General Dynamics Corp. (GD) Q1 2021 Earnings Call Transcript

General Dynamics Corp. (NYSE: GD) Q1 2021 earnings call dated Apr. 28, 2021

Corporate Participants:

Howard A. Rubel — Vice President, Investor Relations

Phebe N. Novakovic — Chairman and Chief Executive Officer

Jason W. Aiken — Senior Vice President and Chief Financial Officer

Analysts:

Jonathan Raviv — Citi Investment Research — Analyst

Seth Seifman — J.P. Morgan — Analyst

Cai von Rumohr — Cowen & Co. LLC — Analyst

David Strauss — Barclays — Analyst

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Myles Walton — UBS — Analyst

Sheila Kahyaoglu — Jefferies & Company — Analyst

Pete Skibitski — Alembic Global Advisors — Analyst

Peter Arment — Robert W. Baird — Analyst

Richard Safran — Seaport Global — Analyst

Robert Stallard — Vertical Research — Analyst

Presentation:

Operator

Good morning everyone and welcome to the General Dynamics First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Howard Rubel, Vice President of Investor Relations. Sir, please go ahead.

Howard A. Rubel — Vice President, Investor Relations

Thank you, operator, and good morning everyone. Welcome to the General Dynamics first quarter 2021 conference call. Any forward-looking statements made today represent our estimate regarding the company’s outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company’s 10-K, 10-Q, and 8-K filings.

With that completed, I’d like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Thank you, Howard. Good morning everyone and thanks for being with us. As you can discern from our press release, we reported earnings of $2.48 per diluted share on revenue of $9.4 billion, operating earnings of $938 million, and net income of $708 million. Revenue is up $640 million or 7.3% against the first quarter last year. Operating earnings are up $4 million and net earnings are up $2 million. To be a little more granular, revenue on the Defense side of the business is up against last year’s first quarter by $444 million and Aerospace is up $196 million. The operating earnings on the Defense side are up $45 million or 6.4%, while operating earnings in the Aerospace side are down $20 million, but still nicely above consensus. I’ll have more to say about this a bit later.

The operating margin for the entire company was 10%, 70 basis points lower than the year-ago quarter. This was driven by a 250 basis point lower margin rate at Aerospace as was fully anticipated in our guidance to you combined with $21 million more in corporate operating expense. From a slightly different perspective, we beat consensus by $0.18 per share. We have roughly $500 million more in revenue than anticipated by the sell side and almost $50 million more in operating earnings so it’s a pure operations peak. I must confess that we were also beat our own expectations rather handsomely. This is in almost all respects, a very solid quarter. It’s hard to find something not to like about it. It’s a very good start to the year.

So let me move right into some color around the performance of the business segments, have Jason add color around cash, backlog, taxes and deployment of cash, and then we’ll answer your questions. First Aerospace; Aerospace enjoyed revenue of $1.9 billion and operating earnings of $220 million with an 11.7% operating margin. Revenue is almost $200 million higher than anticipated by us and the sell side. Revenue is also a $196 million higher than the year-ago quarter. The difference is almost exclusively more G500 and G600 deliveries than year-ago quarter. The 11.7% operating margin is lower than the year-ago quarter but consistent with our guidance and sell side expectations. Finally, we took some mark-to-market charges with respect to our G500 test inventory. Without the charge from a pure operating perspective, performance in the quarter was superb.

Aerospace also had a very strong quarter from an orders perspective with a book-to-bill of 1.3 to 1. Gulfstream alone had a book to bill of 1.34 to 1. In unit terms this is the strongest order quarter for the last two years excluding the fourth quarter of 2019 when we launched the G700. The sales activity truly accelerated in the middle of February and continued on through the remainder of the quarter. The momentum developed in the quarter appears to be rolling over into the second quarter as well. We are experiencing a high level of interest and activity. It is constructive to see this accelerated activity level without the benefit of the removal of travel restrictions and quarantine requirements in many countries outside the U.S. Demand should improve even further when these restrictions are ultimately removed.

