Douglas Harned

Douglas Harned inquired about Marine Systems' throughput, progress in closing the gap on the Navy's target of two Virginia-class submarines per year, and the role of the supply chain. He also asked about Combat Systems' strong backlog, European demand, and the expected timeline for converting this backlog into revenue growth.

Answer

Phebe Novakovic, Chairman and CEO, noted continued improvements in efficiency and retention at Electric Boat, with throughput up, but identified the supply chain as the gating item. She also explained that Combat Systems will see some revenue growth in 2026, accelerating into 2027 as European programs transition from planning and engineering to production.

Douglas Harned inquired about Marine Systems' throughput and progress in meeting the Navy's goal of two Virginia-class submarines per year. He also asked about Combat Systems' strong backlog, particularly from European demand, and the timeline for converting this backlog into revenue growth.

Answer

Chairman and CEO Phebe Novakovic highlighted continued improvements in efficiency and retention at Electric Boat, with increased throughput, but identified the supply chain as the primary gating item. For Combat Systems, Ms. Novakovic expects some revenue growth in 2026, accelerating into 2027 as European programs transition from R&D to production.

Douglas Harned asked about potential increased investment in European combat operations beyond ground vehicles, and the specific drivers and mitigation strategies for delays in the Columbia class submarine program.

Answer

Phebe Novakovic, Chairman and CEO of General Dynamics, stated that General Dynamics would 'stick to its knitting,' focusing on core areas like tactical bridges and high-end combat vehicles in Europe, without expanding beyond. She identified the fragility of the supply chain as the single largest impact on Columbia class delays, exacerbated by demographic shifts, but noted government funding, training programs, and wage increases are coalescing to reduce risk and accelerate throughput.

Douglas Harned questioned the drivers of the significant Q2 revenue increase in the Marine segment and asked how new funding for Block V submarines will translate into improved throughput and margins.

Answer

Chairman and CEO Phebe Novakovic attributed the revenue surge to construction volume, with Virginia-class subs representing 60% and Columbia-class 40%. She explained that margin improvement is tied to supply chain stabilization and that recent contract funding for shipyard productivity, training, and wages will be very helpful in improving throughput, complementing broader industrial base investments.

Douglas Harned from Bernstein inquired about the demand trajectory for Combat Systems vehicles, both in the U.S. and internationally. He also asked about the division of responsibility between General Dynamics and the U.S. Navy in resolving supply chain and inflation cost issues within the Marine Systems segment.

Answer

Phebe Novakovic, Chairman and CEO, confirmed that vehicle demand remains strong both domestically and internationally, though she noted the Stryker program was underfunded for 2025. For Marine Systems, she clarified the primary issue lies with the industrial supply chain, not GD's infrastructure, and that while Navy funding helps, a budget gap from 'fact of life' cost increases still needs to be addressed.

Douglas Harned from AllianceBernstein asked how General Dynamics prioritizes work between the Virginia-class and Columbia-class submarine programs amid supply chain constraints. He also inquired about the effectiveness of government supplemental funding for the industrial base and what additional steps might be needed.

Answer

CEO Phebe Novakovic clarified that Columbia-class has priority across the entire industrial base, a national security decision dictated by the Navy, which has ramifications for the Virginia program. She acknowledged that government funding is intended to expand and shore up industrial base capacity but noted that significant cost growth in manufacturing inputs is a reality that will require funding adjustments over time.

Douglas Harned asked about the trajectory for Sentinel revenues and margins, given the Senate Armed Services Committee's discussion of a pushed-out IOC to late 2033. He also inquired about the lower-than-expected Aeronautics Systems margin guidance for 2026, asking about the development work weighing on it and the path to 10% margins.

Answer

Kathy Warden, Chair, CEO, and President of Northrop Grumman, stated that the company is supporting the Air Force in restructuring the Sentinel program to accelerate timelines, expecting it to remain in development for several years, transitioning to production later in the decade, which is outside the current 2-3 year outlook. Ken Crews, CFO, explained that the low-to-mid 9% AS margin guidance for 2026 is driven by growth from B-21 (0% margin) and development programs like TACAMO, with a path to 10% margins long-term as B-21 exits LRIP and other development programs shift to production.

Douglas Harned asked about the trajectory for Sentinel program revenues and margins, considering continued schedule push-outs and the transition from development to fixed-price work. He also questioned the low-to-mid single-digit Aeronautics margin guidance for 2026, the development work weighing on it, and the path to 10% margins in the coming years.

