General Dynamics (GD) Q2 2026 earnings call transcript

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Second 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 10K, 10Q, and 8K filings. We will also refer to certain non-GAP financial measures. For additional disclosures about these non-GAP measures, including reconciliations to comparable GAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investrelations. gd. com. On the call today are Phoebe Novakovic, Chairman and Chief Executive Officer, Danny Deep, President, and Kim Korea Chief Financial Officer.

I will now turn the call over to Phoebe.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. You may recall that at the outset of its remarks at the end of the first quarter, Danny described it as a very powerful quarter. This quarter is even better in almost all respects.

Earlier today, we reported earnings of $4.24 per diluted share on revenue of $14.1 billion, operating earnings of $1,460 million, and net earnings of $1,160 million. These results compare quite favorably to the year-go quarter, as well as sequentially. For example, against the year-go quarter, revenue is up 8.1%, operating earnings are up almost 12%, and net earnings are up 14.4%.

As a result, earnings per diluted share are up 50 cents or 13.4%. The operating margin for the entire company is 10.4%, a 40 basis point improvement over the year-go 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 had revenue increases as well.

With respect to operating earnings, aerospace led the way with a 26.6% improvement followed by marine systems with a strong 17.5% increase. Sequentially, against a very good first quarter, revenue is up 4.5%, operating earnings are up 2.8%, and diluted earnings per share are up 14 cents or 3.4%. On a year-to-date basis, revenue of $27,600 million is up 9.1%.

Operating earnings of nearly 2.9 billion are up 11.9%, and earnings per share are up 95 cents or 12.8%. We've been consensus to 28 cents in the quarter on more revenue, more operating earnings and better operating margins than it's expected by the sell side. In short, it was a superb quarter and first half. Let me ask our CFO, Kim Korea, to provide some detail on our strong order activity, rapidly growing backlog and superb cash generation, as well as other relevant financial data.

Thank you, PB, and good morning. I'll start with our outstanding cash performance for the quarter. We generated $1.9 billion of operating cash flow, which when combined with a strong 2.2 billion from the first quarter yields over 4 billion of operating cash flow in the first half of the year. Each of our segments contributed nicely, exceeding their planned cash flows and driving operating working capital down over 1 billion from the end of 2025.

Capital expenditures totaled $234 million, or 1.7% of sales in the quarter. Compared to the first half of 2025, capital expenditures were up nearly 30% to $437 million. We continued 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 significantly in the back half of the year, as we continue to invest, especially in our shipyards, to accelerate production and meet future demand.

After capital expenditures, our free cash flow was $1.6 billion for the quarter, yielding a cash conversion rate of 142%, and $3.6 billion for the first half, a cash conversion rate in excess of 150%.

Given our strong cash performance so far, we now expect a free cash flow conversion rate, a little north of 100% of net income for the year. Let's say around 105%. That said, we will have a later second half than the first, which is due to higher planned capital expenditures, which I've already discussed, and three other factors I'll address now.

First, pension. We have decided to contribute approximately $500 million to our pension plans. Given favorable market returns over the last few years, the funded status of many of our plans are near full funding, and this contribution will allow us to de-risk those plans and eliminate significant volatility going forward.

Second, our cash taxes are weighted toward the back half of the year with over $500 million of payments expected. Third, we will be working down some advanced payments on new programs at European land systems during the second half. Now to round out the cash discussion. From a capital deployment perspective, in the quarter, we paid dividends of approximately $430 million and repurchased about $100 million of our common stock to cover dilution.

Finally, we repaid $500 million of notes that matured in June. We have another $500 million of notes coming due in August that we anticipate repaying with cash on chance. At this time, we don't anticipate refinancing these maturities during the year, but we will continue to evaluate market conditions and potential borrowing needs as the year progresses. All in all, we ended the quarter with a cash balance of approximately $4.3 billion in a net-depth position of $3.2 billion down $1.2 billion from last quarter.

