KG: Hi everyone, it’s Monday, February 15th (day recorded). Joining me on the podcast today is Mark Rayha. Mark joined EB in 2019 as the Vice President of Finance, and last month he became EB’s Chief Financial Officer. On the podcast today we’re going to talk a little bit about financial acumen, and you’ll get to meet Mark and learn more about several of these concepts related to EB’s financial performance. So Mark, welcome to the podcast. Let’s start with a little bit about your background.
Thanks Kevin, appreciate being on the podcast today, I’ve looked forward to this opportunity. Before joining Electric Boat, I was Vice President and Chief Financial Officer of General Dynamics Mission Systems. Prior to that, I was at the corporate headquarters as a Staff Vice President of Financial Planning and Analysis for General Dynamics and before that at General Dynamics Land Systems. As a long-time General Dynamics employee, it’s truly a great honor to get a chance to be part of the venerable Electric Boat. It’s also an honor to follow John Leonard—a legend both at GD and across shipbuilding—in this role.
KG: For our employees who don’t work in Finance, sometimes the terminology they hear summarizing our financial performance can be a bit of a black box. But it’s important, from my perspective, that each of our employees understands how their work on a daily basis ties to our bottom-line performance. It’s important for a wide range of reasons. First of all, we’re all shareholders. If we participate in the business’s 401K program, for example, or maybe we invest in General Dynamics on our own. In any event, all of us who come to work every day and commit our blood, sweat and tears to this business are shareholders in the success of this business. So it’s important that we understand how that business functions. At the end of January, General Dynamics had its fourth quarter 2020 earnings call with the investment community. At a high level, let’s talk about why EB is so important to GD’s overall success.
First a reminder: for folks who read the earnings call transcripts, which are published by various financial websites and General Dynamic’s external website, we don’t disclose EB company financials on their own; we’re part of Marine Group with Bath and NASSCO—the shipbuilding group for General Dynamics.
There are several reasons why EB is important to GD’s success and vice-versa. In terms of revenue, we are a large portion of GD overall. We are an easily identifiable, long-standing business and product within the GD portfolio. And of course we have a significant portion of the corporation’s backlog, or contracted work—$39 billion as of now—to build a product that the country desperately needs. Also, because GD prides itself on having a strong reputation, and we are the best in the world at what we do, continuing that on such important programs as ours is essential to GD’s ongoing reputation for excellent performance.
KG: Let’s talk a little bit about that term backlog because some people may think “backlog—that means we’re behind schedule.” In this case, backlog is a very good thing. It’s really our contracted work.
Backlog is a fantastic thing. It means that we are in the enviable position that many businesses never see themselves in. Most businesses—including many within GD—have 12 – 18 months of work in their backlog at any given time. Our backlog means we know with certainty, because we have funded contracts from the U.S. government, that we must deliver 18 Virginia-class submarines and two Columbia-class submarines through 2029. That allows us to see our work horizon over more than five years which allows us to have a stable financial plan, which in turn, allows us to plan investments that will improve our business over time much more readily than a business that is struggling from month to month to understand what its business is going to be.
Also, in a business like ours that requires a significant amount of buildings, machinery and equipment, having a larger business base to spread those fixed costs over is a competitive advantage. It also means that these multi-year contracts provide a great opportunity for all of us to continue our long heritage of delivering the advantage that our Navy needs—including the once-in-a-generation replacement of our ballistic missile fleet. On an individual level, it means long-term, stable jobs and the environment to grow a great, long career.
KG: Well said, I agree with that. Let’s talk about why EB is a big element of what is interesting and attractive to GD investors.
Generally speaking, the investor community appreciates two things that we offer: reasons for business optimism and relative stability and clarity in terms of what we do and the associated ability to forecast a return on their investment. We have more work under contract than in any period of our company’s history, so investors can see that we have a bright future that represents a great shareholder value growth opportunity. And, as I said earlier, our customer’s need for our product is clearly understood and our programs have strong bi-partisan support in Congress. When you combine that with being the best in the world at building submarines, our business outlook is strong and investors can readily see the opportunity for superior returns.
KG: Let’s talk a little bit about how our employees can understand how they, on an individual level, can impact EB’s financial performance. What we do day to day matters. Let’s talk about what’s within our power as individuals to ensure EB’s, GD’s and our own personal success.
For each one of us as individuals working at EB, maintaining a strong internal customer focus is the key. What does that internal customer need and when do they need it? By delivering quality products, safely, on schedule, and within budget, strong financial performance will follow. As they say, time is money. It’s really no different than a business you would do in your home or in a small business that friends or relatives may run. Since we are part of a public company that has shareholders expecting a return, there will always be a focus on earnings and cash flow—sometimes as you note, it’s admittedly difficult to see how your day-to-day work impacts those metrics.
But whether you are working on the South Yard Assembly Building, a design in New London, in the shops or on a module at Quonset Point, assembling, testing and delivering a boat in Groton or on an administrative task like a cost proposal, meeting the schedule commitments set at the start of the project drives financial success.
Once we consistently meet schedule, with first-time quality, of course, we’ll be more financially stable, and we’ll expand what I call a virtuous cycle. This virtuous cycle is relatively simple. The earnings and cash we generate now is what provides the fuel for our continued growth; all of the $2B in investment we are making now in our business is being funded by the financial returns we generated in the past. We’ll need the cash we generate now to fund our growth over the next 10 years.
KG: Thanks Mark. I appreciate you taking the time to introduce yourself to our EB family and talk about a few of the key concepts contributing to our financial performance—that concept of financial acumen. I think it will be helpful for our folks if we continue the conversation from time to time to increase our shared understanding. In the meantime, I couldn’t agree more with your message—if we all focus on delivering on our goals, on-time, with first-time quality, we’ll achieve our critical mission for this country and deliver stellar financial performance for General Dynamics, Electric Boat and ourselves. We’re all shareholders.
Thanks everyone; talk soon.
Kevin
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