Gulfstream experienced a 5.7% increase in service revenue. On the other hand Jet Aviation’s FBO’s and certain of its maintenance facilities are recovering more slowly. Jet Aviation service revenue is down around $31 million coupled with a modest increase in service operating earnings. The FBOs and MRO sites will do much better as business travel accelerates. The G500 and G600 continue to perform well. Margins are improving on a consistent basis and quality is superb. As of the end of last week, we have delivered 104 of these aircraft to customers. The G700 has over 1,400 test hours on the five test aircraft and the first fully outfitted G700 is flying. Its interior is absolutely beautiful. We remain on track for entry into service in the fourth quarter of 2022.

Looking forward, we expect the second quarter to be our most challenging from a delivery perspective. However, we also expect rapid improvement in the third and fourth quarters as we had planned for an increase in production and more deliveries. Combat Systems; Combat Systems has revenue of $1.8 billion, up 6.6% over the year-ago quarter. While all three companies within the group contributed to the growth, the primary source was increased sales of our 8×8 wheel combat vehicles to Switzerland and Spain and sales of our 6×6 Eagle vehicle, so all in all, good growth. It is also interesting to observe that Combat Systems revenue has grown in 16 of the last 18 quarters on a quarter over the year-ago quarter basis.

Operating earnings at $244 million are up 9.4% on higher volume and a 30 basis point improvement in margin. This was an impressive performance by any reasonable measure. You may recall that a notable development for this segment in the year-ago quarter was the formal signing of the restructured contract on the Canadian International program, which settled all issues. The parties continued to perform on that contract as contemplated. This was helpful to free cash flow last year and continues to be so this year. This risk item appears to be behind us. Turning to Marine Systems, you may recall that at this time a year ago I was able to report that revenue in the first quarter of 2020 was up 9.1% against the first quarter in 2019.

I’m very pleased to report today that first quarter 2021 revenue of $2.48 billion is up 10.6% against first quarter 2020. The growth was led by Block V Virginia-class and Columbia-class construction volume. We also enjoyed nice increases in ESB and T-AO and construction volume at NASSCO. This is very impressive continued growth. In fact revenue in this group has been up for the last 14 quarters on a quarter versus the year-ago quarter basis. Operating earnings are $200 million in the quarter, up $16 million or 8.7% on an operating margin of 8.1%. We will strive to improve our operating margin as we progress through the year. On the order side, I should observe that total backlog was down only $231 million sequentially, leaving a powerful $49.8 billion in total backlog.

There was obviously significant order activity in the quarter, including the award of the 10th Block V Virginia-class submarine. Finally Technologies, this segment had revenue of almost $3.2 billion in the quarter, up $95 million from the year-ago quarter of 3.1%. The revenue increase was supplied by Information Technology mostly associated with the ramp up of new programs. IT alone grew 5% in the quarter. Operating earnings at $306 million or up $8 million or 2.7% on a 9.6% operating margin. This is about 40 basis points ahead of consensus. EBITDA margin is 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-class EBITDA margin. Total backlog grew $359 million sequentially and total estimated contract value remained about the same.

There were also some notable items in GDIT’s first quarter worth mentioning. On the bidded proposal front GDIT submitted the highest dollar value of proposals in any quarter since the acquisition of CSRA, 90% of which represent new business opportunities. They ended the quarter with over $30 billion in proposals awaiting customer decision, most of which also represent new business opportunities versus re-competition of existing work. So good order activity in the quarter with a book to bill of 1.1 to 1 and good order prospects on the horizon. That concludes my remarks with respect to a very good quarter. As you know, we never update guidance at this time of the year. We will however, give you a comprehensive update at the end of the second quarter as is our custom.

I’ll now turn the call over to our CFO, Jason Aiken for further remarks and then we’ll take your questions.

Jason W. Aiken — Senior Vice President and Chief Financial Officer

Thank you Phebe and good morning. I’ll start with our cash performance in the quarter. From an operating cash flow perspective, we essentially broke even for the quarter. Including capital expenditures, our free cash flow was negative $131 million. For those of you who followed us for some time, you know we’ve been a fairly significant user of cash in the first quarter for the past several years. This quarter was a marked improvement from that pattern, due in large part to the strong order activity at Gulf Stream and ongoing progress payments on our large international Combat Systems program consistent with the contract amendment Phebe referenced earlier.

