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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.
Earlier today, we reported fourth-quarter revenue of $10.5 billion, net earnings of $1 billion, and earnings per diluted share of $3.49.
This is, in most respects, a very solid quarter, even though we missed consensus by $0.05.
I have more to say about that shortly.
Despite the adverse impact of the pandemic, we achieved most of our operational and financial goals, added dramatically to our backlog, and had a very good cash quarter.
Because of the adverse impact to the economy caused by COVID-19, I'll devote less time to the quarter-over-quarter comparisons and spend more time on the sequential improvement that tells a compelling story of recovery.
I'll go through that in some detail as I give you my thoughts on the business segments.
As we indicated that it would be, the final quarter is our strongest.
It is quite remarkable that we came within $0.02 of the very strong pre-pandemic fourth-quarter 2019.
On a sequential basis, suffice it to say that revenue is up 11.1%, operating earnings are up 20.6%, net earnings are up 20.1% and earnings per share are up 20.3%.
So all in all, a solid quarter with good performance even compared to the year-ago quarter but really good sequentially.
For the full year, we had revenue of $37.9 billion, down from 3.6% from the prior year, net earnings of $3.17 billion, and earnings per fully diluted shares of $11, once again, modestly below consensus.
Our business was strengthened by significant growth in the backlog to a year-end record high of $89.5 billion.
The same is true of total estimated contract value at $134.7 billion.
The total company book-to-bill was 1.1 to 1 for the year, led by the particularly strong order performance of Electric Boat.
The strong order intake across the board positions the company well for 2021 and beyond.
Our cash performance for the quarter and the year was stronger than expected with a conversion rate of 91% of net income for the year.
Jason will have more fulsome comments on this subject in his remarks.
Let me review the quarter, paying particular attention to sequential comparisons and the full year in the context of each group, and provide some color as appropriate.
Aerospace revenue of $2.4 billion is up 23.3% over the third quarter on the strength of the delivery of 40 aircraft, 34 of which were large cabin.
While this was the strongest delivery quarter of the year, it fell short of our expectations by three aircraft, two of which delivered after the first of the year for reasons related to customer preference.
The third aircraft had a willing customer but was not ready for delivery by year-end.
That one is on us.
For the full year, revenue of $8.08 billion is off 17.6% from the prior year.
Nevertheless, operating earnings are still over $1 billion, far away the industry leader.
Fourth-quarter operating earnings of $401 million is 41.7% better than the third quarter on the strength of higher revenue and a 220-basis-point improvement in operating margin.
However, the shortfall against consensus for the quarter and the year is found in the three anticipated deliveries that slipped into this year.
This should not, in any respect, diminish the outstanding performance of Gulfstream in this environment.
Furthermore, margins increased on a sequential basis throughout the year, ending at 16.5% in the fourth quarter.
At midyear last year, we told you to expect revenue of about $8.4 billion with earnings of $1.13 billion.
We finished the year with revenue of $8.1 billion and earnings of $1.08 billion.
The entire shortfall is attributable to 127 deliveries versus our expectation of 130.
All in all, still within the 125 to 130 deliveries we gave you right after the initial shock to the economy caused by the pandemic became manifest.
On the order front, activity in the quarter was very good, and the pipeline remains quite active.
The book-to-bill at Aerospace in the fourth quarter was 0.96 to 1, dollar-denominated.
For the year, the book-to-bill was 0.88 to 1.
This order activity was, in my view, quite good in the midst of a pandemic-induced depression.
We are of the well-considered view that order activity will improve further as travel restrictions are lifted and the economy begins its recovery.
Let me give you some thoughts on our product portfolio.
First, the G500 and G600 unit manufacturing costs continued to decline, and we are producing superb quality.
We had 92 units of this family of aircraft in service at year-end.
Anecdotally, the G500 led the order book in the fourth quarter.
Next, some in the analyst community have expressed concern about the continuing demand for the G650, which first entered into service eight years ago.
At the end of this year, we had 436 G650 in service, an average of 54 a year.
The 650 continues to be in demand, but not at that level.
