Q1 2020 Earnings Call
[music].
Good morning, and welcome to the General dynamics first quarter 2020, <unk> earnings Conference call.
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I would now like to turn the conference over to Howard Rebel Vice President of Investor Relations. Please go ahead.
Thank you Chad and good morning, everyone. Welcome to the General dynamics first quarter 2020 conference call any forward looking statements made today represent our estimates regarding the company's outlook.
These estimates are subject to some risks and uncertainty.
Additional information regarding these factors is contained in the Companys 10-K, 10-Q and 8-K filings.
With that complete I would like to turn the call over to our chairman and Chief Executive Officer BP Novakovic. Thank you had before I address the Companys performance in the quarter, Let me take a moment to discuss general dynamics. This responds to call that 19 and its impact on it.
We have been designated a national critical infrastructure company and as such our required to continue full operations, which we have Dom.
I'm proud of our patriotic employees, who have continued to work hard if armed forces as we face this crisis together.
Men and women in uniform continued to Sir and we must ensuring a safe work environment for our workforce has been and remains our top priority. We have 39000 employees teleworking from home. Unfortunately, a large manufacturing sites cannot do that at these sites we follow CDC recommend.
Guidelines and practice practice, social distancing where possible.
We have increased shift work and the use of PPD.
We are conducting temperature screening where feasible.
As additional screening and ultimately testing become available we will aggressively implement those as well.
Our leadership teams have been and we'll continue to be in the workplace lazy meeting our people.
This is early on the pull the 19th crisis and its impact on our business. So far we've experienced some deterioration in efficiency driven by absenteeism at a couple of our facilities.
We expect absenteeism to decline as we see the rate southern sex infections flow.
We're also entering rather significant cost to sanitize the work environment in our facilities and to provide additional PC.
We've also seen definite weaknesses in the supply chain, particularly with respect to some of Gulfstream suppliers. Gulfstream is working closely with its liars, who is also been hurt by the disruptions at the commercial airplane Oems hopefully, we can sort our way through these issues, but some of them are difficult.
The department of defense is accelerating payment to us to support the defense industrial base. We believe that this will prove to be very helpful.
Regarding the company's first quarter performance as you can discern from our press release, we reported earnings of $2.43 per diluted share on revenue of 8.75 billion, an operating earnings of 941 million and net income of 706 million.
Revenue was down 512 million or 5.5% against the first quarter last year operating earnings were down 73 million or 7.2% and net earnings were down only 39 million or 5.2%.
The defense side of the business was up against last year and again see operating plan upon much this forecast is predicated.
Not surprisingly all of the revenue and earnings shortfall occurred in our aerospace group.
I'll comment on this and.
More detail shortly.
On the defense side of the business revenue and are up modestly against the year ago quarter on were reasonably consistent with our operating plan.
We experienced solid growth at combat systems, and Marine systems, along with a modest decline in revenue it information technology in mission systems.
However, both I T. In mission systems had operating earnings consistent with last year on improved operating margins.
The operating margin for the entire company was 10.8% only 10 basis points lower than a year ago quarter.
Before I get into the details at the operating level, particularly at aerospace I want to give you some revolver and give you some revised forecast data anticipating the impact of cobot 19 on our operations for the year I wanted to spend a moment on the resilience and strength of the company's backlog and its balance sheet.
Total backlog of 85.7 billion is down only 1.2 billion against the end of last quarter Importantly, funded backlog at 63.8 billion is up 6.3 billion.
The modest reduction in total backlog was largely attributable to the marine segment working off some of its extremely sizable backlog, which should be further supplemented with a colombia construction contracts later in the year.
Importantly, information technology backlog continues to show impressive growth.
Aerospace backlog held relatively constant.
So all up the book to Bill was 0.9 to one excluding the impact of foreign exchange fluctuations.
And this time of crisis and uncertainty our balance sheet remains strong.
Following a number of financing activities undertaken in the quarter, which Jason will walk you through in just a few moments, we increased our financial flexibility and liquidity reduced our dependence on commercial paper market and retained our mid a credit rating.