So the quarter was nicely ahead of our expectations and reinforces our outlook for the year of free cash flow conversion in the 95% to 100% range. Looking at capital deployment, I mentioned capital expenditures which were $134 million in the quarter, or 1.4% of sales. That’s down between 25% and 30% from the first quarter a year ago, but we’re still expecting full year cat-backs to be roughly 2.5% of sales. We also paid $315 million in dividends and increased the quarterly dividend by a little more than 8% to $1.19 per share. And we spent nearly $750 million on the repurchase of 4.6 million shares at an average price of just over $161 per share. After all this, we ended the first quarter with a cash balance of $1.8 billion and a net debt position of $11.4 billion down $1.3 billion from this time last year.

Net interest expense in the quarter was $123 million, up from $107 million in the first quarter of 2020. The increase in 2021 is due to the incremental debt issued last year in conjunction with the refinancing of maturing notes. We have $3 billion of outstanding debt maturing later this year. And we plan to refinance a portion of those notes to achieve a more balanced deployment of capital. But this will still result in a declining debt balance this year and beyond. During the quarter, Congress passed the American Rescue Plan Act. As you may be aware, it contains two provisions that affect our business. First, it extends the provision of the CARES Act that allows reimbursement of contractor payments to workers who are prevented from working due to COVID-related facility closures.

This will continue to benefit our Technologies business, although it does not provide for fee on those costs. So that will have an ongoing dilutive impact on the segment’s margins. Second, the Act provides pension funding relief by reducing the amount of required contribution to our pension plans this year by a couple $100 million. However, this same provision reduces the amount of pension costs were reimbursed on our U.S. government contracts. As a result, when coupled with the lower tax benefit from the reduced pension contributions, the impact on our 2021 cash flow is immaterial. We expect the cash benefit from the Act to increase modestly over the next couple of years, reinforcing our expectation that free cash flow can exceed 100% of net income over that period. The tax rate in the quarter at 16.2% is consistent with our full year expectation, so no change to our outlook on that front.

Finally, order activity and backlog were once again a strong story in the first quarter with a 1 to 1 book to bill for the company as a whole, even as we grew by more than 7% in the quarter. As Phebe mentioned, the order activity in the Aerospace and Technologies groups led the way with a 1.3 times and 1.1 times book to bill respectively. We finished the quarter with a total backlog of $89.6 billion. That’s up 4.5% over this time last year, and total potential contract value including options and IDIQ contracts was $131.4 billion, up 6% over the year ago quarter.

Howard, that concludes my remarks. I’ll turn it back over to you for the Q&A.

Howard A. Rubel — Vice President, Investor Relations

Thank you, Jason. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Jon Raviv from Citi. Please go ahead with your question.

Jonathan Raviv — Citi Investment Research — Analyst

Hey, good morning, everyone. Thanks. Thanks for the opportunity here. A question on actually on GDIT, the path and I know you guys have talked about 7% growth this year. You did 5% in the first quarter. It’s a very good start. So any kind of milestones to look upon there? And then just overall commentary on the environment. You’ve heard of some delays and slowness in awards, some other contractors have been highlighting some disruptions impacting organic growth. So any view as to how that’s impacting your ’21, and how that could roll out over ’22 while some these new businesses — these awards come through?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So as I noted, we submitted a very large number of proposals in the quarter. And we’re awaiting over $30 billion in customer decisions on contracts. And COVID obviously had some impact on those — that decision-making process. But we suspect that as — we expect that as the government gets back to full operating cadence that we will begin to work through some of that backlog on the order decisions. And with respect to milestones. If you think about it this way, this is such a large business with 7,000 contracts. There really aren’t any external milestones to necessarily look for. But we were very pleased and not surprised with the growth that they exhibited. And frankly, the fact that many of their new programs or many new program wins were the major factors behind the increase. So, on — we look to be in pretty good stead.

Jonathan Raviv — Citi Investment Research — Analyst

And then there’s — thank you Phebe, and as a brief follow-up against I think the technology and maybe also IT market. When you look at this huge — all this backlog, I think you adjudicated, you mentioned that a lot of it is new business. Would you consider a lot of this new business to be takeaways from other contractors or is this some element of whitespace almost with the government creating and doing more things that are contractor addressable?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So I think it’s a combination. I think we’re winning more than our fair share. Number one. Number two, the government is combining a number of pre-existing current workloads into larger contracts given that the scale and magnitude of the effort that’s required, again, is a good thing for us to bid on those large contracts. And then some of it is just pure program wins. So I think that’s pretty much how we see that market unfolding.

