Q1 2022 General Dynamics Corp Earnings Call
Operating earnings of $908 million and net earnings of $730 million.
Revenue was flat against the first quarter last year operating earnings are down $30 million, but net earnings are up $22 million.
Operating earnings were hurt by a significant expense at the corporate other line, which distorts the truly strong performance of the operating units the.
The improvement in net earnings was aided by less interest expense and a lower provision for income taxes against the year ago quarter.
Earnings per diluted share up <unk>, 13 cents or five 2% year over year.
The operating margin for the entire company was nine 7% 30 basis points lower than the year ago quarter.
This was anticipated in our earlier guidance to you, but also shaped by the aforementioned expense at the corporate other line.
From a slightly different perspective, we beat consensus by <unk> <unk> per share, we have roughly 400 million more in revenue than anticipated by the sell side and almost $20 million more in operating earnings. We also beat our own expectations, particularly so in aerospace about which I will have more to say shortly.
As we indicated in our press release cash from operating activities is just shy of $2 billion about 270% of net income after capital expenditures free cash flow was $1 8 billion, 250% of net income.
This is particularly impressive following a very strong cash performance in the fourth quarter of last year and not at all typical for us and a first quarter. Obviously, we are off to a good start here.
This is an important respects a very strong quarter, a good foundation for the year.
So let me move right into some color around the performance of the business segments have Jason add color around the spectacular cash performance backlog taxes deployment of cash in the makeup of the corporate other line then I'll answer your question first aerospace.
Aerospace and enjoyed another strong quarter. It had revenue of $1 9 billion and operating earnings of $243 million with a 12, 8% operating margin.
Revenue was $16 million ahead of last year's first quarter. Despite the delivery of three fewer aircraft.
Revenue was almost $180 million higher than anticipated by the sulfide. The difference is almost entirely growth at Gulfstream services and jet aviation operating earnings of $243 million or 23 million ahead of last year's first quarter at 10, 5% increase and.
Well ahead of sell side expectations.
The 12, 8% operating margin is 110 basis points higher than the year ago quarter.
Here the gross margin on delivered aircraft was slightly better, particularly the 500, but fully offset by increased R&D spending.
The improvement comes from higher service revenue, coupled with significantly better margin on that revenue.
On the Gulfstream side of the service business. It was the result of an extremely attractive business mix.
Jet aviation it was strong performance of <unk> in the United States.
Aerospace also had another very strong quarter from an order perspective with a book to Bill of one seven to one.
Gulfstream aircraft orders alone had a book to Bill of two <unk> one to one the order activity at Gulfstream was strong across the board, but driven by orders for the 650.
Strong sales activity and customer interest continues so far this quarter as well.
Market remains robust with some slight improvement in southeast Asia, and the Middle East China remains slow.
The Russian invasion of Ukraine has stopped activity in eastern Europe .
And slowed activity in Western Europe .
All of this however is trumped by the strength of the U S market I should add that flight activity is increasing in western Europe , including flight to the U S.
Yes.
This is a good leading indicator of an improving market in western Europe .
On the new product front. The G 500, G 600 continue to perform well margins are improving on a steady basis and quality is superb.
As of the ended the quarter Gulfstream has over 160 of these aircraft in service.
Importantly, U S and Abrams interest from U S allies is increasing.
Land systems had a book to Bill of one two to one orders in Europe were higher primarily from negotiations that have been ongoing.
The pipeline in Europe . However has increased as nations are contemplating higher defense spending to respond to the threat.
Turning to marine systems.
Once again, our shipbuilding units are demonstrating impressive revenue growth, let me begin with a little recent history.
The first quarter of 2020 was up nine 1% against the first quarter and 19 2021 first quarter was up 10, 6%.
First quarter 2022, with the revenue of $2 7 billion is up six 8% over 21.
The growth was led by Columbia class construction and repair volume.
We also enjoyed nice increases in <unk> and DDG 51 construction volume.
I am pleased that the growth is spread overall shipyards.
Operating earnings of $211 million in the quarter up $11 million or five 5% on operating margins of 8%.
We will strive to improve our operating margin as we progress through the year.
The total backlog of almost 43 billion remains robust and is the largest of our operating groups.
Finally technologies.