Next, on to orders of backlog. We had another strong quarter with just shy of $20 billion of orders yielding an overall book to bill ratio of 1.4 to one for the company. Book to bill in all four of our operating segments was greater than one to one. In aerospace, our dollar-based book to bill was 1.5 times. This is the strongest first half for orders for aerospace since 2022 and reflected very solid demand across the entire Gulfstream product line.

In the defense segments, book to bill was 1.4 times led by the combat systems segment at 2.1 times, which received several large contracts, including the production of new armored combat support vehicles, ACSVs for the Canadian Armed Forces.

We ended the quarter with a record level of backlog of $136.5 billion, up 32% from a year ago. Backlog was also a record high for each of our segments. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at $186.9 billion.

Turning to interest, our net interest expense in the second quarter was $49 million, compared to $88 million in the respective 2025 period, and $118 million for the first half of 2026, compared to $177 million in the first half of 2025. The decrease in our interest expense is due almost entirely to the interest we paid for commercial paper borrowings in 2025.

We have not been in the commercial paper market in 2026. Further, our interest income increased in 2026 as we held higher cash balances. At this point, our expectation for net interest expense for the year is approximately $270 million.

Finally, the effective tax rate in the quarter was 17.6%, bringing the tax rate for the first half to 17.7%. This rate is a little higher than our outlook for the full year, which remains around 17.5%. Phoebe, 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 details.

First, aerospace. Aerospace had a very good quarter with revenue of $3.5 billion, and operating earnings of $510 million, with a 14.5% operating margin. Revenue is $463 million more than last year's second quarter, a 15.1% increase. To give you a little perspective here, the increase is attributable to three more deliveries and higher service revenue at both Gulf Stream and Jet Aviation.

The 41 deliveries in the quarter are somewhat more than planned. Operating earnings of $510 million are up $107 million, driven in part by the increased revenue, but most importantly, by 130 basis point improvement and operating margin. There are no unusual items of significance. As a result, the improvement quarter over a quarter comes from a lot of measurable improvements that cross the entire business.

From an operational perspective, we're off to a strong start to the year.

Phoebe mentioned 41 deliveries in the quarter. This is three more than a year ago quarter and sequentially as well. We see durable productivity improvements on all new aircraft types with modestly improved margins, both year over year and sequentially. We perform quite well across all service categories at both Gulf Stream and Jet Aviation with improved operating earnings at each, both quarter over quarter and sequentially. You might note that the second quarter, overall operating margins are down sequentially, despite the fact that operating margins by line of business all improved.

This is attributable to a slightly disadvantageous mix, plus a modest increase in both G&A and R&D.

Phoebe? Turning to market demand, aerospace had a 1.5 book to bill and the quarter of 16 more airplane orders than the year ago quarter and 20 more than the first quarter of this year. The book to bill over the trailing 12 months is 1.3 times.

So we see very active interest across all models in the US and Asia, but some cautious concern from customers in the mid-east, but they're still active in the pipeline.

In summary, the aerospace team had a special quarter, both operationally and in terms of order activity. So let's move on to the defense businesses. First combat. Combat systems have revenue of 2.3 billion up marginally over the year ago quarter. Earnings of 318 million are down 6 million. Margins at 13.9% are down 30 basis points against the year ago quarter do largely to mix.

There was increased revenue performance at ordinance and tactical systems and European land systems offset by a decline of land systems. Sequentially, revenue is up modestly, but earnings are up 2.6% on a 30 basis point improvement in operating margins.

The real good news story here is the order performance at 2.1 to one to build continues to build strong significant backlog. A large portion of the order activity in the quarter was at land systems. Demand for combat systems products is strong primarily driven by US allies. Orders for wheeled and tracked vehicles are up, reflecting the increased threat environment.

