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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.
We will also refer to certain non-GAAP financial measures.
We beat consensus by $0.09 per share on somewhat lower revenue than anticipated by the sell side.
However, operating margin is up about 40 basis points more than anticipated.
This led to the earnings beat.
Revenue is up 1.5% against the third quarter last year.
Operating earnings were up less than 1%.
Net earnings are up 3.1% and earnings per share are up 5.9%.
This is all reasonably good, but the real story for us is the sequential results.
Here, we beat last quarter revenue by 3.8%, operating earnings by 12.6%, net earnings by 16.7%, and earnings per share by 17.6%.
On a year-to-date basis, revenue is up $733 million or 2.7%.
Operating earnings are up $137 million or 4.8%, net earnings are up $140 million, and earnings per share are up $0.64, a strong 8.5%.
We had a powerful quarter from a cash perspective.
Cash flow from operating activities was $1.47 billion, that is 171% in net earnings.
Free cash flow was $1.275 billion, 148% of net income.
This follows a very strong cash quarter performance in the second quarter.
In summary, we enjoyed a good quarter in almost all important respects.
At the outset, let me remind you that in April of last year, we announced that we were cutting production as a result of certain supply chain issues.
Shortly thereafter, it became clear that there was a reduction in demand related to COVID.
That resulted in additional cuts to production.
Those production cuts were preplanned and implemented slowly over the ensuing months and reached their low point in the second quarter of this year.
We had anticipated renewed post-COVID demand in the second half of this year and planned increased production for the second half with 32 planned deliveries in the third quarter and 39% in the fourth quarter.
In fact, demand accelerated in mid-February, a full four months earlier than we had anticipated.
This created opportunities but also operations and supply chain challenges for us, particularly for 2022.
On balance, it is a rich problem to have.
With that, let me turn to the Aerospace results in the quarter.
Aerospace had revenue of $2.07 billion and operating earnings of $262 million, with a 12.7% operating margin.
We managed delivery of 31 aircraft as opposed to the 32 planned, one slipped into the fourth quarter on customer preference.
Revenue is $91 million more than the year-ago quarter, up 4.6% on one fewer aircraft delivered.
On the other hand, operating earnings are down $21 million, on a 160 basis point degradation in margins.
This was the result of an additional $28 million in G&A expenses driven by higher R&D expense and around a $20 million settlement of a supplier claim related to the allocation of warranties after the end of G550 production.
This was offset, but only in part by improved gross margins on delivered aircraft and better margins in the Gulf Street service centers.
The real story here is the quarter-over-quarter sequential improvement.
Sales, earnings and margins are ramping up as planned.
I will not dwell on these numbers.
From an order perspective, the quarter boarded on the spectacular.
In dollar terms, aerospace had a book-to-bill of 1.6:1.
Gulfstream alone had a book-to-bill of 1.7:1.
The second quarter was the strongest order quarter in the number of units that we have seen in quite some time.
This quarter was slightly better.
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 and increased demand continued through the third quarter.
We continue to experience a high level of interest activity and a solid pipeline.
As a result of the order activity, Gulfstream backlog this quarter is the highest in the last six years.
From a new product perspective, the G500 and G600 continued to perform well.
Margins are improving on a consistent basis and quality is excellent.
We have delivered 131 of these aircraft to customers through the end of the quarter with 20 scheduled for delivery in the fourth quarter.
These are the metrics of a successful program building further momentum.
The G700 has approximately 1,800 test hours on the five test aircraft.
The new Rolls-Royce engine is performing well, but much remains to be accomplished.
We remain on track for entry into service in the fourth quarter of 2022 with the G800 to follow in six to nine months.
As I mentioned earlier, we had planned 32 deliveries in the third quarter and came up on short.
The slip was attributable to customer preference.
We implanted for 39 in the fourth and LAD-1 that slipped into the quarter.
If everything goes as planned, we will deliver 40 aircraft in the fourth quarter.
The story in combat systems quarter-over-quarter sequential and year-to-date is all about operating excellence and continued strong margin performance.
Combat systems had revenue of $1.745 billion, down 3.1% from the year-ago quarter.
However, earnings are up 2.2% over the year ago quarter on the strength of an 80 basis point improvement in operating margin, yet another example of strong operating leverage from Combat systems.
Further that theme on a year-to-date basis, Combat system revenue was up $201 million or 3.8%, while operating earnings are up a significant 7.4% on a 50 basis point improvement in operating margins.
with the brigade of Abrams main battle tanks per year and half of brigade of Strykers per year.
Domestic upside is possible from the MPF program where our vehicle is performing well.
In the near term, we are stable internationally, but opportunity rich in the intermediate period with order potential in Poland, the Czech Republic, Romania, Denmark and Switzerland.
You may have read in the press about some noise and vibration issues in Ajax that have emerged during the programs test phase.
We are working very closely with both the British Army and the Ministry of Defense and are confident that both technical issues can be resolved.
In summary, this quarter was an impressive operating performance once again by the Combat Systems Group.
Turning to marine systems.
