months, an impressive 137% of net earnings. We continue to expect free cash flow conversion at around 105% for the year, with the potential for some upside depending on the pace of capital projects in the fourth quarter. Finally, to round out the cash discussion, from a capital deployment perspective in the quarter, we paid dividends of approximately $430 million, and repurchased about $285 million of our common stock to cover estimated dilution. We repaid $500 million of notes that matured in August after previously repaying another $500 million of notes in June. Our balance sheet remains strong. We ended the quarter with a cash balance of approximately $4.4 billion and a net debt position of $2.6 billion, a $3 billion improvement from year-end.

Turning to interest, our net interest expense in the third quarter was $45 million compared to $74 million in the respective 2025 period, and $163 million for the first nine months of 2026 compared to $251 million in the same period of 2025. The decrease in our net interest expense is due to more interest income on higher cash balances throughout 2026, allowing us to avoid the commercial paper borrowing costs that we incurred in 2025. We have not been in the commercial paper market at all thus far in 2026. At this point, our expectation for net interest expense for the year is approximately $215 million. Finally, the effective tax rate in the quarter was 17.3%, bringing the tax rate for the first nine months of 2026 to 17.6%. In summary, it was another outstanding quarter. 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 detail. First, Aerospace. Aerospace had a very good quarter with revenue of $3.54 billion and operating earnings of $513 million, with a 14.5% operating margin. Revenue is $302 million more than last year's third quarter, a 9.3% increase. To give you a sense of perspective here, Gulfstream's new aircraft revenue is up on the delivery of one more aircraft, 40 in total, and a slightly more favorable mix. We also saw good revenue increases in aircraft services at Gulfstream, as well as at Jet Aviation across their portfolio. Operating earnings of $513 million are up $83 million, driven in part by the increased revenue, but most importantly, by 120 basis point improvement in operating margin.

At Gulfstream, we continue to see efficiency gains in manufacturing and completions, particularly on the G700 and G800. For the G800, we've delivered only our 33rd aircraft in this quarter, and although it's relatively early since its entry into service, performance on that airplane has been very strong with additional opportunity ahead of us. Services have also been a highlight this quarter, continuing to grow as the fleet expands. We saw increases in volume at our MRO centers, and at Jet Aviation, activity at our U.S.

FBOs was particularly robust. Turning to market demand, Aerospace had a 1.4 times book-to-bill in the quarter.