I can add anecdotally that in the fourth quarter, it was a close second to the G500 demand.
It remains a strong competitor to anything in the air and will remain a strong contributor to our revenue and earnings for the next several years.
Finally, on the new product development front, all five G700 flight-test aircraft are flying and have over 1,000 hours of test flight.
We appear to be on track for entry into service in the fourth-quarter 2022.
That will stimulate both revenue and earnings next year.
If you've been following our Aerospace R&D spend, you know that there's more to come on this subject.
Revenue in the quarter of $1.96 billion is essentially the same as the year-ago quarter.
Operating earnings of $309 million are $25 million or 8.8% ahead of the final quarter of 2019 on the strength of 140 basis point improvement in operating margin to 15.8%.
For the full year, revenue of $7.2 billion is up $216 million, a 3.1% increase after a 12.3% growth in 2019 despite a revenue decline at ELS, driven by COVID shutdowns in Spain earlier in 2020.
Operating earnings of $1.04 billion are up $45 million, a 4.5% increase.
By the way, this performance is consistent with the initial guidance we provided earlier in the year.
In the U.S., our Army customer is continuing its modernization, which provides steady demand for our combat vehicles and munitions businesses.
The fourth quarter had some nice order activity, including a contract for Abrams Version 3 with a ceiling of $4.3 billion and additional Stryker SHORAD orders with the ceiling of up to $1.2 billion.
Outside the U.S., we are beginning to see increased demand as our NATO allies start to emerge from COVID-constrained activity, including over $200 million of Canadian ammunition orders in the quarter.
In short, this group has had quite positive revenue growth for several years now, continued its history of strong margin performance, had very good order activity, and has a strong pipeline of opportunity as we go forward.
This is once again a good news story.
Marine fourth-quarter revenue of $2.9 billion is up $292 million, a compelling 11.4% increase over the year-ago quarter.
Operating earnings of $247 million are up $48 million against a good fourth quarter in 2019.
Importantly, there is an 80-basis-point improvement in operating margins.
The results are much the same sequentially.
Revenue was up $452 million, and earnings are up $24 million or 10.8%.
For the full year, revenue was almost $10 billion, up $796 million or 8.7%.
Operating earnings for the year of $854 million are up by $69 million or 8.8%.
This is the highest quarterly and full-year earnings ever for the Marine group.
In our midyear guidance to you, we anticipated revenue of about $9.6 billion and operating earnings of $845 million.
We came in above that for both revenue and earnings.
In response to significant increased demand from our Navy customer that you can see in these results, we continue to invest in each of our yards, particularly at Electric Boat to prepare for Block V and the new Columbia ballistic missile submarine.
So suffice it to say that we're poised to support our Navy customer as they increase the size of their fleet and deliver value to our shareholders as we work through this very large backlog and improve our return on invested capital.
Finally, the Technologies group, which consists of GDIT and Mission Systems, is reported together for the first time in a while.
You may recall, we used to report this group as then constituted as Information Systems and Technology.
This new reporting reflects the way we manage these businesses with group executive vice president, Chris Marzilli, reporting to me.
We have also discovered that in this era of end-to-end solutions melding technology, hardware, and software, these business units increasingly go to market together, seeking to provide end-to-end systems and support solutions.
We will, however, continue to provide operating transparency by providing company-specific data where appropriate.
Jason will have more to say about this in his remarks.
This is, of course, the group in the defense segment that has had the most impact from COVID-19 with the most remote participation from employees and the most difficult to access in customer locations.
With all that said, let's turn to the results and commentary on the group and specific businesses.
For the quarter, Technologies had revenue of $3.23 billion, off less than 1% sequentially.
Operating earnings of $352 million are up $38 million or 12.1% on a 120-basis-point improvement in margins.
As you would expect, given the environment, revenue for the first full year is off $711 million or 5.3%, and earnings are off $100 million or 7.6%.
It is well to remember that these revenue and earnings numbers exclude the SATCOM business that we sold in the first half of last year.
All considered, the group performance showed good strength, and earnings guidance from us was close.