Both the strength of our balance sheet, and our increase liquidity give us confidence that our capital deployment ability, including the payment of an eight cents per share dividend increase that our board approved. This March. This is the 20 threerd consecutive year that Gd has an increased its dividend.
After all financial strength is the underpinning of business sustainability.
The biggest part of the story in the quarter with Gulfstream and ability to deliver 13 completed aircraft due to quoted 19 travel restrictions.
We were able to pull two aircrafts scheduled for the second quarter in to delivery for delivery in the first quarter to somewhat mitigate the impact. So net we were down 11 scheduled deliveries.
These planes are completed the customers want them and they will be delivered as soon as travel restrictions are lifted and people feel safe traveling.
The inability to make scheduled deliveries at the end of the quarter, obviously did not permit us to recognize revenue and earnings on those planes. This is purely a timing issue in fact three of their craft test. It liver. This month three are scheduled to deliver in may and the others are dependent on travel restrictions.
Imposed by or on foreign countries.
We are hopeful for prop resolution of these issues.
With that preface aerospace had revenue of 1.7 billion and operating earnings of 240 million with a four point 14.2 operating margin jet aviation for its part had better revenue and earnings in the year ago quarter, even though some of its operations experienced considerable difficulty in the last two weeks of.
The quarter.
[noise] from an order perspective, the last two or three weeks of a quarter are typically when we see the most order activity.
This quarter's activity was progressing quite nicely until mid March when it largely ceased however, the aerospace segment did have a book to bill of 1.1 to one which benefited from reduced deliveries.
We continue to see a lot of interest but transactions are difficult to close in this environment.
It is difficult for our people to make in person sales calls, we can't take customers on demonstration rides and it's difficult to get folks together to work on contract issues.
While demand is very hard to predict at the moment, we believe that we will see accelerated activity once travel restrictions are removed.
For the year, we had anticipated delivery of somewhat in excess of 150 aircraft. It now appears that we will be between 125 and 130 deliveries.
The reduction in Gulf stream deliveries will be driven primarily by supply chain issues and the shutdown of one of our own facilities.
To a lesser degree our own workforce is less efficient due to absenteeism and our strict compliance with CDC guidelines.
In recognition of these impacts we are reducing production and very carefully managing the cost side of the equation. We believe these actions have found our risk.
Apart some excess fios and certain of its maintenance facilities jet aviation is performing well the FCS will do much better when reasonable business travel resumes. We do however expect impasse here as well.
Combat systems had revenue of 1.7 billion up 4.4% over the year ago quarter sales to the U.S. government were up 12%.
Operating earnings of 223 million were up 8.3% on a 50 basis point improvement in margin.
This was an impressive passive performance considering that we have been at a near shutdown in Spain. The headquarters a European land systems and this side of the largest manufacturing assembly facilities.
The notable development for this segment in the quarter was the hormone signing of the restructured contract on the Canadian International program, which settled all issues to the satisfaction of the parties.
With respect to our standing receivable you may recall that we received 500 million early in the first quarter and we received another 500 million. This month. This will be very helpful to free cash flow in the second quarter.
We will begin or regular cadence as scheduled payments in 2021, consistent with deliveries and making further progress in the scheduled amortization of their rich.
[laughter] combat systems had nice order activity in the quarter with over 700 million and Stryker and Abrams orders alone in the quarter and over 250 million in orders from customers outside the U.S.
The group had a book to Bill <unk> 0.9 to one.
As we work through the effects of Cove and 19 on the combat businesses, we have more clarity domestically than internationally since each of the country's response to the crisis is different.
As a result, we have as in the past.
Diligently manage our costs in order to preserve our margin and profitability.
[noise] information technology had revenue of almost 2 billion in the quarter and operating earnings of 150 million, an operating margin of 7.5%.
Our EBITDA margin was an impressive 13.3%, 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 is a best in segment EBITDA margin and a 90 basis point improvement from year ago Forrester.