This segment has revenue of almost $3 2 billion in the quarter down 36 million from the year ago quarter about a 1% decrease.
However, <unk> enjoyed a $55 million increase in rather than the quarter over quarter, and a stunning $286 million sequentially.
This was <unk> highest revenue quarter in over two years.
Operating earnings at $298 million or down $8 million roughly two 6% on a nine 4% operating margin once again, <unk> was up $12 million quarter over quarter and $16 million sequentially technologies.
<unk> technologies EBITDA margin was a strong 13, 1%, including state and local taxes, which are a 50 basis point drag on that result.
Total backlog grew to $293 million sequentially and total estimated contract value grew to $6 billion on the same basis.
The book to Bill for technologies was $1 one to one led by mission systems at one two to one a good indication that their growth will soon resume.
<unk> had good order activity with a one to one book to Bill over 75% of the quarter's awards represented new business.
700 flight test and certification program continues to progress well.
We have five flight test aircraft that have completed over 2800 flight hours.
We also have conducted over 25000 hours of laboratory stimulated flying.
All structural testing is complete and all structural requirements have been met.
The aircraft design manufacturing and the overall program are very mature.
The new Rolls Royce Pearl 700, designed specifically to match the G 700, aerodynamics to optimize speed range emission and fuel burn will be certified in the next few months.
The engine is performing well and exceeding key performance parameters.
Our final step toward entry into services to complete certification flying with the FAA. This is typically the most predictable part of our test program.
All of this has been achieved during a pandemic and a certification process made increasingly rigorous due to industry events unrelated to Gulfstream.
In that connection the flight test process has a first time requirement that was not part of our original flight test plan or any prior development effort.
It is a model base develop mental software validation in line by line examination of the plane software.
The level of effort is considerable.
Completing a 100% of the software validation is the impediment to finishing performance testing by the FAA and G 801st flight.
I can assure you that the validation work to date has proceeded well and presented no surprises. It is just resource and time intensive.
This leads me to some comments on the timing of certification.
We continue to target certification of the G 700 for the fourth quarter of this year.
But the ultimate timing is dependent on the FAA.
It seems prudent for us at this time to recognize the risk of a three to six months slip in the process and to plan for it accordingly.
If such a slip below occur we have offset any impact to our 2022 financial plan with an increase of deliveries of current production aircraft.
Also not adversely impact 2023.
It also remains our view that the G 800 certification will follow the G 700 by six to nine months.
Gulfstream remains committed to a safe and comprehensive certification test program.
Production of customer G. 700 is underway and we are preparing for entry into service, we will deliver a mature high quality aircraft.
Looking forward to next quarter, we expect to deliver 26 aircraft with rapid increases in the third and fourth quarters as we have previously indicated.
So far supply chain issues have been in the news since category. However, we expect an increasing number of issues. In this regard later in the year and believe we are on a path to work through them successfully.
In short off to a very good start at aerospace next.
Next combat.
Combat systems had revenue of 168 billion down 8% over the year ago quarter earnings of 227 million are down 7%.
The numbers are reasonably consistent with our outlook and sell side expectations margins at 13, 6% or a 20 basis point improvement over the year ago quarter, So strong operating performance.
Stryker and Abrams have considerable support in the U S and Abrams interest from U S allies is increasing.
Land systems had a book to Bill of one two to one orders in Europe were higher primarily from negotiations that have been ongoing.
The pipeline in Europe . However has increased as nations are contemplating higher defense spending to respond to the threat.
Turning to marine systems.
Once again, our shipbuilding units are demonstrating impressive revenue growth, let me begin with a little recent history.
The first quarter 2020 was up nine 1% against the first quarter and 19 2021 first quarter was up 10, 6%.
First quarter 2022, with the revenue of $2 7 billion is up six 8% over 21.
The growth was led by Columbia class construction and repair volume.
We also enjoyed nice increases in <unk> and DDG 51 construction volume.
I am pleased that the growth is spread overall shipyards.
Operating earnings of $211 million in the quarter up $11 million or five 5% on operating margins of 8%.
We will strive to improve our operating margin as we progress through the year total backlog of almost 43 billion remains robust and is the largest of our operating groups.
Finally technologies.