In addition, OTF continues to have particularly strong growth in munitions. So I want to repeat what I said last quarter because performance this quarter further demonstrates the strength and breadth of the combat portfolio, particularly with international vehicles, as well as our munitions group. It's encouraging during this period of transition and recapitalization to next generation platforms for our US land force customers that the overall group continues to provide a healthy growth outlook with very nice margins.

You've seen the 2.1 book to build in the quarter where confidence there is more to come. Phoebe? So turning to marine systems. Once again, our shipyards are each demonstrating strong revenue growth. This quarter's growth at 10.4% was driven by the Columbia and Virginia cost programs, followed by NASCO and BAF, expressed in dollar increases. However, in growth expressed as a percentage of revenue, both NASCO and BAF outpaced electric boat for the first time in my memory.

Turning has improved 17.5% on a 40 basis point improvement in operating margins. We can point to clear and measurable productivity gains. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at electric boat. We will continue to invest as we go forward to support the additional demand we see in the national security interests of the United States.

Turning to operating performance. As CB mentioned, momentum continues to build at each of our shipyards and we are making good progress with our efforts to accelerate build rates. A great example of this is at Bath Iron Works, where our most recent DDG-51 destroyer delivery was accelerated by almost three months versus planned due to the excellent performance of the ship and its sea trial.

At electric boat on the Columbia program, we had a significant increase in the number of hours earned as compared to both the year ago quarter and sequentially. In the first half of this year, the hours earned are up 37% versus the same period last year. Material deliveries also continue to improve with a 65% increase in sequence critical material of this quarter over the second quarter last year. Let me state the obvious.

This is the segment given its backlog and improving productivity where we can accelerate value for our shareholders as we accelerate delivery of submarines, surface combatants and auxiliary ships. Continuous operational improvement has our undivided attention and focus.

Back to you Phoebe. So finally, technology. This group is also experiencing growth in revenue and earnings albeit not at the pace experienced by aerospace and marine systems. Revenue of 3.6 billion is an increase of 4.1% over the second quarter of 2025. Both businesses contributed respectable growth but mission systems led the way. Operating earnings of 339 million are up 2.1% over the year ago quarter.

Operating margin decreased 20 basis points from 9.6 to 9.4%. The group's order activity was also encouraging with the book, the bill of 1.1 times for the quarter and 1.3 times for the trail in 12 months. Growth admission systems came from across the portfolio, most notably in land and air systems and in their international portfolio. The international portfolio was up more than 35% since 2024 and we expect that to continue to be a key driver of growth for the year and beyond.

In IT services, we've discussed elongated procurement cycles and that continues. But a real bright spot has been GDIT's success in capturing programs under agile contracting mechanisms such as other transaction authorities or OTAs. GDIT has submitted and won more OTAs in the first half of 2026 than for all of last year. So let's turn to guidance for the rest of the year. At the outset, I want to review what we've told you today. In January, we told you to assume an EPS range of $16.10 to $16.20.

And April, our updated guidance for 2026 was an EPS range of $16.45 to $16.55. With that as a predicate, let me proceed to provide our operating forecast for the remainder of 26 with some specifics around our outlook for each business group and then a company wide roll up. For 2026, we now expect aerospace revenue of around $13.8 billion.

Gulf Stream will still deliver about 160 airplanes. There is some potential upside delivering large cabin aircraft and some risk on the 280 deliveries for obvious reasons.

We anticipate a 14.7% operating margin for the year. The third quarter operating margin will be about the same as this quarter with a better fourth quarter. In combat, we expect revenue of about $9.8 billion coupled with a 13.8% operating margin. As noted earlier, the marine group has been on a remarkable growth journey. Our outlook for the year now anticipates revenue around $18 billion with an operating margin for the year of 7.4%. In technologies, we expect revenue of $14.1 billion and an operating margin of 9.4%.

So for 2026, company wide, we expect to see revenue of approximately $55.7 billion and operating margin of 10.5%. You've already heard Kim's commentary about our estimates for cash flow for the year tax rate and interest expense. All this rolls up to an increased EPS forecast of $16.80 to $16.90 for the year.