The revenue decline in the quarter of about 8% from Q1 2019 is attributable to three factors.
A series of program completions in our intelligence and Homeland Security Division a decision to exit non core lines of business and our federal civilian division and the closure of some customer sites.
Late in the quarter to all by the central personnel.
Sequentially revenue was essentially flat despite a slowdown in contracting actions late in the quarter.
As I noted toward the ended the quarter some of our customers, including a number of our classified customers close their sites to all but essential mission employees.
This impacted revenue and we'll continue to do so until some of the shelter in place rule begin to look like Conversely, the number of our piece. We have received has increased dramatically in the last four weeks since the beginning in March the government has accelerated the 150 RFP is valued at over 4 billion.
As I mentioned earlier.
I T continues to build backlog with an impressive 1.2 to one book to bill in the quarter, Despite a slow down and contract awards due to the virus.
The book to Bill on a trailing 12 month basis is 1.1 to one their total backlog is 9.500 billion and total estimated contract values sits at 28.1 billion.
This ultimately positions the business nicely for growth.
[noise] mission systems revenue of 1.1 billion was down 42 million, but earnings of 148 million held steady against a year ago quarter on a 50 basis point improvement in operating margin.
The modest drop in revenue was driven by a decrease in the sale of various short cycle products as well as an expected decline in our tactical communications line of business.
We saw nice growth and our U.S. Navy surface fleet integration and underwater fire control system program.
We anticipate revenue to pick up as the year progressive supported by the strong unfunded backlog and new business pipeline.
Turning to Marine systems. This is once again a good news story revenue of 2.25 billion is up 9.1% against a year ago quarter earnings.
Earnings are up only modestly due to the mix shift at NASSCO and the failure of many employees to report to work at Bath Iron works, leading to operational inefficiencies.
Nevertheless, the performance was good and particularly solid at electric boat.
In March GB successfully completed sea trials for the U.S., Vermont, the lead ship and block four and delivered the boat to the Navy earlier. This month. In addition work on block five has continued to ramp up and now represents a third of the Virginia program revenue.
We've also increased our advanced construction on the first Colombia as we approach the plan construction date in October of this year.
So now let me do my best to give you a hand updated forecast in this uncertain world.
Our aerospace forecast at present, certain my lacks crystal ball precision, but at the moment, we were revising our expectation for aerospace to revenue of about 8.5 billion, an operating earnings of about 1.15 billion to repeat the reduced 2020 guidance is related to our.
Ability to produce and deliver aircraft given supply chain issues and workforce productivity.
While we are largely delivering out of backlog, we are mindful of potential cancellations or default issues as well.
With respect to the defense businesses the impact to date has been minimal. So we are holding our full year targets for these segments. However, based on our experience over the past several weeks there is modest pressure on revenue, but at current levels, we have a path to make up that on the earnings side.
We will gain more clarity as we progressed through the second quarter, and we will file refine our forecast on the defense side of the house at midpoint of the year consistent with our past practice.
So on a companywide basis at this point, we see E P S and $11.30 to $11.40 per fully diluted share for the year.
I'll now turn the call over to our CFO, Jason Ader skins for further remarks.
Thank you Phoebe and good morning.
The first thing I'd like to note is a key accomplishment on the financing front in the quarter in anticipation of depending maturity of $2.5 billion of notes in may of this year and given the extreme volatility we've seen in the market since the outbreak as a pandemic, we issued $4 billion a fixed rate notes in late March at very attractive rates.
While this financing was part of our planning pre covert 19, the additional liquidity enhances our financial flexibility during the pandemic, particularly in light of the fact that our free cash flow is weighted towards the second half of the year.
To that point, our free cash flow in the quarter was negative $851 million.
The cash performance in the quarter was impacted by the coded 19 outbreak, most notably a Gulf stream due to delayed customer payments associated with the net 11 airplanes, we weren't able to deliver.
As Phebe noted customer orders were also postponed in the last two weeks the quarter.