This segment has revenue of almost $3 2 billion in the quarter down $36 million from the year ago quarter about a 1% decrease.
However, G D. I T enjoyed a $55 million increase in red are the new quarter over quarter, and a stunning $286 million sequentially.
This was <unk> highest revenue quarter in over two years.
Operating earnings at 298 million or down $8 million roughly two 6% on a nine 4% operating margin once again, <unk> was up $12 million quarter over quarter and $16 million sequentially technologies.
<unk> technologies EBITDA margin was a strong 13, 1%, including state and local taxes, which are 50 basis point drag on that resolved totaled.
Total backlog grew to 293 million sequentially and total estimated contract value grew to $6 billion on the same basis.
Book to Bill for technologies was $1 one to one led by mission systems at one two to one good indication that their growth will soon resume.
<unk> had good order activity with a one to one book to Bill over 75% of the quarter's awards represented new business. So good order activity in the quarter and good order prospects on the horizon.
Judy I T alone submitted over $5 billion in the quarter.
Bringing the number of submitted proposals and the decision of protest skew to 29 billion.
As you know we never update guidance at this time of the year. We will however provide you a comprehensive update at the end of next quarter as is our custom.
Concludes my remarks with respect to a very good quarter I'll now turn the call over to our CFO , Jason Aiken for further remarks, and then we'll take your questions. Thank.
Thank you Phebe and good morning, the first thing I'd like to address is the unusually high corporate operating expense of $71 million in the quarter, which is up from $32 million in the year ago quarter.
Given our full year expectation of around $110 million in corporate expense. This year, you might have expected the first quarter number similar to last year.
However, this year was impacted by a change to some of the terms of our equity compensation plans, which resulted in the acceleration of the expense associated with those awards.
This was a onetime noncash item and you should expect a lower corporate expense in the remaining quarters to result in our full year outlook of $110 million.
If you consider the performance of our operating segments in the quarter. Excluding this corporate expense anomaly. The segment margins improved from 10, 3% a year ago to 10, 4% this quarter.
Turning to our cash performance, we had the strongest first quarter, we've seen in some time.
Following several years of negative free cash flow in the first quarter. This quarter was a marked improvement due in large part to the strong order activity at Gulfstream and ongoing progress payments on our large international vehicle program at combat systems.
For the quarter, we generated operating cash flow of nearly $2 billion for a conversion rate of 270% of net income.
Including capital expenditures of $141 million or free cash flow was $1 $8 billion or a conversion rate of 250%.
So the quarter was well ahead of our expectations some of which was favorable timing in our operating working capital, but the performance certainly reinforces our outlook for the year of free cash flow conversion at or above 100% of net income.
Looking at capital deployment, I mentioned capital expenditures were $141 million in the quarter or one 5% of sales, which is consistent with last year.
We're still planning for capex to be around two 5% of sales for the year.
We also paid $330 million in dividends and increased the quarterly dividend of nearly 6% to $1 26 per share.
And we spent over $290 million on the repurchase of $1 3 million of our shares at an average price of almost $225 per share.
After all this we ended the first quarter with a cash balance of $2 9 billion and our net debt position of $8 6 billion down $2 $8 billion from this time last year and about $1 3 billion below the year end position.
Net interest expense in the quarter was $98 million down from $123 million in the first quarter of 2021.
The decrease in 2022 is due to the one 5 billion reduction in debt last year.
We have another $1 billion of outstanding debt maturing later this year and we'll have more to say about our plans related to those notes as we get closer to their maturity in November .
The tax rate in the quarter at 14% benefited from the timing of equity compensation activity and associated deductions consistent with our expectations. So no change to our outlook of 16% for the full year.
So that implies a higher rate for the balance of the year to arrive at that outcome.
Order activity and backlog were once again, a strong story in the first quarter with a one to one book to Bill for the company as a whole.
As Phebe mentioned the order activity in the Aerospace group led the way with a one seven times book to Bill, which is also the book to Bill for the group over the last 12 months.
As a result aerospace backlog has increased by almost 50% in the past year.
Technologies in combat systems also had solid quarters with a one one times and a one times book to Bill respectively.
We finished the quarter with a total backlog of $87 2 billion, while total potential contract value, including options and <unk> contracts was 129 billion.