To wrap up, as we go into the second half, coming off a very strong first half, we feel very good about the potential for the second half and the full year. Nicole, back to you.

Thank you, Phoebe. As a reminder, we ask participants to ask one question and one follow up so that everyone has a chance to participate. Operators, do please remind participants how to enter the queue.

So you've followed us long enough to know that some time ago we ceased giving you the details about model and years out. That became a very competitive issue. But look, we will, the supply chain has stabilized for getting, coming down our learning curves on all of our products. We're still working through some of the challenges on completion such just a question of pace.

So we'll take all of this into due consideration and give you some real clarity next year, what to expect.

Yeah, I think, let me take that one. I think the second half, and as compared to the first half, is really just a function of material receipts, the stuff that we received in the first half that we're actually now installing. And as you know, it's important to reflect that we've increased sales for 2026 over 2025, almost $1.3 billion, which exceeded even what we thought. I think we'll see it continue to grow.

Maybe not quite at that pace, but certainly we're getting up into, as you say, a lot of large numbers, but we don't have any expectation that it will slow down much because there's just volume out there that we have to execute on. But it's natural tail off in the second half of the year compared to the first.

Yeah, we don't typically give the exact build rate, we leave that to the Navy, but as you know, we're trying to get to two Virginia class at one Columbia in the early 2030s timeframe, and we're on that path, and we're actually where we expect to be at this point in the process.

Yeah, I mean, we have seen significant improvements in their pace and the cadence of delivery. I mean, there are still some challenging areas, as I think we mentioned in the last call, where we had single sources of supply, but generally the supply chain is improving, and we're counting on it to continue to improve.

Yeah, so I would say that there are a lot more than today influencing the budget that there have, than there have been historically, but from our perspective, a lot of our programs are funded in the base budget, but the reconciliation is important, because if you stop and think about it, weapons production has been on very low rate production, or fairly minimally sustaining production for quite some time.

And in order to gear up production to meet the current threat environment, we need additional funds, the entire industry does. And so this is, I think, from a national security perspective, meritorious. So there are a lot of moving parts on all of this, and we'll continue to support our customer and the Congress as best we can.

Can I try it? Hey, look, this is something we always look at, and something we never talk about is just think that's improved, but then it's always on our mind. So you can rest assured about that.

No, we consistently looked at it this way. But when we have met some of our other obligations with respect to cash, or if there's a particularly attractive bolt-on out there, but we are doing what we always have done and understand the marketplace and see what, if anything, makes sense. But golly, please, we just never talk about it.

Yeah, so we are a subcontractor, both at OTS and mission systems, to a number of the missile primes, and we have some content on all of the missiles, for the most part, with things like actuators and motor cases at OTS and guiding systems and other components at mission systems. So the framework agreements that the primes have signed up to, we have mirrored agreements with them to ramp up. And so we're, again, a part of the supply chain, but certainly not a prime there.

Yeah, I would say broadly speaking, when we look across the areas that we highlighted in the past that were causing some difficulties, there has been a noticeable improvement in the cadence. Areas of concern haven't really changed, where we have single sources of supply for large complex components. And that can be somewhat of a pacing item. But when we look across the entire enterprise and each of the operating units, there has been a noticeable improvement in the supply chain. And that's a really good thing.

So we saw that as well. We're told that these contracts will be coming soon. And when we get those, let's give you the clarity that you're seeking here. I think that's best done after the awards or granted.

So I think what we expect to see is double digit growth continuing at European land systems, given the threat environment and the demand for combat support vehicles, as well as other systems. OTS, because of artillery from missile components, 155.

And then within land systems, this is a transition period, as we talked about before. But the double digit growth at the OTS and ELS ought to drive high single digit growth for the group going forward.

