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Text: 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.
Revenue was essentially flat against the second quarter last year, but operating earnings are up $125 million and net earnings are up $112 million.
Earnings per share are up $0.43.
To be a little more granular, revenue on the defense side of the business is up against last year's second quarter by $308 million or 4.2%.
The Aerospace is down $352 million, pretty much as planned.
Operating earnings on the defense side are up $98 million, or 14.3%, and operating earnings in Aerospace are up $36 million on a 390 basis point improvement in operating margin.
The operating margin for the entire company was 10.4%, 140 basis points better than the year-ago quarter.
From a slightly different perspective, we beat consensus by $0.07 per share on somewhat lower revenue than anticipated by the sell side.
However, operating margin is 20 basis more than anticipated, coupled with a somewhat lower share count.
This led to the earnings bit.
On a year-to-date basis, revenue is up $596 million or 3.3%, and operating earnings are up $129 million or 7.3%.
Overall, margins are up 40 basis points.
The defense numbers are particularly good with revenue up $752 million or 5.2%, and operating earnings up $143 million or 10.3%.
On the Aerospace side of the business, revenue on a year-to-date basis is down $156 million or 4.3%, but earnings are up $16 million or 4% on a 90 basis point improvement in operating margins.
The quarter was also very strong from a cash perspective.
Free cash flow of $943 million is 128% of net income.
Cash flow from operating activities was 151% of net income.
In summary, we enjoyed a very good growth in the defense businesses in the quarter and had a very solid quarter from an earnings perspective across the board.
The year-to-date results give us a solid start to the year and enable us to raise our forecast for the full year, which I will share with you at the end of these remarks.
Let me put the aerospace results in some recent historical context so as to put our performance into our perspective where it can be understood.
As you recall that in April of last year, we told you we were cutting production as the result of certain supply chain issues.
It subsequently became clear that there was a reduction in demand related to COVID-19 that resulted in additional cuts to production.
Those production cuts were implemented slowly over the ensuing months and reached their low point this quarter.
You may also recall that I told you last quarter that the second quarter would be the most challenging for Gulfstream because of these preplanned production cuts.
On the good news side of the story, we had anticipated renewed post-COVID demand in the second half of this year and planned increased production for the second half.
In short, you will see more deliveries, revenue and operating earnings in the second half as a result.
With that, let me turn to the aerospace results in the quarter.
Aerospace had revenue of $1.6 billion and operating earnings of $195 million, with a 12% operating margin.
Revenue was $352 million less than the year-ago quarter or 17.8% as a result of fewer planned aircraft deliveries.
On the other hand, operating earnings are up $36 million or 22.6% on a 390 basis point improvement in margins.
From a pure operating perspective, we did very well.
From an order perspective, the quarter border long is spectacular.
In dollar terms, Aerospace had a book-to-bill of 2:1.
Gulfstream alone had a book-to-bill of 2.1:1, even stronger if expressed in unit terms.
This is the strongest order quarter in number of units in quite some time.
It was all the more remarkable in that it did not include any fleet sales.
As previously discussed, sales activity truly accelerated in the middle of February and continued on through the remainder of the first quarter.
The pipeline that developed in that quarter rolled over into the second quarter as is obvious from these results.
We continue to experience a high level of interest activity and a growing pipeline.
From a new product perspective, the G500 and G600 continue to perform well.
Margins are improving on a consistent basis and quality is superb.
We have delivered 115 of these aircraft to customers as we speak.
The G700 has approximately 1,600 test hours on the five test aircraft.
We remain on track for entry into service in the fourth quarter of 2022, but much remains to be accomplished, particularly with respect to the certification of the new Rolls-Royce engine.
Looking forward, we have planned 32 deliveries in the third quarter and 39 in the fourth.
If all goes well, we may be able to bring in a few more forward from the first quarter of 2022 to meet current demand.
Turning to Combat Systems.
All of the comparisons in combat systems quarter over quarter sequentially and year-to-date are quite favorable.
Combat systems had revenue of $1.9 billion, up 8.3% over the year-ago quarter.
While ordinance and tactical systems did well, the primary source of growth was combat vehicles at both land systems and european land systems.
So all in all, very good growth.
It is also interesting to observe that combat systems revenue has grown in 17 of the last 19 quarters on a quarter over the year-ago quarter basis.
For the first half of the year, combat systems revenue of $3.7 billion, is $257 million or 7.4% over the first half of last year.
Operating earnings for the quarter at $266 million are up 11.3% on higher volume and a 40 basis point improvement in margin.
For the first half, combat systems earnings of $510 million are up $48 million or 10.4% over the last year's first half.
The quarter was also good for combat systems from an order perspective with a 1:1 book-to-bill, leaving a modest increase in total backlog.
Demand for our products, particularly our combat vehicles, remain strong with Europe leading the way.
Abrams main battle tank demand is also increasing and the Stryker remains the combat vehicle of choice for multiple U.S. Army missions and operations.
This was an impressive performance once again by Combat Systems.
Revenue of $2.54 billion is up $65 million over the year-ago quarter.
It is also up sequentially in year-to-date.
In the quarter, the growth was led by the DDG-51 and T-AO volume.
Submarine construction was stable with increases in Virginia Block V and Columbia, offset by a decline in Block IV and engineering.
For the first half, revenue is up $302 million or 6.4%.
This is very impressive continued growth.
In fact, revenue in this group has been up for the last 15 quarters on a quarter versus the year-ago quarter basis.
Operating earnings are $210 million in the quarter, up $10 million or 5% on operating margins of 8.3%.
You may recall that we experienced a strike at bath last year.
I am pleased to report that our relationship with the union is strong, and we are both committed to improving bath performance.