On the defense side, we've seen accelerated payments coming from some of our customers starting in the month of April in the form of increased progress payment rates and other contract mechanisms, but we've passed those moneys onto our suppliers to help sustain our supply base.
In fact as of last week, we had received approximately $65 million, an accelerated payments from our customers and advanced almost $300 million to our suppliers on an accelerated basis.
After all this we ended the first quarter with a cash balance of $5.3 billion and a net debt position of $12.7 billion down slightly from this time last year.
Our net interest expense in the quarter was $107 million down from 117 million in the first quarter of 29 team on a lower average outstanding commercial paper balance.
But for the year, we're revising our interest forecast up to approximately $490 million to reflect the additional borrowings I discussed earlier.
Q2 will be the peak interest expense for the year.
As Phebe noted, we have ample liquidity, including 5 billion in lines of credit, which we renewed during the first quarter and.
And we expect the outstanding debt balance to come down over the next couple of quarters as we repay the 2.5 billion maturing in may as well as our commercial paper balance.
On the capital deployment front capital expenditures of $185 million in the quarter were consistent with a year ago.
We expect capex for the year to be down somewhat from our original forecast as we manage that spend in light of the circumstances, but still in the range of 2.5% of sales on a reduced sales number.
In the quarter, we paid $295 million in dividends and spent 500 million on the repurchase of 3.4 million of our shares.
This covers the dilution from stock option exercises that we were unable to address last year due to cash constraints plus the anticipated dilution for the current year.
For the year, we now expect free cash flow to be in the range of 80% to 85% of net income versus the 85% to 90%, we previously forecasted reflecting the reductions and Gulfstream aircraft production and delivery rates, partially offset by the reduced capital expenditures cost savings across the company and somewhat lower cash taxes.
Speaking of taxes, our effective tax rate was 16.7% for the quarter benefiting from several factors, including lower international taxes, and increased research and development tax credits for the year, we're lowering our anticipated tax rate from 17.5% to 17%.
[noise] as Phebe mentioned in her remarks, we finished the quarter was total backlog of $85.7 billion, that's up 24% over this time last year and total potential contract value, including options and I'd like you contracts was up was 124 billion up 20% over the year ago quarter.
And just one last thought for you as you consider the quarterly progression throughout the year.
Obviously, there is more uncertainty than we would normally have at this point in the year, but as you might expect we anticipate the second quarter being the low point and EPS in the range of 25 to 30 cents below the first quarter with a steady ramp in the second half to achieve the updated targets would phebe discussed.
Howard that concludes my remarks, I'll turn it back over to you for the QNX industries. As a reminder, we ask participants to ask one question and one follow up.
So that everyone has a chance to participate Chad could you. Please remind participants how to enter the Q.
Thank you.
Just the Q and ask the question May Press Star then one in the telephone keypad, if you're using the speakerphone. Please pick your handset suncor pushing the keys.
To withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble a roster.
[noise] and offers question will come from.
Nicely with JP Morgan. Please go ahead.
So seifman. Your line is been open perhaps your line is moving on your end.
So when you are still on borrowing as needed apologies.
Hi.
Hi, Good morning, sorry is that munis.
So realize this is probably very difficult given where we are in the press that the nature of the the situation I think the you know the deliveries you talked about it gold stream this year coming out of backlog I think was probably fairly.
Consistent with [noise], you know, maybe where people thought or maybe even a bit better as we look out.
Beyond.
This year and we think about.
What might happen to the backlog as we move through the year and as you deliver out of backlog.
Is there any way to kind of.
Don't know if there's any way to bounce or maybe any way to talk about some of the distinct aspects of this pressure that gold stream is seeing now versus periods of pressure in the past.
So let me read it just sat and into part.
Our reduction in production this year was driven almost exclusively by.
Perturbations in the supply chain as some of our suppliers entered this crisis [noise].
Somewhat in Paraguay, both from a exposure to the commercial aviation market and some financial difficulties the crisis exacerbated that and even before this all hit they were having some difficulty keeping up with our original production rate. So we took down.