Answer

Chair, CEO, and President Kathy Warden noted that the Air Force is restructuring the Sentinel program to accelerate timelines, but it will remain in development for several years, with production transition outside the 2-3 year outlook. CFO Ken Crews explained that Aeronautics' 2026 margin guidance (low-to-mid 9%) is driven by growth from 0% margin B-21 and development programs like TACAMO, while mature production is stable. He expects a path to 10% margins long-term as B-21 exits LRIP and development programs shift to production.

Douglas Harned from AB Bernstein questioned why the full-year guidance increase was modest despite strong Q2 margin performance and asked how increased FY26 funding for B-21 and Sentinel would impact future revenue and earnings.

Answer

CFO Kenneth Crews explained that the strong operational performance was partially offset by a non-operational item: a higher effective tax rate resulting from changes to R&D tax credit treatment in the new tax reform. Chair, CEO & President Kathy Warden added that the increased funding for B-21 and Sentinel provides a tailwind for 2026, with expenditures expected to be front-loaded and begin as early as the current year.

Douglas Harned asked if the B-21 cost changes would impact the profitability of the next block of aircraft and questioned the source of discussions about increasing the program of record. He also inquired about the international demand pipeline for the IBCS program.

Answer

CEO Kathy Warden stated that the next block of B-21s is still expected to be profitable, as the process changes should help, though material costs could be a headwind. She cited congressional testimony for discussions on increasing B-21 quantities and noted strong IBCS interest from about a dozen countries.

Douglas Harned from Bernstein asked for clarification on the new strategic theme for the reorganized Defense Systems segment and inquired about the growth outlook and potential constraints for the rocket motor business.

Answer

CEO Kathy Warden explained that the reorganized Defense Systems segment is now focused on strategic missiles, tactical weapons, and command and control, creating synergy across the missile defense life cycle. She added that the solid rocket motor business is growing capacity to meet strong demand from both stockpile replenishment and new weapons programs, with new capacity expected online in late 2026.

Douglas Harned of Bernstein sought an apples-to-apples comparison of the Space segment's backlog change, excluding program shifts, and asked to identify key future growth drivers. He also asked for the expected international sales percentage for the Defense Systems segment.

Answer

Chair, CEO and President Kathy Warden explained that the Sentinel program's move to Defense Systems accounts for the major backlog shift. She described the remaining Space backlog as large, diversified, and containing many early-stage programs with significant growth potential. She deferred providing a specific international sales percentage for Defense Systems until the January guidance call, citing the rapidly expanding nature of that business.

Douglas Harned asked for clarification on the 10% improvement in turnaround times (TAT) for LEAP, CFM56, and GE90 engines, specifically if it applies to both internal and third-party shop visits, the levers driving this improvement, and its financial impact.

Answer

Chairman and CEO Larry Culp clarified that TAT improvement is an internally oriented metric, driven by better material availability and efficient execution of standard work. He noted that a 40% year-over-year improvement from priority suppliers and 90%+ delivery to commitments reduce system noise, leading to more completed shop visits and productivity gains.

Douglas Harned inquired about the 10% improvement in turnaround times (TAT) for LEAP, CFM56, and GE90 engines, asking if this applies to both internal and third-party shop visits, the levers enabling this improvement, and how it's reflected financially.

Answer

Chairman and CEO Larry Culp clarified that the TAT improvement is internally oriented, driven by enhanced material availability and efficient execution of standard work on the shop floor. He cited a 40% year-over-year improvement from priority suppliers delivering at over 90% commitment levels, which reduces system noise and enables productivity gains. Financially, this translates to more completed shop visits and significant productivity unlocks.

Douglas Harned of Sanford C. Bernstein & Co., LLC followed up on LEAP profitability, questioning the confidence in long-term margin projections given the early stage of performance restoration shop visits.

Answer

SVP & CFO Rahul Ghai reiterated that LEAP service margins are expected to equal *overall* service margins, not CFM56's. He based his confidence on improving LEAP durability, conservative modeling, and extensive experience with profitable long-term service agreements on other platforms like GEnx. CEO Lawrence Culp added that cost improvements from repairs and fixed cost leverage also support the outlook.

Douglas Harned inquired about the sources of the accelerated commercial services growth forecast and whether performance could exceed guidance if supply chain issues are resolved.

Answer

CEO H. Culp confirmed that the demand strengthening is broad-based across narrow-body and wide-body platforms. He acknowledged that while there is significant pent-up demand and a large backlog that could support higher growth, the company's immediate focus is on operational execution to meet the current guidance. He stressed that 2025 will be an execution challenge, not a demand challenge.