Jonathan Raviv — Citi Investment Research — Analyst

Thank you very much.

Operator

Our next question comes from Seth Seifman from J.P. Morgan. Please do with your question.

Seth Seifman — J.P. Morgan — Analyst

Thanks very much, and good morning.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Hi Seth.

Seth Seifman — J.P. Morgan — Analyst

I was wondering if you could, I think you mentioned some inventory write-downs on G500. I was wondering if you could quantify that just so we could have a cleaner look at the Aerospace margin?

Phebe N. Novakovic — Chairman and Chief Executive Officer

Yeah, so we’re not in the habit of giving detailed product-by-product margin. We did have a mark-to-market on some of our test airplanes, on the 500 test airplanes, which is pretty much to be expected with test airplanes. But we see that as largely behind us. So I noticed that just to tell — to give you all some color that absent that we would have seen even better operating performance.

Seth Seifman — J.P. Morgan — Analyst

I guess maybe without quantifying is there — is it possible to talk a little bit about the, I guess, the trajectory of margins at Aerospace we should expect through the year, and sort of, as we go into Q2?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So we expect the deliveries to be lower in Q2, margins to be compressed in Q2, but increasing nicely then quarter-over-quarter as we go through Q3 and into Q4. But recall, we admitted before that we see 2021 as our lowest margin year for all the reasons that we noted, not the least of which is we took out 10 airplanes, largely as — in our production last year, largely as a result of the end of the G550 production and some mid-cabin. So when the demand begins to increase — increasingly picks up, and we ought to see some return to what we had considered our normal production rates, enhanced delivery rates. So that’ll drive margin.

Seth Seifman — J.P. Morgan — Analyst

Okay.

Phebe N. Novakovic — Chairman and Chief Executive Officer

And by the way, when you think about margin, particularly going into next year, you can’t discount the impact of the entry into service of the G700.

Operator

Our next question comes from Cai von Rumohr from Cowen. Please go ahead with your question.

Cai von Rumohr — Cowen & Co. LLC — Analyst

Yes, thanks so much. Good quarter, Phebe. So could you give us some more color on demand at Gulfstream? You basically said it’s broadly based, but first, what are we looking at in terms of corporate demand, which we’ve heard is still weak and ultra high net worth, which we’ve heard is very strong. And any color specific models, like I think you said, you had 70 orders for the G700. Are those — is that number moving up at a decent pace?

Phebe N. Novakovic — Chairman and Chief Executive Officer

In the inverse order, yes, that number is moving up with respect — at a good pace. With respect to the balance and this quarter order activity, it really was a broad section across all buyers. We’re beginning to see some of the big Fortune 500s re-enter the market space as clarity around the U.S. economy increases. And to that end, the U.S. had a strong order quarter and accounted for more than half of this quarter’s orders. So look, if you think about demand, as we see the lifting of the international travel restrictions and removal of quarantine restrictions and the increased confidence of obviously the U.S. economy but also global economies, we expect to see demand continue to increase and should it we see Gulfstream as being in very good stead.

Cai von Rumohr — Cowen & Co. LLC — Analyst

So you mentioned demand getting better and we know that pre-owned prices are continuing to come down. And we have the weird situation where all this is happening while international routes are not opening up. Given the strength and demand if you wanted or if the demand were there to sort of deliver more planes, how long would it take you to kind of uptick, your production rate so that we can see those deliveries moving up

Phebe N. Novakovic — Chairman and Chief Executive Officer

So on average, it takes about six months lead time. But we’re looking at just a few more production airplanes as I noted in my remarks, and we’ll continue to adjust and be sufficiently agile as we see demand continue to increase. So I liked how we balanced ourselves right now. Prudent yet forward looking and we are pretty efficient when it comes to ramping up. But it does take a lead time of about two quarters.

Cai von Rumohr — Cowen & Co. LLC — Analyst

Thank you.

Operator

And our next question comes from David Strauss from Barclays. Please go ahead with your question.

David Strauss — Barclays — Analyst

Thanks. Good morning.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Good morning David.