Finally, a quick note on our expectations for EPS progression for the balance of the year, we expect the second quarter to be roughly 10 cents above the first quarter with more significant steps up in the second half of the year.
Howard that concludes my remarks, I'll turn it back over to you for the Q&A.
Thanks, Jason.
As a reminder, we ask participants to ask one question with one follow up so that everyone has a chance to participate.
Operator could you please remind participants how to enter the queue.
Thank you we will now begin the Q&A if you'd like to ask a question that you can press star one on the telephone keypad. If you would like to withdraw your question you May Press Star two please.
Please ensure you're on mute locally when asking your question.
First question for today comes from Ron Epstein of Bank of America. Your line is now open.
Good morning, everyone. This is mariano latest Mona on for.
Iran today.
Hey, good morning.
You get into your question.
Some of you may have noted an interesting juxtaposition of the subjects in my remarks, and I will just note that the capacity for technology to err is endless.
Nonetheless, I hope you got the message Alright go ahead.
That's fine.
We got the message type, but we got it.
So on IRA you mentioned strong volume from Martin our purposes could you give us some more color on what were the main drivers and please help us understand how sustainable are those volumes on margins.
Yes.
So we had higher R&D, but.
But we had a very strong margin performance and services.
And a particularly good mix and service R&D at Gulfstream.
Also some improvement in gross margins, so that mix drove margins.
How sustainable are the volumes such services.
Does anything change in services business.
What do you think that that.
Particular mix is going to be hard to replicate.
But for the moment, we're sticking to our our margin guidance that we gave you just to remind everybody. It is custom to update you at the end of the second quarter with a full and detailed.
Analysis by of our prospects for the rest of the year by group and then.
But for the whole company.
But well stick with what we've got now we're off to a good start however.
Thank you. Our next question comes from Myles Walton of UBS, Michael Your line is now open.
Thanks.
It can be on your comment around the software validation approach in the certification is that something thats been recently added after the original certification plan was agreed to or is it just that you're getting to the point, where youre having to accomplish this this new no.
Added this was an added process that we had not contemplated when we originally.
Laid out our certification plan.
And it's a result of events that are independent of us.
I see okay.
And then on the on the free cash flow.
Jason is it the case it looks like Unbilled was because it was pretty favorable and we know about the UK combat vehicles, but.
Sorry about the Canadian combat vehicle, but did the UK combat vehicle also start to play out.
No as you point out we continue to receive steady payments on the international program that we reset a couple of years ago. So that continues the pace, we're still working through issues with the customer on the UK side. So we hope to see that.
Resolved later this year.
Thank you. Our next question comes from David Strauss of Barclays. David Your line is now open.
Great. Thanks.
Phebe could you touch on a little bit more marine margins.
Percent, that's the lowest we've seen in a while.
I think you've talked in the past about the business eventually getting 99% plus kind of margin. So can you talk about what exactly happened in the first quarter in the.
Progression premier to get to that above 9% level.
So as we've noted before our margins will be compressed as we worked down our learning curves on Columbia you May recall, we are booking initial Colombia.
At a conservative margin that coupled with the well publicized supply chain scheduling issues in Virginia have have driven some margin compression, but we expect those to stabilize over time as well.
And just to add to that David and put another point on what Phebe mentioned there the Columbia program, while we saw growth as she mentioned in all three of the shipyards. The Columbia program did bring more than half of the volume increase in the quarter. So just from a mixed perspective. Those are early read early margin rates on that program or impacting the aggregate margin for the group too.
Okay and Phoebe.
Outlook for this business longer term you still think it is Colombia.
It gets into production further into production.
Do you still think it can be a 9% to 10% margin business.
Yes, as we get further into production.
The schedule stabilize on Virginia, and both Bath and Nasco will all contribute.
So we are targeting that and we believe that that is fully achievable.
Thank you. Our next question comes from Seth Schiffman from J P. Morgan Your line is now open.
Okay.
Thanks, very much and good morning.
You mentioned.
The.
The outlook for Gulfstream, both for this year and reinforced the.
The guidance for next year, so understand that that's where we're headed in terms of deliveries, but I guess can you walk through the mechanics, a little bit more if if.
If gulfstream needs to see a significant step up in deliveries in the second half at the same time that.