Douglas Harned from Bernstein inquired about the 2025 LEAP engine output forecast, considering challenges like the Boeing strike, supply chain constraints, and the transition to new HPT blades.

Answer

Executive H. Culp explained that the focus is on meeting both new engine and aftermarket demand. He highlighted a 18% sequential output increase from key suppliers due to FLIGHT DECK initiatives. While 2024 LEAP deliveries will be down year-over-year, he is confident in growth for 2025. The new HPT blade, expected to be certified soon, will improve engine durability and is easier to manufacture, which will help unlock production capacity in 2025.

Douglas Stuart Harned asked about the investments in the Charleston facility for the 787 program, specifically what is needed to achieve production rates of 12 to 14 per month, and the CapEx trajectory for these expansions.

Answer

President and CEO Dave Calhoun confirmed that current investments in Charleston are aimed at achieving 787 production rates higher than 10, specifically in the teens, which will involve doubling the manufacturing footprint. He noted that while the expanded facility will aid rate 10, its primary utilization is for rates beyond that, expected around 2028. EVP and CFO Jay Malave added that CapEx is projected to increase next year, related to both the Charleston expansion and growth in St. Louis.

Douglas Harned of AB Bernstein questioned the feasibility of achieving future 737 MAX rate increases at six-month intervals, asking about potential bottlenecks and the strategic role of the fourth assembly line in Everett.

Answer

President & CEO Kelly Ortberg explained the fourth line in Everett will handle the more complex Dash-10 variant, allowing the three Renton lines to flow faster. He expressed confidence that near-term supply is not a bottleneck due to significant buffer inventory. Ortberg stressed that the company will prioritize production stability and will not increase rates if the system 'wobbles.'

Douglas Harned inquired about the impact of tariffs on the aviation industry and Boeing's engagement with Washington to navigate the current tariff environment, seeking insight into how the situation might evolve in the U.S., Europe, and China.

Answer

President and CEO Robert Ortberg stated that Boeing is in constant communication with the U.S. administration, emphasizing the aerospace industry's importance to the trade balance. He expressed hope for negotiated settlements but confirmed Boeing is prepared to manage the situation, particularly by remarketing aircraft intended for China to other customers. Ortberg noted that a tariff-free environment is ideal for the entire industry.

Douglas Harned questioned how Boeing is preparing for production rate increases beyond 38 per month on the MAX, focusing on workforce readiness and specific supply chain areas that require attention to avoid future bottlenecks.

Answer

CEO Kelly Ortberg stated he is less concerned about internal staffing and more focused on ensuring supply chain readiness, particularly for long-lead items like forgings and castings. He stressed that all rate increases are contingent on meeting stability KPIs and mentioned close collaboration with key suppliers like GE. CFO Brian West added that existing factory facilitization provides flexibility for higher rates.

Douglas Harned from Bernstein questioned how Boeing plans to rebuild its leadership talent and culture, especially with the loss of experienced personnel and an ongoing workforce reduction, and whether this would involve both internal and external hiring.

Answer

President and CEO Kelly Ortberg emphasized that culture change starts at the top and is a continuous process. While he believes Boeing has great internal talent, he is open to supplementing the team with external resources to bring in outside perspectives. He clarified that the workforce reduction targets overhead inefficiencies to streamline the organization, not core engineering or production roles.

Douglas Harned asked about the growth dynamics of the LEAP, CFM56, and CF34 programs and sought details on the company's new engine exchange strategy, including whether it involves building inventory.

Answer

CFO Dan Satterfield detailed the unique drivers for each program: LEAP's ramp is focused on process precision, CFM56 leverages existing expertise, and CF34 is benefiting from a wave of engines entering their first major overhauls. He clarified the engine exchange program is an asset-light model that begins with a single engine investment and becomes self-funding, avoiding a large inventory buildup.

Douglas Harned questioned if supply chain issues and part shortages have created a bottleneck for the MRO ramp-up. He also asked if the favorable margin impact from lower material pass-through in the quarter was a one-time event or an emerging trend.

Answer

CEO Russell Ford acknowledged ongoing supply chain constraints but detailed mitigation strategies, including using serviceable materials and investing in proprietary repair development. CFO Dan Satterfield clarified that the lower material pass-through is not necessarily a trend, as its impact can fluctuate based on the timing of large engine shipments near quarter-end.

Douglas Harned of AB Bernstein asked about the growth drivers in the industrial gas turbine (IGT) market, the importance of long-term agreements, and how IGT margins compare with commercial aerospace.

