通用動力 (GD) 2021 Q1 法說會逐字稿

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.

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 estimates 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.

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 will 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 beat. I must confess that we 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 $196 million higher than the year-ago quarter. The difference is almost exclusively more G500 and G600 deliveries than the 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 1.3:1. Gulfstream alone had a book-to-bill of 1.34:1. In unit terms, this is the strongest order quarter for the last 2 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 FBOs 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 accelerate.

The G500 and G600 continued 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 5 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 delivery.

Combat Systems. Combat Systems has revenue of $1.8 billion, up 6.6% over the year-ago quarter. While all 3 companies within the group contributed to the growth, the primary source was increased sales of our 8x8 wheeled combat vehicles to Switzerland and Spain and sales of our 6x6 Eagle vehicles. 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 continue 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 am 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 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 have revenue of almost $3.2 billion in the quarter, up $95 million from the year-ago quarter or 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 bid and 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 recompetition of existing work. So good order activity in the quarter with a book-to-bill of 1.1:1 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.

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 Gulfstream 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 CapEx 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 2 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 of hundred million dollars. However, this same provision reduces the amount of pension costs we are 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 1:1 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 1.3x and 1.1x 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.

Thank you, Jason. (Operator Instructions) Operator, could you please remind participants how to enter the queue?

(Operator Instructions) Our first question today comes from Jon Raviv from Citi.

A question on, actually, on GDIT. The path, I think, you guys have talked about, about 7% growth this year. You did 5% in the first quarter, so definitely a good start. So any kind of milestones to look upon there?

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 that impact the organic growth. So any view as to how that's impacting your '21 and how that could flow out over '22 as some of these new businesses -- as these new awards come through?

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 program wins -- or many new program wins were the major factors behind the increase. So all in all, we look to be in pretty good stead.

And then as -- Phebe, and as a brief follow-up, again, sticking to the technology and maybe also IT market, when you look at this huge almost backlog of things to be 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 white space almost with the government creating and doing more things that are contractor addressable?

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 workload in the 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.

Our next question comes from Seth Seifman from JPMorgan.

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.

Yes. 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 noted that just to tell -- to give you all some color that absent that, we would have seen even better operating performance.

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

So we expect, as I noted, 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 have noted 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 a -- in our production last year, largely as a result of the end of the 550 production and some mid-cabin.

So when the demand begins to increase -- increasingly picks up, then we also see some return to what we had considered our normal production rate and, hence, delivery rates. So that will drive margin. 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 700.

Our next question comes from Cai von Rumohr from Cowen.

Good quarter, Phebe.

Thanks, Cai.

So could you give us some more color -- kind of 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 on 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?

In the inverse order, yes, that number is moving up with respect at a good pace. With respect to the balance in this quarter order activity, it really was a broad section across all buyers. We're beginning to see some of the big Fortune 500 reenter 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.

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 in 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 rates so that you can see those deliveries moving up?

So on average, it takes about 6 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 like 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 2 quarters.

And our next question comes from David Strauss from Barclays.

Phebe, I 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 still the right way to think about this business going forward, particularly when the 700 comes in? And do you expect the 700 to be margin accretive when it starts to deliver?

So the 700 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 650 backlog, which had a salutary effect of better aligning 650 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 450/500 -- the 450/550 with 500 and 600. So that is largely behind us. And we, as I said, expect to see some nice margin accretion as we go forward.

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.

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 have been the elevated inventory level at Gulfstream as we've invested in the new models between test airplanes and the buildup 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 500s and 600s hit that inflection point and no longer be a headwind. But at the same time, keep in mind, we're building up on the 700 as that program moves toward entry into service. So that will 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 of that contract that 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 2 pieces are moving, that kind of gets us on a cash flow trajectory from -- if you go back to 2019, we were in the 60-ish percent 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 high -- mid- to high-90% range. The one piece there that's 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 at large, being in the 100 to 100-plus percent range really with those 2 working capital pieces at Gulfstream and Combat Systems becoming the tailwinds that 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.

Our next question comes from Ron Epstein from Bank of America.

Switching to -- switching over to the ship business. How is Electric Boat adjusting to both having the Virginia class and the Columbia class in everything that they got to do, everything in terms of workforce, supply chain, so on and so forth? I mean how is that going?