We'll be seeing incremental supply chain issues, and then there might be a need to backfill. Some G 700 deliveries in 2023, well with those supply chain issues potentially still out there kind of some.
Some of the things that give you confidence in that and that delivery outlook, given those sort of qualitative headwinds that you talked about.
So with respect to the supply chain.
We are working through all of those.
And we don't see those as as impacting our 'twenty three 'twenty four estimates that we gave you.
A R R.
Estimates on on Gulfstream are predicated on the current demand environment, which has been strong as I noted continues into this quarter along with our backlog. So we're pretty comfortable that we've got both the supply chain and manufacturing capability.
To meet all of those those two out your requirements and.
As I noted in my remarks if.
Should there be a slip.
Then we will increase in production aircraft this year.
Yeah.
But.
Look you know with respect to that slip potential slip we wanted to be as transparent as possible to give you. Some insight when we thought and then tell you that how we were going to <unk>.
Dress that so that there's no economic impact from that.
Either year 'twenty three 'twenty four.
Great. Thank you and then as a follow up Jason I guess.
You mentioned you talk about addressing the debt.
On the next call, maybe but if we could ask for a little bit of a preview in terms of how youre thinking about it generally theres, probably some debt due each year for the next several years.
We just saw one of <unk>.
One of your peers look to term things out for a while.
How do you think about where you want to take the capital structure from here and the role of a debt repayment now that interest rates are going up.
Yes, I think.
Our overarching approach to this remains unchanged we continue to target the.
Mid a credit rating and wanted to get our metrics in line with that for the long term.
In keeping with that I think you can expect us to.
Retire this debt that we see coming due later this year what happens after that I think remains a little bit in play we will we'll have to see because we talked about the elevated debt. We had at post <unk> acquisition and the fact that we intended to bring that down but we never intended to get back to the level, we had been with Sn.
Zero net debt prior to that acquisition. So now we're getting into the range looking ahead into the next couple of years of where we're probably going to be evaluating is this the place to land. We don't have an answer to that yet, but that's going to become more of the conversation. So.
We'll see where that plays out I expect at this point that we'll go ahead and retire.
The debt that matures this year, but then we'll be more active in that conversation, but again I think ultimately targeting that mid a credit rating and everything that is attendant to that.
Thank you next question comes from Robert <unk>.
But research Roberts your line is now open.
Thanks, so much good morning.
Honey.
Phebe you mentioned the very strong order performance in aerospace this quarter I was wondering what sort of impact. This has had on the lead time suggests specific to the <unk> hundred 50, you mentioned, whether this is starting to have any sort of impact on customer demand peeps people like saying, it's going to take too long to get my jet.
No we'd manage that lead times very successfully.
So <unk>.
Present, and we've given even given the robust demand, we do not see that as an issue.
Yes.
And just as a follow up.
How is the pricing environment evolved over the last three months.
Well as you know, we are medicine, and love to talk about pricing, but you can imagine that.
Pricing has kept pace with other economic factors.
Thank you. Our next question comes from Robert Spingarn from many is research your.
Your line is now open.
Good morning.
Phebe I was hoping to dig into combat a little bit.
And just ask what types of products, you expect European nations to demand most and to what extent do you expect those to be products from combat systems, and particularly from Eos.
So.
Sure.
Sure. The recent threat environment drive increased spending in rearming and Recapitalizing land forces, we will see an increase in demand and I suspect it to be aligned along our ordnance business as well as our vehicle business, both in the United States and it at E L.
But I'm I'm careful not to get ahead of our customers here.
Do you see much opportunity in technologies, perhaps permission or even <unk>, maybe on the cyber side over there.
There could be some because clearly in today's or fighting environment.
Interoperability on networks and communication is critical and reliable interoperability. So I suspect there could be some increased demand, but we have not seen any of that so far.
Thank you. Our next question comes from Doug Harned from Bernstein Your.
Your line is now open.
Good morning, Thank you.
Uh huh.
Can you.
Comment on inflation when you when you look forward, obviously, we're in a perhaps a difficult inflationary environment.
How you see it effecting.
Both on the Gulfstream side and on the government customer side in terms of what you can pass through what could pressure margins.
So let me address that holistically across the company because we've dealt with.
