Hi everyone; it’s Kevin. Today is Friday, February 18th (date recorded). General Dynamics just announced its 2021 financial results and held its earnings teleconference with the analysts that cover our stock a few weeks ago. Mark Rayha, Electric Boat’s VP and our Chief Financial Officer, is with me today, so welcome back Mark. Let’s break down some of the concepts and terms we see in an earnings report into some plain English. To start, we’ll talk about how Electric Boat impacts how investors see GD as a whole and how we impact the GD share price.
Absolutely, Kevin, it’s great to be here. EB is one of the most visible companies within the GD portfolio. Not only do we make the most consequential product available to the US DoD (Department of Defense), we are a large part of the growth story that makes General Dynamics stock very attractive to investors. Fundamentally, investors seek the highest return at the lowest risk. Even in this world with internet chat boards and meme stocks that create wild swings in share prices, most investors still look for companies with strong and durable demand for its products with a demonstrated ability to meet that demand. Operational excellence is in the DNA of all the GD business units, and it’s an ongoing theme at all levels of leadership. Companies like EB that have a long history of delivering on-time and on-budget are, therefore, very attractive. When you combine a reputation for excellence with the level of work that we have on contract, EB represents a great value opportunity to an investor. For those of us that own shares of GD stock through our 401k funds or through other means, we are creating that long-term wealth for our shareholders and for ourselves.
Phebe (Novakovic, GD’s CEO) talks about it with us all the time, and the point about operational excellence being in our DNA is something that’s critically important and a hallmark of all the GD business units. Here at EB, our backlog and the opportunity it creates for every member of our team is really at a historic level. We will be building Columbia submarines through the 2040 timeframe, and the Navy’s need for attack submarines has never been greater. That’s as a result of the great power competition with Russia and China. There are no signs of that letting up, so there is strong and durable demand for our products. Let’s talk about how that translates into GD’s investment into our business. Why would the corporation choose to invest in us?
As you said, General Dynamics and the US Navy have invested a significant sum of cash capital to facilitate our ability to produce both Columbia and Virginia at the same time. A company the size of General Dynamics has many options for where to allocate its scarce capital, and it bases its decisions on where to invest on the financial return that investment provides or the expectation of where that investment will pay back. The fact that the General Dynamics Board of Directors approved close to $2 billion in investment in our business is a clear indication that they believe in this business’s ability to make significant money using those new facilities. Our job is to provide that return on investment by delivering our products on time and within the budgets, of course considering that our priorities are always safety, quality, schedule and cost, in that order. It takes each one of us doing our part every day to ensure that occurs.
So when we get through earnings season like we just came through for 2021, we hear a lot of terms thrown around, and when you read investor briefs or analyst articles about GD, the focus is always on earnings and cash flow. Let’s talk about a few of those concepts for those who are not as familiar with those measures and how they are used to gauge our financial performance.
Sure, let’s start with our earnings. Earnings is the difference between the price that our customer pays for our product and what it costs us to make it. Many of us have heard of the term “earns” or “earned hours” in the context of our day-to-day work building submarines. Earning those hours—getting the work done at or below the target for that work order—is how we make money. That “money” is “earnings” from a financial reporting or financial markets standpoint. Obviously our skilled trades work many work orders in any given day, and there are thousands worked on each submarine, but the basic equation is always the same. Rework or any other hold-up that causes a shipbuilder to unnecessarily stop working negatively impacts our ability to make money.
Now let’s talk about cash. Cash is the lifeblood of any business, large or small. Any business needs to generate cash to fund purchases of the equipment, tools, raw materials and other components it needs to build its products.
The earnings and cash we have generated in the past provide the funds for all of the investment we are making in the business now. Training and development and large capital assets like the South Yard Assembly Building, the Holland barge, the Atlas floating dry dock and the numerous buildings at Quonset Point are all being paid for with the earnings and cash we generated in the past.
That’s important to recognize. There’s a legacy that we’ve inherited from others, and we build on that legacy as shipbuilders. It’s always important to keep that in mind. For example, when we look at the South Yard Assembly Building taking shape, and the other large investments we need to construct and deliver Columbia, think about our seasoned shipbuilders who worked hard to deliver on the Virginia program from its start. Their hard work gave them, first of all, a career, and I know personally there’s a lot of pride that comes from supporting our nation’s defense. I see it in every individual I talk to in the shipyard. Thirdly, it gives a legacy of investment into our future. So the work we’re doing today really sets the stage for the future shipbuilders. That’s pretty awesome to think about. So we inherit that legacy, and we leave on a legacy.
So Mark, I think it will be helpful to continue this conversation periodically. I think we need to continue to build our collective “Finance 101” muscle, that is, our knowledge as an organization on what makes the organization tick from a financial perspective. Any final thoughts to share before we close?
I think the thing that comes to mind is the financial markets can get complicated, and there are many things that impact the GD stock price that we can’t control, so we shouldn’t worry too much about that. We just have to control what we can. We are the best in the world at delivering an incredibly sophisticated product. Not many people can go home each day knowing that they helped build a product that keeps the entire world safer. One of our strengths as a business is how our people do what it takes and rise to the occasion in moments of truth. Building on that reputation for excellence and getting better each day in completing our work on time and within budgets, meeting our commitments to each other, and continuing to deliver the most important national security product to our sailors and our nation is how we will continue to reward anyone that invests in General Dynamics.
Thanks Mark, and thanks everyone for listening. We’ll talk soon.
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