Production.
Which we believe help.
The risk at the current environment and frankly, a de risks some of 21. If in fact, we see weakening demand, but look with respect to this year's production you can only go as fast as your weakest link and in your chained. So so.
That's part one part to what you're really I think I'm teasing out a bit is is how you see demand in this environment.
And as I've as I I think we alluded to we fully expect business aviation to recover in due course [laughter]. The question is as specific timing, but this will again be a bus market for us and will lead it with a strong portfolio of new products you know if you.
Think about it.
One of the outcomes that could occur as a result that this particular crisis is that business can it will afford to rely on those commercial airline providers, who are either financially week.
Or unpredictable so the fundamental case for business aviation remains the same if not somewhat strengthened by this crisis and frankly I think there's a case to be made that much will inherit a business aviation as a result of of this particular crisis, but there's an important reality I think for all of us to compress.
And to understand this this market and that is in all markets up or down we have the distinct advantage in product service and costs that leaves the competition to compete only on price and availability.
Great.
Thank you enough.
The next question will come from Robert Stallard Clinical research go ahead.
Thanks, so much good morning.
Running.
Im Phebe I sort of if you could comment on what you might have seen in the short cycle business jet aftermarket and the Fpos this quarter and Pepsi in April as well.
So this could be a lead indicator when demand environment is going.
[noise] show I think this is a particularly on unusual environment and that it was worldwide and effect that all human beings not just particular sectors.
So have the imposition of travel restrictions both in the United States and elsewhere.
That really drove a flying hours.
So we saw considerable decrease and and the number of flying hours that we believe will resume when some of these some of the travel restrictions begin to ease and people feel a little bit safer and in traveling.
I will tell you the loading it or most of our service centers remain solid we've implemented some rolling furloughs that a couple of our smaller sites, but scheduling infections and plan maintenance continue at a good pace, but some of the discretionary work I think refurbs for.
Our avionics upgrades have fallen back a bit.
But again wansley resumed normal or a big into approach normal flying cadence then we anticipate that some of this full will likewise resolve.
Okay. Thank you.
[noise] [noise] and then of course and will come from George Shapiro with Shapiro Research [noise].
Oh, yes, a good morning, Hi, rich.
[noise] one for Jason and then one for you Phebe you want for Jason and maybe you mentioned, it's been a few did I missed it. If you can reconcile you know you have in the back your gross orders and then if you just look as backlog I guess, that's in that number is that roughly 300 million dollar difference, primarily cancellations, which you do.
Okay, but listen a back there were what is it and then for you Phebe in terms of Ah the expectation for deliveries for the year I assume this second quarter is gonna be a lot worse than the rest of it and the rest of the year and also where it's the status of the eases certification for the 600.
Thanks, Okay, why we had four defaults in the quarter a chunk of those were not for 2020 airplanes.
Those are customers live expect to see back.
With respect to the second quarter, I think deliveries will be stronger <unk> as you can imagine what the reduction in production. We are are taking costs out of our business.
And we'll have some.
Charges.
Around those particularly in any of the Uh huh.
Risks charges in the moment and so that could that depressive second quarter, a bit by deliveries could be expect them to be higher Juan send depending on how fast and at what sequencing and what areas. These travel restrictions lift.
You know, it's very hard if you think about it. It is we need those travels restrictions to kind of abate because.
People typically come to pick up their airplanes in Savannah, or we fly.
Ah, we fly them elsewhere to effectuate that transfer and that's extremely difficult and kind of constrained environment, but as we see some of the rolling all reopenings, both in United States and outside the United States, We expect some of those deliveries to dissolve nicely.
Okay. Thank you.
The next question is from David Strauss with Barclays. Please go ahead.
Thanks, Good morning.
[noise] juice Phebe wanted to ask on the implied Gulfstream decremental margins I think.
Are you took down revenue by about <unk> billion in a house then.
EBIT expectation by about 400 million applying somewhere.