Inflationary pressures and increases in commodity costs.
And during ways through a portfolio of actions.
One is our contract architecture.
The second is to the extent possible price increases we've cut costs in other areas to offset some of the increases and then where possible we've had.
Commodity substitution and part substitution.
So that combination of arrows in our quiver has mitigated any impact and at the moment, we do not.
Project.
A margin compression as a result of.
Of increased prices.
So your.
So you actually you see.
Are these things that you would have not done before or are you doing things that offset.
Basically reduce your costs in other ways or is it more on the ability to pass through some of the price increases.
Can't give you a very I can't unpack that and give you a very clear distinction between which of these capability of which of these.
Coal has resulted in and the largest impact on our ability to offset inflationary.
Increases, but because it's a combination of things and some contracts you've got contract architecture that protects you.
In other cases, you take additional cost.
Cuts that you had not anticipated taking before but you know one of the things you'd expect from a company with strong operating leverage is when a cost increases somewhere else you left find offsetting cost reductions and so we have historically done that and we're continuing to do that and then in some instances you can have products.
Substitution.
That's not particularly frequently but it can happen in some critical products. So so I think it's that panoply of of weapons that we've used to offset these increases.
Thank you next question is from Kyle locally from Jefferies. Your line is now open.
Hey, good morning, Phebe, Jason Howard Thank you.
So I wanted to ask about RMB.
Gulfstream in 2022, 23, and 'twenty four given bottoms for Gulfstream profitability now when we think about the G 700. The G 800 in the 400 whats the magnitude of the inverse.
Investment you have to put into work with the FAA or is it more of a heavy time burden like how do we think about that maybe in terms of dollar amount or is it just more time in a push out of <unk>.
Certification and delivery.
We've noted it it's more a question of time resources certainly on the new requirements.
But you.
You saw an increase in R&D this quarter and it was because we have this new set of software validation requirements that we need to work through them and we've accommodated that in our plan. Jason If you want to add anything to that just making sure. We understand the nature of your question I mean, if it is.
This this this potential risk of TV talked about any additional effort we have to undertake.
And the certification process. It is both the time risk but of course cost travels with time and so there's there is.
The burden of the additional effort that goes on the man hours that have to occur to accomplish those tasks. So it put some pressure on the R&D budget and CB said you saw some of that even in the first quarter, but but I don't think any of this is enough to change the profile of what we've talked about either from an R&D spend in the aggregate in the 'twenty two 'twenty three 'twenty four time frame.
Or as we think about it in terms of the margin rate impact that it has on the business. So again just to recap where we see this were at an elevated state. This year. It will remain elevated in 'twenty three and then once we get the 708 hundred certified it remains somewhat elevated but will notch down a step down in 'twenty four.
The effort shifts more towards the 400, and then we'll see it sort of returned back to more of a normal run rate level beyond beyond 2024.
Okay, and then maybe one more on technology now how are you thinking about the technology portfolio I think it has a lot of good businesses in there, but you know organic growth hasn't been as robust as let's say marine.
How do you think about the businesses in that portfolio overall do you like it as a whole as the combined technology of admission business or any thoughts.
Yeah, we spent a fair amount of time early on after the acquisition of CSI.
Trimming that portfolio, both it and our Iot business as well as.
And our mission systems business. So we like the mix of lines of business that we have right now we believe they are complementary and we believe that there are good growth.
Engines, but I don't know that we've heard your questions that clearly, but if one of them was and and correct me if I'm wrong, but if one of them was comparing this to marine growth.
Very few.
Items in the defense budget are going to grow as reliably and as robustly as the submarine in shipbuilding accounts.
So I wouldnt hold that as a metric.
I think continued steady growth on the topline, but more importantly, the bottomline and technologies. This has really been our focus if that makes sense.
Thank you David.
Yeah.
Thank you.
Our next question comes from Mike Maugeri from Wolfe Research, Mike. Your line is now open.
Thank you everyone.
I think historically sort of your commentary has been for four to 500 of annual revenue growth at marine sort of implies a moderation from here.
It's been strong over the last few years, maybe some risk retirements coming through on Columbia class. So with that said I mean is there any sort of good reason to think that growth should moderate over the next few years at marine.