Revenue of $2.64 billion is up $232 million, above 9.6% over the year ago quarter.
The current quarter revenue growth was distributed fairly evenly across the three shipyards.
It is also up sequentially and year-to-date.
Year-to-date revenue was up 7.5%.
This is very impressive continued growth.
In fact, revenue in this group has been up for the last 16 quarters on a quarter over year ago quarter basis.
Operating earnings are $229 million in the quarter, up $6 million or 2.7% on an operating margin of 8.7%.
On a sequential basis, operating earnings are up $19 million, on a 40 basis point improvement in margins.
Electric boats performance remained strong, and while still early in the Columbia first ship construction contract, the program remains on cost and schedule.
We had a particularly strong quarter in our ship repair business, continuing to support our navy customer.
Throughout the group, we have a solid backlog of new construction and repair work, and our programs are well supported in the FY '22 budget.
In summary, revenue growth is clearly visible.
The real opportunity given this steady revenue visibility is margin improvement over time.
This segment had revenue of $3.120 billion in the quarter, down $130 million from the year ago quarter or 4%.
The revenue decrease was attributable to Mission Systems from timing on several programs in part driven by chip shortages.
On the other hand, information technology grew revenue against the year ago quarter at a rate of 1.4%.
Operating earnings of $327 million are up $13 million or 4.1% on a 10.5% operating margin.
EBITDA margin is a truly impressive 14.4%, 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.
This quarter revenues decrease will impact the year, and we now expect revenue to be around $12.6 billion or $400 million less than our second quarter update.
Earnings will, however, remain the same on better margins.
Total backlog remains relatively consistent over all comparator periods.
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 GDIT was a little better than 1:1 and somewhat less emission systems.
The pipeline remains active at both businesses.
From an opportunity perspective, cybersecurity is a top priority throughout the government and the budget calls for tens of billions of dollars in unpiloified in both the defense and civil spaces.
This is a significant opportunity for which we are well positioned to support our customers' needs, particularly as more and more customers move toward a zero trust model.
So that concludes my remarks with respect to a very good quarter and first nine months.
As we look toward the end of the year, we expect performance to be in line with the update to guidance that we gave you on the last call, except as I referenced in my remarks about mission systems.
However, earnings per share guidance remains unchanged.
I'll start with our cash performance in the quarter.
Operating cash flow was $1.5 billion in the quarter, once again on the strength of Gulfstream orders and from continued strong cash performance from our technology segment.
Including capital expenditures, our free cash flow was $1.3 billion or a 148% net earnings conversion.
Through the first nine months, our conversion rate is 91%, approaching our full-year outlook for free cash flow conversion in the 95% to 100% range.
For those of you who followed us for some time, this performance through the first nine months of the year is better than we've seen in the past several years, and gives us good line of sight to achieving the upper end of our target cash range for the year.
Looking at capital deployment.
Capital expenditures were $196 million in the quarter or 2% of sales.
That puts us a little under the 2% of sales for the first nine months, so trending somewhat below our forecast for the year.
We're still projecting full year capex in the range of 2.5% of sales.
So that obviously implies an uptick in spending in the fourth quarter.
We also paid $332 million in dividends and spent $117 million on the repurchase of 600,000 shares in the quarter.
That brings year-to-date repurchases to 8.5 million shares at an average price of just under $174 per share.
We repaid $500 million of notes that matured in July.
And although there were no new issuances, we ended the quarter with $2 billion of commercial paper outstanding.
We expect to fully retire that balance before the end of the year.
So we ended the third quarter with a cash balance of just over $3.1 billion and a net debt position of $10.5 billion, down more than $800 million from last quarter and down $1.4 billion from this time last year.
With the scheduled CP repayment in the fourth quarter, we expect to end the year with a net debt balance below $10 billion for the first time since 2018.
As a result, net interest expense in the quarter was $99 million, down from $118 million in the third quarter of 2020.
That brings the net interest expense for the first nine months of the year to $331 million, down from $357 million for the same period in 2020.
The tax rate in the quarter was 15.3%, bringing our rate to 15.9% for the first nine months, consistent with our full-year outlook, which remains around 16%.
Order activity and backlog were once again a strong story in the third quarter with a 0.9 times book-to-bill for the company as a whole, bringing us to a 1:1 ratio for the first nine months and a 1.2 times ratio for the trailing 12 months.
As Phebe mentioned, the order activity in the Aerospace group led the way with a 1.6 times book-to-bill in the quarter, while technologies recorded a book-to-bill of one-to-one.
Foreign exchange rate fluctuation resulted in a $300 million reduction in backlog in the quarter, with the majority of that impact in Combat Systems.
We finished the quarter with a total backlog of $88.1 billion, that's up 8% over this time last year, and total potential contract value, including options and IDIQ contracts was $129.6 billion.
[Operator instructions] Operator, could you please remind participants how to enter the queue?

user
q3 revenue $9.6 billion.
significant gulfstream order activity continues.
backlog at end of quarter was $88.1 billion, up 8.1% from year-ago quarter.

assistant