David Strauss — Barclays — Analyst

Phebe wanted to follow-up on some of your earlier comments around the margin in Gulfstream. So, over time, we got used to this being a mid to high teens business. Is that all the right way to think about this business going forward, particularly when the G700 comes in and you expect the G700 to be margin accretive when it starts to deliver?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So the G700 will be margin accretive when we begin deliveries. We think about this on — given our portfolio and our place in the firmament as a mid-teen margin business for the short term. But as you can imagine, we’ll continue to work margins. And as we’ve talked about many times before, margins at Gulfstream are a whole host — driven by a whole host of issues, not the least of which is service mix, mix of airplanes. And when we were hitting our apex of margin a couple of years ago, that was, as you recall, an acceleration of the G650 backlog with [Indecipherable] effective, better aligning G650 demand with the backlog so there wasn’t too much of a wait for people, but also helping us transition through that period when we were replacing the G450, G500 — the G450 G550 with G500 and G600. So that is largely behind us. And we — as I said, expect to see some nice margin accretion as we go forward.

David Strauss — Barclays — Analyst

Great, that’s helpful. And Jason, could you comment a little bit on the moving pieces of capital and what to expect there? Inventories come down a bit, advances, have been a bit of a headwind. So just, how we should expect the different pieces within working capital to move from here? Thanks.

Jason W. Aiken — Senior Vice President and Chief Financial Officer

Sure. You’ll recall the major moving pieces that we’ve talked about sort of outside the normal run rates for the business, in general, has been the elevated inventory level at Gulfstream as we’ve invested in the new models, between test airplanes and the build up for production and entry into service. That obviously has been a headwind for several years now. We saw that start to turn at the end of last year a little bit better than we thought was going to happen, a little earlier than we thought was going to happen. And so we — that helped us outperform our cash flow expectations for 2020.

You can think about that for Gulfstream continuing to normalize this year, we’ll start to see the G500s and G600s hit that inflection point, and no longer be a headwind. But at the same time, keep in mind we’re building up on the G700s as that program moves toward entry into service. So that’ll become a little more neutral this year, and then eventually shift into a tailwind in the 2022 period and beyond. The other piece is obviously the large international program at Combat Systems, which again was a headwind for several years. That turned with the modification to that contract and Phebe discussed earlier, into a more neutral event last year.

So that stabilized last year and becomes a very modest tailwind this year. And then becomes a more meaningful tailwind in ’22, ’23 and a little bit more in ’24. So when you think about the way those two pieces are moving, that kind of gets us on a cash flow trajectory from you go back to 2019, we were in the 60%-ish range, moving toward an expectation of the 80% range last year. We outperformed that a little bit as Gulfstream did a little better. And now we’re in the mid to high 90% range.

The one piece there that still sort of keeping us out of the 100% range really is the elevated investment profile in capex at Marine Systems. So once that normalizes next year, it gets back into the 2% of sales range. You should expect to see us the whole business large being in the 100% to 100% plus range, really with those two working capital pieces at Gulfstream and Combat Systems becoming the tailwind would allow us to get even nicely above 100%. So that’s kind of the trajectory for all those major moving pieces. Hopefully that gives you a sense of where we’re going and the basis for our expectation for the improvement that we see ahead.

David Strauss — Barclays — Analyst

Yeah, absolutely. Thanks very much.

Operator

Our next question comes from Ron Epstein from Bank of America. Please go ahead with your question.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Yeah, hey, good morning.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Good morning Ron.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

How are you? Switching over to the ship business, how is electric boat adjusting to boats having the Virginia-class and the Columbia-class in — everything that they got to do in terms of workforce, supply chain, so on and so forth? I mean, how’s that going?

Phebe N. Novakovic — Chairman and Chief Executive Officer

It’s going very well, on both ramping up Virginia, and equally importantly, more significantly, Columbia. There’s something important to remember when you think about Columbia, we started work on that program 14 years ago. And in that 14 year period, we have worked assiduously with the Navy to reduce all known potential risks that we could foresee in the ramp up of a very complex new program, and that included workforce hiring and training, supply chain readiness, facility readiness, construction prototyping, technology readiness, retiring potential known risks and potential risks in new high end technologies. And then the design maturity that this boat entered into construction with a 83% design completion level.