Now, we continue to project $4 million to $500 million a year.
On average you'll see some perturbations in quarterly growth.
Largely driven by material sales.
But nothing that changes the project the trajectory.
Got it. Thank you and then sticking with marine can you speak to the pipeline of bass, maybe some upside there as it might relate to a hypersonic work on DDG 1000 additional work for DDG 51, or are we sort of pretty much tapped out there from a capacity standpoint.
Well, yeah, those are mixing kind of two different predicates. One there's been a lot of talk about integrating various weapons systems onto a shipboard platforms, but we haven't yet seen any of that materialize.
And so it is not a question about capacity, we have adequate capacity that we have expanded and updated and upgraded in the last few years through our capital to fund improvements at Bath and frankly, the other shipyards. So it's simply a question of the demand coming out of the out of the U S. Navy.
And we haven't had any surprises that are continuing with respect to Bath that Navy has continued to.
<unk> DDG 51 production, so we expect that to be a steady steady pace going forward.
Thank <unk> next question comes from Pizza Almond from Bad Pizza. Your line is now open.
Thanks, Good morning Phebe Jason.
Maybe just circle back on your comment regarding the pipeline increasing potentially with combat.
I was just curious about your overall comments on how we should expect eventually show up in backlog or should we consider this more of a 'twenty three 'twenty four event when we're thinking about that and then just as a follow up related to kind of the budget outlook now that we've got in the 15 to 23 requests and we saw what was enacted for 'twenty. Two maybe you could just give some high level thoughts on how.
TD is fair given the given the request.
Well, if youre talking specifically about combat I I think that you know it is.
Hard to give projections about timing when in fact, the budgets for the most part have not materialized and in insignificant increases, but where are they too in and the land forces and land forces modernization.
We have every expectation that the vehicle combat vehicles demand will increase and an ordinance in arguments will increase.
So I think it's premature to bake in any background noise.
Really some of that and I would say.
That.
One of the interesting things that we have not quite seen at the same level as the Abrams interest from multiple U S allies.
So we'll have to see how that plays out over time.
There are some potential out there, but as I said don't want to get too far ahead of our customers here now to see how all of this you know it takes time.
To get from the threat to full funding to allocation of awards I think you'll hear that from a lot of folks not just us.
Thank you. Our next question comes from Colin von <unk> from Cowen Your.
Your line is now open.
Thank you so much so phebe.
You recently had a mid contract wage hike.
Where the lower five of the 10 pay grades had a pay hike.
<unk> of over 20% I assume mix is an issue, but could you comment on.
What that impact is labor availability and cost and is there any read across to electric boat that this should be a concern there too.
So the.
Wage increase at Bath is an attempt to help stabilize the manufacturing workforce and build ship faster.
So this in turn will ultimately how competitive the sand margins. So we think we can fully address any cost impact.
And I think the touch labor market has been less impacted by some of the well publicized labor shortages and they tend to be more regional to the extent that they've existed.
So we do we take each one of our lines of business on a case by case basis.
And then react accordingly, but bath with a special set of circumstances.
Given given Maine, and and the realities in Maine.
Thank you Brian .
Great and then switching gears a little bit.
What impact.
Do the Russian sanctions have on your business at Gulfstream.
So.
To the extent that we expected an impact we anticipated it to show up at.
Jet aviation and some other European locations.
But they were jet was able to offset that with additional additional volume.
With respect to Russia, as I noted I think before they're less than 5% of our Gulfstream backlog.
And and we had no deliveries this quarter, obviously, we've had no cancellations and we have in this demand environment being able to manage the relatively few number of Russian airplanes in our backlog. So we do not see an impact.
The moment.
Thank you. Our next question comes from Matt Akers from Wells Fargo.
Your line is now open.
Hi, Good morning. Thanks for the question I Wonder if you could talk on technologies, a couple of things I guess one.
You commented on some supply chain impacts on emission system, just how those are trending and then also just the timing of some of these new awards and when they can start to ramp up.
So we discussed I think when he started.
Starting maybe in the third quarter and again in the fourth quarter. The some of the chip shortages that we were exploring admission experiencing admission system that was constraining the ability to deliver a series of different kinds of products.