It's going very well on both ramping up Virginia and equally important and 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 or potential risks in new high-end technologies. And then the design maturity that this boat entered into construction with an 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 gate very strongly. They've done a very good job.

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

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 to date, we have not seen a particular impact.

Our next question comes from Myles Walton from UBS.

Phebe, 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 has always historically been an acquisitive company. Is the appetite growing there?

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 bolt-ons here and there, but we don't see anything on the horizon here of any significant opportunities that would entice us.

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

Yes. I think perhaps less of a target ratio, then 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 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.

And our next question comes from Sheila Kahyaoglu from Jefferies.

Phebe, maybe a big-picture question for you because I know Howard always has us 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 flat lines or where operating leverage comes from that?

So from a strategic perspective, we decided several years ago to invest in a number of our significant lines of business where we believe 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 financials performance. And it requires a discipline across -- it requires discipline across a series of elements in -- 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.

Our next question comes from Pete Skibitski from Alembic Global.

Phebe, I was wondering -- in combat, I'm wondering if you could give us a sense of what international orders are out there for you, maybe both kind of sole-sourced expectations as well as competitive opportunities?

So international consists of 2 items, primarily sales outside the United States from entities outside -- 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 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 U.K. 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, United States has had a long history of providing its allies with FMS opportunities. And we have a number of those in our comp -- opportunities in our Combat Systems, again, selling through the U.S. government to key U.S. allies positioned in particularly dangerous spots. So we see that nice cadence continuing in terms of our orders.

Okay. And U.S.-wise, do you expect programs that you're competing for, this MPF and OMFV, you think they survive? Any budget tightness?

So new programs are always the most vulnerable. But with MPF, we were the only contractor to develop. I think there were 12 prototypes. We delivered those last year. We like our offering. We think it's what the Army wants, but we are very attuned to Army demands and how they see their fight, and that's where intimacy with the Army helped significantly. That, plus [nice gigs]. So with all of them at 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 with key, with the 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 that for -- demand for our programs continuing to go strong. And there is 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 systems and will remain such. So that ensures that our place in the firmament remains pretty strong.

And our next question comes from Peter Arment from Baird.

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 -- look at GD's portfolio?

So clearly, as I think perhaps as Ron mentioned, the demand for products that meet the Pacific theater has increased. That puts our shipbuilding business, particularly submarines, in a very good stead. And you can see all of both the rhetoric, the funding, supporting increased submarine production. And we are executing on the current programs of record and working with the Navy to see how additional submarines can be executed in a relatively short term.

With respect to our Combat Systems group, unfortunately, but regrettably the case, the hottest 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 Systems is highly aligned with that reality that we're now faced within Europe.

So all in all, we like our positioning with the new administration's 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 or 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.

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

So if you mean from both cyber, cyber is embedded in all of our business. And if you get to what I think you referred to as PSYOP, one would be -- it would be the height of folly to discuss any of that. 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 fight in the moment.

Our next question comes from Richard Safran from Seaport Global.

First question I had is, I was interested in the announcement, and I think it was back in February where at IT, you added Amazon cloud services to 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 improved 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.

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 an 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.

Okay. And then second and just kind of a broad strategic question for you and your comments about 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 are going to persist long after COVID? I was just wondering if you discuss how this changes, how you're thinking about that impacting and improving margins.

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 have 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 positive and determinative of real performance and execution.

I think what you saw, 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 -- on our operating performance and our operating leverage. The more disciplined the company is, the better they were able to adapt to the vagaries and some of the really significant challenges that COVID provided both to the workforce and, frankly, the customers and the environment.

So I think that to me, it underscored, amplified 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 simply undergirds the importance of that discipline that focuses on performance.

And our final question comes from Robert Stallard from Vertical Research.

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, we 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?

So think about 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 sector of our customer base. And the U.S., we'll -- initial estimates show or indications are that, that demand is carrying through into the second quarter.

Pricing is holding up very well. As you well know, we are very disciplined about our pricing. It is precious. Once lost, you don't get it back, not without a hard slog. So pricing has done very well. And we'll -- as I noted earlier, it's about 6 months to ramp up additional production, 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.

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.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.