So we built a family of aircraft to satisfy the mission that we knew that our customers flew, and they're varied. Some customers want a suite of airplanes, from the large ones to medium to the medium size ones, depending on where they fly, how they fly, and who they fly.

There are others who are primarily driven by large cabin given their missions. And so we see, this is the intent of this whole family of aircraft. So there are certainly some benefits, as we continue to come down our learning curve there.

And of course, as you know, we never discussed pricing. But from my point of view, given the broad spectrum of offerings that we have, and will have once it's 300 and 400 are out in the market, new product has driven demand that's always been our view, and it continues to remain our view. This is a wholesome portfolio.

I'm very good.

I think from a margin standpoint, as Phoebe mentioned, in her remarks, I think the third quarter will look a lot like the second quarter, with the fourth quarter being the strongest from a margin standpoint. And that is, as Phoebe's mentioned, the fact that we're coming down the learning curve on all of the airplanes, but also due to favorable mix.

And I think the margins, you can expect them to continue to be in that neighborhood with some slight variability all associated with mix.

Yeah, from a workforce standpoint, we've been really pleased with our ability to attract and retain the necessary number of workers in our shipyards. And the Navy's been a great help with that in a lot of different ways. And so from a ramping standpoint, we are hitting exactly what we need to hit from a resource standpoint on that front. So very positive from that perspective. And then, as you mentioned, from a margin standpoint, the improvement in margin is a function of throughput and improvements on the deck plates and with the supply chain improving. And we can expect that that will continue a slow, steady drumbeat as we continue to focus on executing.

Yeah, so at that, growth will continue as we improve our throughput and productivity, which they are doing and have done materially over the last few years. And at NASCO, again, it'll be driven by increased demand and coming down our learning curves on the oilers and other support and supply ships. NASCO is very well positioned and has been, for some time, is a high-performing shipyard. And it has the capability, design and manufacturing capability, to produce, design and produce complex auxiliary ships, sub-tenders, oilers.

So we like very much the positioning that NASCO is in, and we see some growth there as well with additional product coming in, because they have additional capacity, by the way.

Well, we've always encouraged fixed price contracting when it's appropriate and the customer is interested. So we see additional interest in fixed price, which we welcome. And we're also very interested in agile acquisition programs and pipelines that allow us to bring product quickly to our customers. GDIT is very fast in what they execute, and their investments that they've made over the last few years have well positioned them in the marketplace.

Opine, I just said we keep it there. We haven't let that be interrupted, because we haven't given you. I think in the whole 10 years of leadership team, any kind of out year, I think once or twice they've given you some out here color, we're not going to go there on margin. But let's just say, of both getting aviation and Gulf streamer high-performing companies, and they'll continue to improve over time.

OK, look, the prior, yeah, again, I'm going to interrupt you, because the prior peak was really all around one product. And this is now a portfolio product. From large cabin to mid-sized cabin, they carry different margins with them by definition they do. So it's a more complicated, more robust, and I think, frankly, a richer product offering for the market to avail itself of, and we're seeing that. So we're not going to get into the business of how good can it get at the moment, but you will see continued performance within this construct of this new business model that we've got as a result of the investments we've made, these families, family of aircraft.

Well, I think the customer and the submarine industrial base are aligned around the need for getting these contracts out, particularly to stabilize the industrial basin and to ensure that we continue to have long lead material for these contracted in advance of these long-term development programs.

But as I noted, we're told that the contracts will be coming soon. And so we're confident that when they come out, I think it'll be as we expected and very welcome by the supply chain in particular.

Are you asking across the company as a whole or GDIT? And maybe GDIT in particular for this question?

So let's step back a minute and remember how GDIT has been strategically thinking about innovation in general for the last few years. And they've invested in what they call their digital accelerators, which we've talked about before, including an early focus on AI and automation. And that focus has provided them the skills to build and secure and connect the latest technologies and apply them to a growing number of agencies and systems.