Revenue came in at $350 million, below our guidance, $12.65 billion versus $13 billion, but margins, particularly at GDIT, were better, leading our earnings forecast to be on target.
From a margin perspective, GDIT was at 7.9%, up 40 basis points sequentially.
Mission Systems, at 16.2%, was up 290 basis points over the last quarter.
For the full year, the group's free cash flow exceeded 150% of full-year imputed net earnings, the strongest performance within General Dynamics.
GDIT's performance was even stronger.
It was the best quarter cash performance in its history.
The group enjoyed a tremendous order quarter with significant wins by GDIT in four major programs, all of which are IDIQ contracts.
As a result, under our conservative accounting policy, these awards are found in total estimated contract value rather than in unfunded backlog.
Jason will get into this more in his remarks as well.
Each quarter in the past, I've tried to give you some insight about GDIT.
Once again, let me share some thoughts.
The fourth quarter was an extension of the momentum GDIT built throughout the year despite COVID headwinds.
They remained focused on what they could control in an otherwise turbulent year, supporting customers and their employees while controlling costs, converting cash, and winning new business.
On the new business front, GDIT won several large deals in key technical focus areas, including cyber, cloud, and artificial intelligence.
These wins drove GDIT's total estimated contract value up $2 billion or 11% as compared to both the third quarter and year-end 2019.
As you will see in our guidance, GDIT is poised for very nice growth in 2021.
The first thing I'd like to address is our cash performance for the quarter and the year.
That resulted in free cash flow for the year of $2.9 billion, a cash conversion rate of 91%, nicely ahead of our anticipated 80% to 85% of net income.
To put this in context, our cash from operations for the year of $3.9 billion was less than $20 million shy of the highest annual operating cash flow we've ever had, notwithstanding the impact of COVID on our operations in 2020.
In fact, our free cash performance for the year was just short of achieving our original pre-COVID cash forecast, so really a remarkable outcome.
This was the result of outstanding performance across the business to close out the year, most notably in the Aerospace group, which began to draw down its inventory that we've been discussing for some time, and the Technologies group, which continues to generate superb cash flows, as Phebe mentioned, in this case, in excess of 150% of imputed net income for the year.
And as you'll recall, at this time last year, we negotiated a path forward on our large international contract in Combat Systems, including a revised progress payment schedule that liquidates their receivables balance over the next three years.
As part of that agreement, we received two payments of $500 million each last year, and we received the next progress payment earlier this month in accordance with the revised schedule.
So that OWC will continue to unwind, as we've discussed on past calls.
Of course, Marine Systems continues with its significant facilities improvements in support of the unprecedented growth on the horizon.
To that point, we had capital expenditures of $345 million in the fourth quarter for a full-year total of nearly $1 billion or 2.5% of sales.
You may recall, we had expected our capex to peak in 2020 at roughly 3% of sales due to these shipyard investments.
As you might expect, given the impact of the pandemic, we've managed the timing of this capex spend prudently, and the result is three years, '19, '20, and '21, at roughly 2.5% of sales.
This timing fully supports our Columbia and Block V build plan at Electric Boat.
We then expect to trend back down and return to the more typical 2% range by 2023, consistent with our previous expectations.
The net result is that we expect cash performance to continue to improve in 2021 to the 95% to 100% conversion range with year-over-year growth in free cash flow in 2021 and beyond.
We ended the year with a cash balance of just over $2.8 billion and a net debt position of approximately $10.2 billion, reflecting a $1.7 billion reduction in the fourth quarter.
Our net interest expense in the fourth quarter was $120 million, bringing interest expense for the full year to $477 million.
That compares to $110 million and $460 million in the comparable 2019 periods.
Our next scheduled debt maturities are for $2.5 billion in the second quarter and $500 million in the third quarter of this year.
Due to the timing of our cash flows, we may be in the commercial paper market for a transition period.
But overall, we expect interest expense to drop to approximately $420 million in 2021.
We also paid $315 million in dividends in the fourth quarter, bringing the full year to $1.2 billion.