And great contrast to Virginia, which has been an exemplary program at 43%. So all of this prior planning, and 14 years of detailed blocking and tackling at every conceivable level has mitigated an awful lot of risk and allowed us to proverbially hit the ground running on Columbia. And so far, so good. I will note it’s a very complex program. So you can’t declare victory on any shipbuilding program, right out of the bat. But we have taken unprecedented and historically unprecedented measures to retire all the known risks going forward. So that has really allowed us to execute coming right out of the gates very strongly. They’ve done a very good job.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Got it. Got it. Got it. And it seems like the focus on the Pacific has been good for the ship business. How’s it been for Gulfstream, when you think about U.S.-China relations that had an impact on Gulfstream demand in the region?

Phebe N. Novakovic — Chairman and Chief Executive Officer

Not that we can see. So our demand in Asia has been quite steady and good. We’ve got a nice large installed base, a lot of customer intimacy there. So today, we have not seen a particular impact.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Okay, got it. Thank you.

Operator

The next question comes from Myles Walton from UBS. Please go ahead with your question.

Myles Walton — UBS — Analyst

Thanks. Good morning.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Good morning.

Myles Walton — UBS — Analyst

Hey, we haven’t heard your thoughts on M&A for a little bit. So I was hoping maybe we could go there. Obviously, you’re getting to a point on your leverage, which is getting pretty attractive, building up plenty of firepower. What are you looking at in terms of landscape? GD’s always historically been an acquisitive company. Is the appetite growing there?

Jason W. Aiken — Senior Vice President and Chief Financial Officer

So we have been through a significant investment period across many of our large lines of business. And our focus here is on execution and primary focus. We will — we always look for potential niche bull bonds here and there. But we don’t see anything on the horizon here of any significant opportunities that would entice us.

Myles Walton — UBS — Analyst

Okay. And Jason, what’s the target debt ratios that we’re aiming for? I know, you said you’ll refinance some of it but maybe a little color?

Jason W. Aiken — Senior Vice President and Chief Financial Officer

Yeah, I think perhaps less of a target ratio than — we’re going to continue to prioritize our mid A rating. That’s always going to be sort of where we seek to land long term. And so the key for us right now is we had, as you’re aware, sort of an outsized level of debt maturing this year versus if you look out over the next 10 to 20 years, what are what our debt ladder maturity phasing looks like. And so really, what we’re aiming to do is sort of bring that into more of a balanced picture of capital deployment that allows us to step down the debt over time in reasonable measures, as well as have considerable flexibility and firepower available for other deployment opportunities.

Myles Walton — UBS — Analyst

Thank you.

Operator

And our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead with your question.

Sheila Kahyaoglu — Jefferies & Company — Analyst

Good morning everyone. Thank you. Hey, Phebe maybe a big picture question for you because I know Howard always has this covered on the numbers. You’ve been at GD as CEO for almost a decade now and at the company for 20 years. How do you think about where GD goes over the next decade whether from a portfolio focus or customer focus as the budget flatlines or where operating leverage comes from that?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So, from a strategic perspective, we decided several years ago to invest in a number of our significant lines of business, where we believed that we could realize the best return on invested capital and really drive value. We have been in that period at Gulfstream GDIT, primarily the Gulfstream GDIT and the Marine Group. So the key now, from my perspective is all about execution. And execution has been the hallmark of everything that we do here and it is the undergirding of all financial performance. And it requires a discipline across — it requires a discipline across a series of elements and that are factors in all operations. But really, as I see the next several years, it’s all about execution, and wise deployment of capital to drive nice value creation. Ultimately, long term value creation is based on good product, a superb execution, wise investments and smart capital deployment. So that’s what I see us doing.

Sheila Kahyaoglu — Jefferies & Company — Analyst

Thank you very much.

Operator

Our next question comes from Pete Skibitski from Alembic Global. Please go ahead with your question.

Pete Skibitski — Alembic Global Advisors — Analyst

Yeah, good morning, Phebe and Jason and Howard.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Good morning.