Mid to high 20 decremental margins.
How much of this is driven by just a.
We reduced protiviti weaker though production issues, you know work work related issues and supplier issues that you said the decremental margins are a bit higher.
I would say.
Some of that is based on efficiency, particularly as we learn to optimize.
Operating in a C.D.C. driven environment.
But some of it is also mix.
Okay.
And then a follow up on capital deployment, obviously you have the.
The debt pay down here in May you got to deal with commercial paper, but how are you thinking about a share repurchase in the in the current environment. Given you know maybe political headwinds to doing that versus where your stock price currently says things.
I think you're quite right to point out with them, but little Cook concerns of concerns within the policy arena about stock buybacks.
But from my perspective in periods of great uncertainty and volatility maintaining your liquidity.
And the strength of your balance sheet is key so we're going to stand Pat on stock repurchases at the moment.
Our next question comes from quarter Copeland with millions research. Please go ahead.
Hi, Good morning, TV, Jason Howard.
Tighter.
<unk>.
Yeah, I know each one of the.
Or ground turns or demands for most of those oh known sort of unique fingerprint and I wondered if you might just kind of help give us some color on you know what this one is like in terms of your customer conversations and then I would imagine that.
The good majority your customers the fortune 500 companies out there you know.
Going through some sort of exercise on the you know the timing of expenditures on aircraft. When the you know clapping revolvers and whatnot I just.
How does that discussion how is that going on them out as lot of all in terms of the timing of those I, what I would assume or continued purchases in the future from [noise].
So Brian are they a elements that this is distinctly different from the last time that we experienced.
In the 2008 timeframe the great recession or was that interest remains very active.
Whereas in the recession, it simply stopped because of Oh, the impact on multiple multiple key sectors.
Here, it's really been about more about simply timing.
How soon does the economy reopened how soon can be get travel restrictions back. So the conversations are continuing that hasn't stopped but in terms of.
Bob translating.
That activity into orders some of that is it going to take some time as we see how all of the <unk> a reduction in travel restrictions as well as the stabilization in the economy occur, but we see this more as a question of timing in this environment as of the moment you know the backlog is holding up there.
Hey nicely.
Which is also distinctly different from the last time.
But we're always mindful that if you have six this worldwide economic crises of the large economies that become really dire backlog as an issue that we're gonna have to follow very carefully and we're being very mindful. This is a company that has been to this kind of environment before albeit for very different reasons and manifesting itself.
In different ways.
And is it fair to characterize the decisions you'll make from a production standpoint, it could get to the lower deliveries as.
Temporary in nature, whether that's you know furloughs or timing really I guess I'm doing is are you protecting.
Upside and you know your production capacity for when things return to normal is at the right way to think about what you're doing.
I think the right way to think about it is that you know when you have changes in your environment you have to react fairly quickly.
Postulating the best possible out.
Postulating as best as you can what various outcomes are like and what we have done is is in the moment sized our production so that our supply chain couldn't keep up with it but also recognizing that it prepares us if in fact that man does increasingly we are weak.
And next year to manage that risk as well. So I think we have bound to our risk as well as we possibly can in the moment understanding where what we see.
Your next question comes from kind of on rumor with Cowen. Please go ahead.
Yes, thank you very much so.
Number of dealers you know we've talked to kind of expect as you indicated that demand should take a laser year as chemicals that impact upgrades, but one of the concerns they have is that.
Basically there's a weakening in terms of.
Pre owned market pricing there is starting to to erode and May go down.
In particular with GE six soon see where you have a large installed base.
Pre owned GE 650 useless.
With your production are you seeing or to what extent are you concerned about potential pricing pressures.
Thanks.
Oh, we have yet to see any Ah, we don't see any significant build up of like new pre owned ball stream.
And ER and we see no impact on price you know the pre owned inventory for each of our large cabin, including the 650 is well below the market standard threshold. So at the moment, we either have a lot of pre owned inventory in our house.