And we repurchased 700,000 shares of stock in the quarter, bringing us to just over 4 million shares for the year for $600 million or $148 per share.
With respect to our pension plans, we contributed $480 million in 2020, and we expect that to decrease to approximately $360 million in 2021, the majority of that in the second half.
Turning to income taxes.
We had a 15.4% effective tax rate in the fourth quarter, resulting in a full-year rate of 15.3%, consistent with our previous guidance.
Looking ahead to 2021, we expect a full-year effective tax rate of around 16%.
Next, I'd like to alert you to two accounting changes that we've made in the fourth quarter, one related to segment reporting and the other related to pensions.
The segment change is the one that Phebe alluded to earlier and relates to our GDIT and Mission Systems businesses.
As the federal IT services and defense electronics markets have evolved in recent years, we've seen a significant increase in the customers' prioritization of these capabilities and a shift to large-scale, end-to-end, highly engineered solutions that require critical mass and a broad array of technology services and hardware offerings to meet these customer demands.
And more recently, the COVID-19 pandemic has only accelerated these trends with an expansion of remote connectivity and an added sense of urgency around required technology investments.
As you've seen, we've responded to these trends over the past several years to further solidify our position as a market leader in this space, including the combination of our C4 and ISR businesses to form Mission Systems and, of course, the acquisition of CSRA to reposition GDIT as a leader in this market.
With these integrations now complete, along with some considerable portfolio shaping and realignment, we are seeing the market dynamics continue to evolve.
The two businesses share the same defense, intelligence, and federal civilian customer base and increasingly go to market together to meet these customers' needs.
In addition, we're seeing considerable commonality and a significant complementary pull-through in their core offerings.
So we will now be reporting them as one technology segment to better reflect the way we're running the business as we position them to best compete in this robust market.
To be clear, we'll continue to provide transparency into the individual revenues and associated programmatic detail for each business, but of course, that becomes somewhat of a mixed bag as they increasingly engage in joint pursuits.
With respect to pensions, we've adopted an accelerated method for amortizing actuarial losses for our government pension plans to better align the timing under GAAP with when the costs are allocated to contracts.
Because these costs are recovered on our contracts, this change had no impact on our net income or cash flow.
However, you'll note some differences between captions on the balance sheet and income statement as this accounting change has flowed through the financial statement.
In particular, this reduces our corporate operating earnings, which we expect to be a negative $85 million in 2021, and increases our other income, which is below the line, which we expect to be approximately $90 million in 2021.
The impact of these two income statement line items is equal and offsetting, so no impact to net income.
And lastly, a little color on backlog.
As of the end of the year, our funded backlog, total backlog, and total estimated contract value are all up compared to a year ago and, as Phebe mentioned, at record highs.
As an indication of the steady improvement since the peak of the disruption from the pandemic, Aerospace book-to-bill returned to 1 times in the quarter, consistent with Phebe's remarks on what we're seeing in terms of Gulfstream demand.
Marine Systems had an outstanding quarter with a book-to-bill of over 4 times due to the exercise of the $9.5 billion option for the Columbia construction contract, providing opportunity for further long-term top- and bottom-line growth for Marine Systems.
And a little bit of color on order activity for the Technologies group for the quarter.
They had a very nice quarter with some notable awards, including the final resolution on the DEOS program with a potential value of $4.4 billion; the EMITS contract in support of the U.S. Army in Europe; the State Department's GSS 2.0 contract with a potential value of $3.3 billion; and a contract with the Air Force to develop a digital engineering environment.
Importantly, given the conservative approach we take to reporting backlog, the preponderance of the value associated with these contracts doesn't show up in orders or backlog at the time of award.
In fact, only a portion of the awards shows up even in our IDIQ potential contract value.
This is quite different from the way most of the peer group approaches this, so worth spending a moment on it.
The way we book these awards is to conservatively estimate initial near-term value in the IDIQ category.
Then as the program progresses and the customer exercises orders, that value moves into the backlog and ultimately gets reported as revenue.