And what we're seeing is AI tightly integrated in with cybersecurity and opportunities that, frankly, are spanning most of GDIT's portfolio. It also helps to have deep and rich relationships with a number of the OEMs and partners. So GDIT has been very agile and strategic, I think, planning as well as implementation of AI and automation, as well as other important technology improvements.

So I'm going to quarrel with you on one word, luxury. That is, I would argue, that is a misapprehension or characterization of these, but really are tools. And for almost all of our Fortune 500, Fortune 100 companies and both public and private, they are business tools.

There are some high net worth individuals who participate in the market, but even they, they will tell you, even in those cases, they'll tell you, this is really about efficiency, safety efficiency, and efficacy in doing their jobs. So I think that's important.

These are not luxury yachts that sail around the Mediterranean. These are airplanes that get the job done for our customers, whatever their mission is. So, so look, we are well positioned in the marketplace because we have all these new products that we've heavily invested in, and that we are producing at scale and well with the attention we've always had on quality and safety. So I think by definition, that positions us well on the market without any getting into any specificity about, you know, out your margin performance, but we believe in the capability of both GED aviation and Gulfstream to continue to improve and continue to produce with this family of airplanes.

Does that help you?

Yeah, I think we're still coming down the curve specifically around completion. So I think there's still more opportunity. And we're seeing that both on the G700 as well as the 800. So I think there's still more room for them.

Well, as you know, I'm no longer in the business of estimating EIS given, you know, that the regulators accept the pace. But with respect to the 300, and thank you for raising that because I think it's important to recognize that we are going, we're going to have a gap in production from the end of the 280, which auto the final 280 out of delivering the second quarter of next year and the onset of the 300, which late 27, early 28, somewhere in that. And so we all have a planned production break, so that if you infer from that quite correctly, that we'll talk more about large cabins next year.

On the 400, we've whipped up our efforts on the 400, and we'll have more to say over the next couple of quarters about where we think the 400 will be. But these new airplanes are coming, and we're pretty excited about it.

No. Not given the agreement we have with our partner. By the way, has in this environment continued to perform beautifully, and now it's relentless emphasis on quality.

But for obvious reasons, production may lag a little bit at the end of this year, and then we have this bit of a gap on the 300.

So, Dara, I think we have time for one more question. Thank you very much.

Yeah, I can't speak to the situation at some of these other companies. I can tell you that for the major component, Gulfstream has a very clear relationship that has really given the supply chain visibility into our production plans for whatever period is appropriate, and so they are able to keep up now, and our expectation is they will be in the future as well. So, I don't know what the others are seeing, but we're pretty tightly integrated with these key suppliers, and they're keeping up.

And, you know, their ability to – the supply chain's ability to continue to produce and produce on schedule has been very helpful in ensuring that we can continue to drive our orders, and orders were, of course, a big component of our significant component of our cash for this order. So, it's really a team effort between Gulfstream and its suppliers.

So, we have handled in the technologies group, which are both fairly relative to our portfolio at large, faster cycle businesses. We've managed the CRs pretty well, so I would expect us to be able to do so as long as they're not too extended. I think both businesses are poised for some growth, particularly mission systems, as you recall, have gone through a transformation from a lot of legacy systems into investments in new programs and new products, and that is beginning to take off the lease continuously, to see continued strong growth there.

And the steady growth that we have seen studying criminal growth, we have seen at GDIT. And look, they've got a pretty robust pipeline, at about 120 plus billion. That's a qualified pipeline out there, so that positions them well to continue to perform across their hundreds of programs, that's both for mission systems and GDIT. And it's all about your ability to meet your customers' needs quickly and with excellent products and quality on time.

Great, well thank you everyone for joining our call today. As a reminder, please refer to the General Dynamics website for the second quarter earnings release and highlights presentation. Finally, we want to let you know that we expect to hold our Q3 earnings call on Friday, October 30th at 9am. We will resume our normal schedule for the fourth quarter call. If you have additional questions, I can be reached at 703-876-3152.