Nor do we see that it is in and impacted Ah our current demand nor our current.
Our current pricing. So this in it and again is very different than what we saw in the 2008 2009 timeframe a pre owned is simply not an issue and the moment.
Thanks, So much my one follow up would be can you give us an update on how you're doing gbpfive hundred 600 production and the expectation where certification of the G 700 2021.
[noise]. So it's gone inverse order that G. 700 continues that performance test airport. Its test patterns, we have about 100 flying hours under our belt and a airplane is performing extremely well.
The 506 hundred to of course are gonna be some of the or some of the change in the production that we have a set for the year some of them that mix issue, but the demand for both of those programs has been wholesome and is increasing.
And I think George asked a question that I failed to answer on Jaeson. It and you tease that that is as well and directly he asked I had been slowed by the Oh by the impact that the Mack said, while I can't speak to that directly in terms of their timing.
This is no doubt impacted them as well, but we won't get through that and these airplanes and the more that they're in the market. The more people see you know exactly what these airplanes can do for them and and and look pretty impressed.
The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
I know.
[noise] CB is is 100% of the Gulfstream delivery in revenue outlook reduction that you've made year to today.
It's 100% of that from supply chain disruption and inability to fly to deliver airplane disruption.
And and none of it from demand impact.
Really isn't demand driven I think I've noted two factors a couple times, but let me just you know help reiterate as as I think I've discussed some fulsome detailed the supply chain.
But we also have some efficiency issues within these plants.
Within our assembly manufacturing plants as we learn to optimize production under the social distancing rules additional P. P E cleaning.
A shift work as you as we've increased the number of ships. So as we begin to optimize that over time and a production environment that will also allow us to mitigate any impacts from from some of the inherent inefficiencies there but that was also an issue.
You, but overwhelmingly the predominant issue here was.
Was.
Was the supply chain and frankly as I said, if you think about it in terms of it should we see significantly weakening demand we have done a nice job to de risk. Some up 21, and I think that system, that's where you could potentially see demand and one of the one of the salutary.
Manifests itself the actions that we're taking today.
To provide some risk mitigation for for 21. So that's what I've said, a couple times, we believe that weve bounded our risks and all respects the moment.
Have you seen any not not just through Q1, but but year to date have you seen any cancellations or deferrals in the existing backlog.
Yeah, I mentioned earlier, we had for and all of whom they have well three at home, we expect to come back and Ah, but that is all of that we've seen to date and that backlog of holiday continuing to hold up very nicely.
But we recognize that you know that we'll deal with any additional impacts to the backlog, but so far so we're not hearing noises coming out of the customer base and the backlog.
Of any no at this moment.
Our next question is from Ron Epstein with Bank of America. Please go ahead.
Yeah, good changing gears, a little bit too.
The.
The Navy's accelerated its procurement.
System, if you talk to them.
We're very proud of.
For contract in a short period of time, how are you seeing that in your international business and how do you.
Sure.
Shell on our Navy.
Really leaders and beacon to stability in for fore sight during this entire and crisis or they have increased the velocity, which we've gotten contract awards are particularly see that on the repair side.
Our our new ship construction is our large big contracts I wouldn't expect to see any additional particular, increasing velocity on those but we have on the shorter cycle businesses and they have been.
Gaining the need to under GERD. This the defense industrial supply chain.
And then as what was the one follow on you mentioned a couple times in her prepared remarks.
Even in some other questions that you've got some concerns over the supply chain.
How do you see that playing out, particularly if you've got a.
Hi, mom and pop supplier.
Is largely commercial aerospace systems do much to fund.
<unk> Gulf stream I mean, how are you trying to mitigate risk.
Well sensitive negotiations, we're working closely with all we know how all of our our challenge suppliers are at the moment working closely with them to get to provide onsite mitigation and support Warwick.
Then house, we will.
And we'll continue to do so but there is risk here. It. It's it's not without the rest for reasons that I think you all can understand as well if we can.
Thank you next question comes from Jon Raviv with [noise].