Pete Skibitski — Alembic Global Advisors — Analyst

Phebe, I was wondering, in Combat, I’m wondering if you can give us a sense of what international orders are out there for you maybe both, kind of sole source expectations as well as competitive opportunities?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So international consists of two items, primarily sales outside the United States from entities from our business units outside the United States. As well as FMS sales emanating from the United States. And unfortunately, for the state of humankind, the world has become an increasingly dangerous place. And so we see the reflection of that concern in many of U.S. allies with increased demand for many of our products. In Europe, Eastern Europe, a little bit in Asia, parts of the Middle East and in the former Commonwealth nations and the UK as well. So we look for nice steady demand signals coming from outside the United States for our business units that are domiciled ex-U.S. And FMS, the United States has had a long history of providing its allies with FMS opportunities, and we have a number of those opportunities in our Combat Systems, again, selling through the U.S. government to key U.S. allies positioned in particularly dangerous parts. So we see that nice cadence continuing in terms of our orders.

Pete Skibitski — Alembic Global Advisors — Analyst

Okay. And U.S. wise you expect programs that you’re competing for this MPF and on the fees think they survive any budget tightness?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So new programs are always the most vulnerable. But with MPF we were the only person — only contractor to develop. I think there were 12 prototypes. We delivered those last year. We liked our offering. We think it’s what the army wants, but we’re very attuned to army demands and how they see their fight and that’s for — intimacy with the army helps significantly. That plus — so with OMFV, that program got stretched considerably. So we are taking it seriously and participating but there’s a long way to go before that comes to fruition.

But recall another element and a key element of Army modernization is upgrading is key with important and innovative new technologies, their existing platforms. And for us, that means Stryker and Abrams and both are undergoing major upgrade programs. So all in all, we see the demand for our programs continuing to go strong. And there’s nothing like going back to the earlier comments about execution. There’s nothing like performing on schedule and on budget to amplify and provide a bit of an antidote to any potential cuts that come in the future. So combat is the Army’s major integrator of combat wheeled system and will remain such for that — that ensures that our place in the firmament remains pretty strong.

Pete Skibitski — Alembic Global Advisors — Analyst

Right. Thank you very much.

Operator

And our next question comes from Peter Arment from Baird. Please go ahead with your question.

Peter Arment — Robert W. Baird — Analyst

Yes, thanks. Good morning Phebe, Jason. Phebe a question on the budgets. I guess just kind of following up on your comments there, just we got the skinny budget from the new administration and obviously we’re going to get some — a lot more details soon but how are you thinking about just the alignment with the new administration priorities when you think at — look at GD’s portfolio? Thanks.

Phebe N. Novakovic — Chairman and Chief Executive Officer

So clearly as I think as Ron mentioned, the demand for products that meet the Pacific theater have — has increased. That puts our shipbuilding business particularly submarines in a very good stead and you can see all of both the rhetoric ascending supporting increased submarine production. And we are executing on the current programs of record and working with the Navy to [Indecipherable] additional submarines can be executed in a relatively short-term. With respect to our Combat Systems Group, unfortunately but regrettably the case the hardest theater at the moment is Russia.

And so whether we like it or not that is the reality with which we are faced and this administration has been very quick to respond appropriately to the Russians and so you see — we believe that Combat System is highly aligned with that reality that we are now faced within Europe. So all in all we like our positioning with the new administration priority. Remember and particularly administration and this President has been an advocate of strong national security throughout his long and distinguished career. U.S. National Security strategy is driven by the threat of the perception of threat that has not changed. So we will see some changes in relative priority among systems. But in all instances we see ourselves very well aligned.

Peter Arment — Robert W. Baird — Analyst

And just as a quick follow-up, you know something that doesn’t get talked a lot about, but you have a lot of CyOps capabilities. Maybe you could just give us a little color on how you see the opportunities there. Thanks.

Phebe N. Novakovic — Chairman and Chief Executive Officer

So if you mean from both cyber, cyber’s embedded in all of our business and if you get to, what I think you referred to as CyOps. One would be, it would be the height of falling to discuss effect but let’s just put it this way, we have always been on the leading edge of innovations with respect to cyber and electronic technologies that apply to the real world right in the moment.

Peter Arment — Robert W. Baird — Analyst

Appreciate all the color Thanks Phebe.

Operator

Our next question comes from Richard Safran from Seaport Global. Please go ahead with your question.

Richard Safran — Seaport Global — Analyst

Phebe, Jason, Howard, good morning. How are you?

Phebe N. Novakovic — Chairman and Chief Executive Officer

Good morning.