NASSCO is coming down the learning curve on the ESG and is nearing completion on the first of the new oilers.
Repair was also strong.
Electric both performance remains strong.
And while early in the Columbia first ship construction contract, the program remains on cost and schedule.
The segment has revenues of $3.16 billion in the quarter, up $98 million from the year-ago quarter or 3.2%.
The revenue increase supplied by information technology, mostly associated with the ramp-up of new programs, was almost 10%.
Mission systems experienced a modest decline in revenue driven by the sale of our space antenna business last year and a shortage of chips for certain products, which we are working to remedy in the second half.
Operating earnings at $308 million are up $61 million or 24.7% on a 9.7% operating margin.
EBITDA margin is an impressive 13.7%, including state and local taxes, which are a 50 basis point drag on that result.
Most of our competitors carry state and local taxes below the line.
Total backlog grew $95 million, so good order activity in the quarter with a book-to-bill of 1:1 and good order prospects on the horizon.
The book-to-bill at IT was a little better than 1:1, and somewhat less at Mission Systems.
This is particularly good performance in light of the continued delays by the customer in making contract awards.
In total, GDIT has nearly $34 billion in submittals awaiting customer decision with most representing new work.
In addition to these submittals, our first half order book does not reflect approximately $4.6 billion of awards made in GDIT that are now in protest, including two sizable contracts challenged by a competitor.
These delays are pushing work we anticipated delivering in the second half of 2021 to 2022.
While new award activity has generally been slower, new requests for proposals have remained robust.
GDIT's hefty submittals in the first half reflect significant customer demand for modernization and securing IT infrastructure in the wake of COVID.
Business has the opportunity to submit another nearly $20 billion in proposals through the end of the year.
This concludes my remarks with respect to a very strong quarter and first half.
I'll start with our cash performance in the quarter.
From an operating cash flow perspective, we generated over $1.1 billion on the strength of the Gulfstream order book and additional collections on our large international combat vehicle contract.
Including capital expenditures, our free cash flow, as Phebe noted, was $943 million, or a 128% net earnings conversion.
You may recall that for the past several years, our free cash flow has been heavily weighted to the back half of the year.
So the strong quarter derisks that profile somewhat and reinforces our outlook for the year of free cash flow conversion in the 95% to 100% range.
Looking at capital deployment.
I mentioned capital expenditures, which were $172 million in the quarter or 1.9% of sales.
That's down from last year, but our full-year expectation remains in the range of 2.5% of sales.
We also paid $336 million in dividends and spent approximately $600 million on the repurchase of 3.3 million shares.
That brings year-to-date repurchases to 7.9 million shares at an average price of just under $173 per share.
We have 279.5 million shares outstanding at the end of the quarter.
We repaid $2.5 billion of notes that matured in May, in part with proceeds from $1.5 billion in notes we issued in May.
We also issued $2 billion of commercial paper during the quarter to facilitate the repayment of those notes and for liquidity phasing purposes, but we expect to fully retire that CP before the end of the year.
After all this, we ended the second quarter with a cash balance of just under $3 billion and a net debt position of $11.4 billion, consistent with the end of last quarter and down more than $900 million from this time last year.
As a result, net interest expense in the quarter was $109 million, down from $132 million in the second quarter of 2020.
That brings the interest expense for the first half of the year to $232 million, down slightly from $239 million for the same period in 2020.
We repaid another $500 million of notes on July 15, as we continue to bring down our debt balance this year and beyond.
At this point, we expect our interest expense for the year to be approximately $425 million.
The tax rate in the quarter and the first half at 16.3% is consistent with the full-year expectation.
So no change to our outlook of 16% for the year.
Order activity and backlog were once again a strong story in the second quarter with a 1:1 book-to-bill for the company as a whole.
As Phebe mentioned, order activity in the aerospace group led the way with a twice book-to-bill, while combat and technologies each recorded a book-to-bill of 1:1 on solid year-over-year revenue growth.
We finished the quarter with a total backlog of $89.2 billion.
That's up over 8% over this time last year.
And total potential contract value, including options and IDIQ contracts, was $130.3 billion.
Finally, a quick note on the operating results in the technologies group.
You'll recall in the second quarter of last year, we recognized a loss of approximately $40 million on an international contract that resulted from scheduled delays caused by COVID-related travel restrictions.
We formally closed out this matter with the customer this quarter.
And despite the fact that our activity on the contract has been dormant for over a year, the accounting rules required us to reverse approximately $45 million of previously recognized revenue in the quarter.
Without this reversal, the technologies group would have seen organic growth of 6.4% in the quarter.
Now let me do my best to give you an updated forecast.
The figures I'm about to give you are all compared to our January forecast, which I will not repeat.
In our aerospace, we expect an additional $200 million of revenue with an operating margin of around 12.4%, which is 10 basis points below what we previously forecasted.
This will result in an additional $10 million of operating earnings.
There could be some upside here if we can squeeze out a few more planes in the year.
With respect to the defense businesses, combat systems should have another $100 million of revenue and add another 10 basis points of operating margin.
So total revenue of $7.4 billion and operating margin number around 14.6%.
Marine Systems has an additional $300 million and 10 basis points of improved margin.
So annual revenue of $10.6 billion with an operating margin around 8.4%.
Technology revenue will be down $200 million from our previous forecast but adds 30 basis points of operating margin.
So annual revenue of $13 billion with an operating margin of around 9.8%.
So on a companywide basis, we see annual revenue of about $39.2 billion and an overall operating margin around 10.6%.
This rolls up to earnings per share around $11.50, $0.45 to $0.50 better than our forecast going into the year.

user
backlog at end of second-quarter 2021 was $89.2 billion.
total estimated contract value, sum of all backlog components, was $130.3 billion at end of quarter.

assistant