Thanks, and good morning, turning to I.T. for me.
And no any visit to some of those nice backlog trends.
Mm trends translates into gross you know when some of those items and then also can you talk about how I see a supporting the customer.
The current environment and how it can be oriented to support new clarity is coming out of the kind of ours a crisis.
And so do day I T is an enormous agility, coupled with their customer intimacy. So as we as our cut.
Both on the defense.
In Cal and federal civilian environments and on new opportunities.
I think one of the challenges is that.
And in a regular cadence and regular order and that will then drive our ability do attendees sites you know while many of our people can work.
Okay from home a lot of them have to be on fight with customer.
Stop and full bore operation.
Dr. than additional revenue on our part, but but lumped is ah.
And Judy I T has had been very successful then in winning additional business that ultimately begins to.
To translate into revenue and profitable revenue at that.
Equally needed, particularly on I T get everybody back and work.
He timing issues from from.
Incremental backed up.
Impact from Dot the revenue side.
You know from just this a bit of a hiatus that some of our customers have taken.
But their position for good growth with their band and capture rates. So they fit very nicely and comfortably right now and then market space.
This is a follow up can you talk about how customer conversations.
For an environment, where there might be more focus on this aggregator workforces further acceleration to the cloud further out you monetization larger implementation of CDC and age.
Type type work packages, so in any sort of thinking about how the national priorities might shift or accelerate commences.
I don't know that we have seen anything that one could could realistically discern a trend from I think it's too early.
As far as a distributed workforce I think that's way too early I think you have we have to look at the efficiency.
Metrics on how that actually plays out as I say a lot of arc our of our people need to be on customer sites, but we haven't seen a wholesale strategic or structural shift and the way that our customary thinking it Bob I get the cloud or its mission and they in a.
Post coven environment I suspect naturally there will be thumb again, as we think about how long do we keep social dismissing.
How long do we keep integrated shifts and rolling shift. So I think some of that will play out, but so far I haven't seen a material or structural change and how our customers thinking about their mission.
And then we have one final question operator.
Sure and a question will come from Sheila Kahyaoglu with Jefferies. Please go ahead.
Hi, good morning, PB chasing in Howard and thank you for the time.
Well I mean, maybe it maybe this one for you I'm given its free cash flow can you revisit some of it.
Conversion in 2020, it seems like Canada payments are on track to that still about a billion.
And what are other changes to working capital, perhaps with either progress payments or inventories is it fair to assume that you know Gulf stream was maybe 500 million or so of inventories in Q1, given you couldn't deliver 11 aircraft.
Sure I think you've picked up on a number [noise] instinctively on a number of the of the drivers here the the to 500 <unk>.
In program were inherent in our in our forecast so those coming in is.
Certainly welcome news to solidify that element of the outlook.
When you think about the defense side of the business and some of the accelerated contract payments progress payment rates have moved from 80% to 9% and.
Some other advance mechanisms were seeing as I mentioned, most if not all of that is essentially flowing through to the supply chain. So thats really sort of a net pass when it comes to the outlook. So bottom line really when you think about the overall impact it really is that gold stream.
And it's that push of both of the production.
Out a worse I should say the production rate down when you think about it we were expecting to start this year with.
Sort of the inflection point on working through some of the inventory working capital at Gulfstream between the test airplane deliveries.
And getting 500, 600, upto more steady state production level with these production shifts that sort of pushes that out call. It six to 12 months and so the inflection point on that working capital draw down it at Gulfstream, We'll just push out some somewhat so that's really the driver.
In the difference on the on the on the free cash flow conversion.
Great. Thank you very much.
[noise]. Thank you.
And Chad, Thank you and everyone else up for being on this call today as a reminder, please refer to the general dynamics web.
Sorry for the first quarter earnings release, and the highlights presentation, which contains.
Our summary outlook. If you have any additional questions I can be reached at 73.
8763117.
Thank you [noise].
The conference has now concluded. Thank you are tending to this presentation you may now disconnect your lines.
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