Richard Safran — Seaport Global — Analyst

First question I had is, I was interested in the announcement, I think it was back in February where at IT you added Amazon Cloud services to so the milCloud 2.0. What I wanted to know was how much does the addition of Amazon enhance your offering? Was this something that just improve the cost on the program or is this something that maybe opens up new opportunities for expanding cloud service to the government? Just anything you can tell us regarding the size of the opportunity or what this does would be appreciated.

Phebe N. Novakovic — Chairman and Chief Executive Officer

So not surprisingly, the U.S. Department of Defense is moving as all major institutions are increasingly to the cloud. And so our cloud offerings are incrementally important part of our offerings that we believe will ultimately drive increased adoption across our existing contracts and adoption of the technology suite that we offer and frankly, an expansion of the market. So cloud presents a significant opportunity and we are well positioned to execute on.

Richard Safran — Seaport Global — Analyst

Okay, thanks for that. And then second, and just a have a broad strategic question for you and your comments about that execution. Over the past year or so you’ve made a number of changes to adjust how you’re operating clearly for obvious reasons. I was just wondering what are the more permanent changes in how you operate and that you’re going to persist long after COVID? I was just wondering if you’ve discussed how these changes, how you’re thinking about that impacting and improving margins?

Phebe N. Novakovic — Chairman and Chief Executive Officer

So let me infer a little bit from the question you’re asking. We hear a lot of anecdotal evidence that there may be systemic changes emanating from COVID that has to do with work at home and what that might mean for commercial real estate footprint. We still believe it is too soon to declare any change structural. We do expect to see some, the extent to which remains to be seen, but some work from home either in hybrid capacities or in some cases more completely. But I don’t see that move as something that is dispositive and determinative of real performance and execution. I think what you saw in going back to execution through COVID and frankly this company’s performance across its business units during COVID was really a manifestation of the discipline that we have in all of our operating — and our operating performance and our operating leverage.

The more disciplined a company is the better they were able to adapt to the vagaries and some of that really significant challenges that COVID provided to the workforce and frankly to customers and the environment. So I think that, to me is underscored, amplified of our operating excellence. And I suspect that that will continue — the understanding of that will continue to permeate as we go forward and we will continue to build on that. Operating excellence is never static. It has to get better and better and better. That’s what continuous improvement is all about. And frankly, we have a long-standing discipline around that. So I don’t think there’ll be a structural change in our operating performance. But it’s simply undergirds the importance of that discipline but focuses on performance.

Richard Safran — Seaport Global — Analyst

That’s excellent color. Thanks.

Howard A. Rubel — Vice President, Investor Relations

And Jamie, we’ll have time for just one last question, please.

Operator

And our final question comes from Robert Stallard with Vertical Research. Please go ahead with your question.

Robert Stallard — Vertical Research — Analyst

Thanks very much. Good morning.

Phebe N. Novakovic — Chairman and Chief Executive Officer

Good morning.

Robert Stallard — Vertical Research — Analyst

Phebe, just a couple of quick ones on the Aerospace division. Clearly a very strong first quarter here, but I was wondering if you had seen any demand pulled forward into the first quarter from the second quarter. And then secondly, you talked about this before. How is the lead time for aircraft looking? Are we still looking at roughly 12 months between an order and a delivery and also, how has pricing fared in the first quarter? Thank you.

Phebe N. Novakovic — Chairman and Chief Executive Officer

So think of that demand less about pull forward. Demand comes when it comes and you execute it as it arrives on your doorstep. So what we saw with respect to demand is starting as I noted in mid-February, we start — we saw a nice steady increase in demand across a broad spectrum of our customer base and the U.S. Our initial estimates show or indications are that that demand is carrying through into the second quarter. Pricing is holding up very well. As you all know, we are very disciplined about our pricing. It is precious once lost. You don’t get it back. We’ve had a hard slog. So pricing has done very well. And will, as I noted earlier, it’s about six months to ramp up additional and I don’t see that interim significantly changing anytime soon given all of the elements that have to perform. So I hope that answers your question.

Robert Stallard — Vertical Research — Analyst

Yeah, that’s very helpful. Thank you.

Howard A. Rubel — Vice President, Investor Relations

Operator. This now ends our call. Thank you very much everybody for your time and I will be available to answer your questions. And I can be reached in my office. Thank you very much.

Operator

[Operator Closing Remarks]