So we have largely worked through those issues at mission systems, but we are now contending with the pent up demand that resulted was generated by last year.
Last year slower deliveries as a result of of chip shortages.
As we worry that that ought to be upside for.
[noise] upside for mission systems on the on the revenue side is as we go forward.
And the timing of of of new orders typically at G. D. I T. They tend to be a.
You have tend to have a quarter lag or a quarter and a half lag.
From time of award to New starts so we will see some of them all of the recent larger awards.
Begin to show up.
Next quarter, and then increasing over time.
Thanks, that's helpful and if I could.
Gulfstream.
I mean, one of the questions that I've gotten is how.
Sort of sustainable this business could be if we do go into a recession I guess, we just talked about it that come up at all with your customers or are people concerned about the economic outlook and sort of how resilient do you think.
This could be if we do have a downturn.
Yeah.
Well, we haven't heard a whole lot of that in the pipeline, but lets past is prologue here.
And I think what we have demonstrated repeatedly at Gulfstream as the pulse team has a very good cyclical.
And in the past what we've seen is relatively short economic perturbations in a pretty quick recovery at Gulfstream.
So I think you know our job is to manage in and play the cards that are dealt to us and we've done so very effectively.
So you know you you can probably estimate.
The future of the U S economy better than than we can that seems to be you know great sport.
Got a Nobel prize that you get it right.
But.
We're quite comfortable at the moment on where we stand and I'm very comfortable at Gulfstream stability.
<unk> to be a good cyclical.
Thank you next question comes from Christy.
From Morgan Stanley Christine Your line is now open.
Thanks.
Looking at the fiscal year 'twenty three budget request, we're seeing a generational investment in the nuclear triad benefiting the Columbia class.
And we're also seeing.
Advanced capabilities like E C system seeing outsized growth.
As you look at your portfolio with the IP business stable leverage.
Second lead out.
Appetite to add a new vertical through the business to capture more of the outsized growth in advanced capabilities that you may not have today.
Well I think now we are we do not discuss potential acquisitions or divestitures, but we like where we are positioned to take advantage of the recapitalization of the triad.
You want to ask another question.
Great Yeah, and maybe following on capital deployment then.
Understanding that you're not going to talk about large M&A.
What about additional priorities for cash how should we think about dividend payments versus share repurchases, particularly as you're in the leverage where you want to be and the business is generating significant amount of free cash flow.
I think fundamentally there is no change to the way we've articulated our capital deployment priorities, we talked a little earlier about the dividend increase earlier. This year that was the 25th annual consecutive annual increase.
And Ah.
We've made pretty clear the significant investments we've been making in the business over the past several years.
And now really.
If you will if theres any pivot at all its shifting back the attention more toward a rewarding those patient shareholders with return of capital and share repurchases and you've seen us do that last year, we embarked on that a little bit in the first quarter and I think you should expect to see us continue that and the tactical and opportunistic way.
M&A is always opportunistic and as <unk> said not something that we disclose are out in front of anything so.
Kind of how you should expect this debate.
And operator, we'll take one more question please.
Thank you our final question for today comes from George Shapiro from Shapiro Research your.
Your line is now open.
Okay. Thanks.
Phoebe.
You had a hunting for cancer meeting cancellation in the quarter and I guess from what you said in response to the question before it wasn't due to Russia.
Tell us where that might have been.
We had one cancellation.
And I have no clue, where it was I thought it wasn't Russia.
Okay. Thanks, and then okay got it yes.
Yes.
That's fine.
And then Jason where the payments from the Canadian contract in the first quarter similar to last year's first quarter, which was around $1 billion and also do you expect more to occur this year as well.
Thanks.
Yes payment levels. This year are very similar to last year, both in the first quarter and for the balance of the year. So the pattern should be pretty similar and again that customer has been very consistent in their payments since we negotiated the recapture of that program.
Yes.
Thank you alright. It includes the Q&A for the state I will hand back to Howard Rubel for any closing remarks.
Thank you Alex.
And.
Thank everybody else for joining our call today as a reminder, please refer to the general dynamics website for our first quarter earnings release and highlights presentation. If you have any questions I can be reached 703 870 63117. Thank you very much for your.
Attention today.
Yes.
Thank you for joining today's call you may now disconnect.
Yeah.