And over time, incremental amounts of IDIQ value are added to that bucket as our visibility into the program evolves.
As a result, over half of the group's annual orders and revenue come out of this potential contract value category.
So the headline numbers you see in the firm backlog belie the outstanding performance in the quarter, as reflected in the total estimated contract value for the group of just over $41 billion.
That concludes my remarks.
With that, I'll turn to our expectations for 2021.
So let me provide our operating forecast initially by business group and then on a companywide roll-up.
In Aerospace, we expect revenue to be about $8 billion, essentially flat with 2020.
Operating margins will be about 12.5%, leading to operating earnings of $1 billion, maybe slightly more.
So what is driving this forecast and, in particular, the lower margins in 2021 when revenue is similar to 2020?
You will recall that I told you last quarter, we will deliver 13 fewer G550s as that airplane is no longer in production.
This leaves us with 13 fewer aircraft, not including the three slips from 2020.
So all up, 10 fewer aircraft.
This reduction in revenue will be made up by a roughly $500 million increase in services across Jet Aviation and Gulfstream at about 10% lower operating margin.
There are a lot of other puts and takes, but this gives you the big picture for the lower anticipated margins.
By the way, our forecasted production delivery considers our backlog, our fourth-quarter orders, and our take on current demand.
I fully expect 2022 will have better revenue and earnings, stimulated by the entry into service of the G700 in the fourth quarter and improving demand across the product lines as the economy recovers.
In Combat Systems, we expect revenue of about $7.3 billion, an increase of approximately $100 million over 2020.
We expect the operating margin to be about 14.5% and operating earnings to exceed last year by $20 million or 2%.
We look for revenue, earnings, and margin rate to grow quarter over quarter during the year with a particularly strong fourth quarter.
After several years of good revenue growth, 2021 and 2022 will have modest growth.
Growth should resume in 2023 and beyond as several developmental programs move into production.
The Marine group is expected to have revenue of approximately $10.3 billion, an increase of over $300 million.
Operating margin in 2021 is anticipated to be around 8.3%, driven in large part by increased work on the first two cost-plus Columbia submarines, which have conservative initial booking rates.
We anticipate growth at each of the yards.
The long-term driver of growth here is the submarine work, which will expand significantly.
Our biggest upside opportunity in this group is to outperform the forecasted revenue line.
We expect revenue in the Technologies group of $13.2 billion, $580 million more than 2020.
This is a growth of 4.5% with GDIT growing at a rate of 7.1%.
Mission Systems will be essentially flat with organic growth of 3%, offset by the SATCOM divestiture.
We expect earnings of $1.25 billion, about $50 million more than 2020.
This implies an overall margin of 9.5% with GDIT returning to 7% or more.
So for 2021, companywide, we expect to see approximately $39 billion of revenue, up over $1 billion from 2020, and operating margin at 10.5%.
This all rolls up to a forecast range of $11 to $11.05 per fully diluted share.
On a quarterly basis, we expect earnings per share to play out much like it has in prior years with Q1 about $2.20 and progressively stronger quarters thereafter.
Let me emphasize that this plan is purely from operations.
It assumes a 16% tax provision and assumes we buy only enough shares to hold the share count steady with year-end figures so as to avoid dilution from option exercises.
So much like last year, beating our earnings per share guidance must come from outperforming the operating plan, achieving a lower effective tax rate, and the effective deployment of capital.
I should leave you with this one final thought.
Our strong cash flow in 2020 and our anticipation of a 95% to 100% conversion rate in 2021 leaves us with the ability to engage in a share repurchase program this year to enhance the earnings per share figures I have just given you.
We will see how that plays out.
I'll be more specific about this after the end of the first quarter.
Back to you, Howard.
As a reminder, we ask each participant one question and one follow-up question so that everyone has a chance to participate.
Operator, could you please remind participants how to enter the queue?

user
q4 earnings per share $3.49.
q4 revenue $10.5 billion versus refinitiv ibes estimate of $10.78 billion.
company-wide operating margin for q4 was 12.3%, up 90 basis points from the prior quarter.

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