Answer

Executive Chairman and CEO John Plant confirmed that IGT margins are very comparable to commercial aero margins, causing no dilution from the high growth. He stated that Howmet has secured agreements with three of the four major large gas turbine OEMs and is finalizing the fourth. Plant also highlighted very strong growth in aero-derivatives, driven by demand for data centers, which will be supported by new capacity coming online in 2026 and 2027.

Douglas Harned of Bernstein asked about the key drivers behind the significant margin improvements in Fastening Systems and Engineered Structures, their sustainability, and the potential upside from a future wide-body production ramp.

Answer

Executive Chairman and CEO John Plant explained that the margin gains were driven by a combination of improved process controls leading to higher yields and lower scrap, a positive mix effect from exiting lower-margin businesses, and favorable pricing. He expressed confidence that the high-teens margin for the Structures segment is now 'absolutely solid'.

Douglas Harned inquired about the significant increase in Fastening Systems' EBITDA margins to nearly 28%, asking if this new level is sustainable or if it was driven by unusual factors in the quarter.

Answer

Executive Chairman and CEO John Plant explained that the margin improvement is the result of sustained operational productivity and commercial discipline. He noted that while the positive impact from a richer wide-body aircraft mix has not yet been fully realized, it represents future upside as A350 and 787 production rates increase. Plant concluded that while the pace of margin expansion may slow, further improvements are still expected.

Douglas Harned questioned the company's production capacity planning and investment profile for both current and new engine airfoil blades.

Answer

Executive Chairman and CEO John Plant confirmed that Howmet is increasing investment in its Engine Products segment to meet robust, long-term demand. He explained that modern engines require more frequent shop visits, driving a multi-year need for more spares. The company is working with customers on 5-year demand plans and is committed to adding capacity to meet this uninterrupted growth.

Douglas Harned of AB Bernstein questioned the apparent disconnect between HII's significant 20% throughput improvement goal and substantial new funding, versus its more modest 3% shipbuilding revenue growth guidance for the year.

Answer

President and CEO Christopher Kastner explained that the revenue guidance already incorporates factors like wage increases, a major ramp-up in outsourcing, and new Charleston operations, most of which will occur in the back half of the year. He stated that while there is potential upside, the guidance is appropriate given the time it takes for these efforts to translate into recognized revenue, and he remains comfortable with the 4% long-term growth outlook.

Douglas Harned asked for specifics on how increased government funding for shipbuilding will translate into a concrete plan to improve production throughput, particularly for the Virginia-class submarine program.

Answer

President and CEO Christopher Kastner explained that the FY '24 2-boat contract is the first step, containing targeted investments for workforce, equipment, and facilities to accelerate throughput. He emphasized this is part of a broader, industry-wide effort to build out the industrial base, acknowledging it will take time but expressing confidence that these are the right investments to increase the submarine build rate.

Douglas Harned asked about the key drivers behind the current gap between shipbuilding margins and the historical 9-10% target, questioning the specific impact of inflation versus other operational issues. He also questioned the feasibility of returning to those historical margin levels given the current economic and funding environment.

Answer

President and CEO Christopher Kastner explained that inflation's impact is complex and broader than direct costs, affecting supply chain efficiency and workforce experience. He affirmed his belief that returning to a 9% margin is achievable for new contracts, citing the customer's receptiveness to current economic conditions in upcoming negotiations for over $50 billion in awards. He compared the situation to the successful post-Katrina recovery, stressing the importance of negotiating realistic cost and schedule estimates.

Douglas Harned from AB Bernstein asked for a breakdown of the major components of the record $8.3 billion in quarterly bookings and their distribution across the business segments.

Answer

Chairman and CEO Christopher Kubasik confirmed that every segment had a book-to-bill over 1.0, with Aerojet Rocketdyne near 2.0x. SVP and CFO Kenneth Bedingfield provided details, citing strong orders in missile solutions and space propulsion for Aerojet; mission networks and airborne combat for SAS; ISR and maritime for IMS; and international contracts for CS.

Douglas Harned of AB Bernstein requested a breakdown of the major components of the record $8.3 billion in quarterly bookings and how they were distributed across the business segments.

Answer

Chairman & CEO Christopher Kubasik confirmed that every segment had a book-to-bill over 1.0, with Aerojet Rocketdyne near 2.0x. SVP & CFO Kenneth Bedingfield elaborated that the strong orders were broad-based across missile solutions, space propulsion, mission networks, ISR, maritime, and international communications, aligning with strategic growth areas.

Douglas Harned asked for clarity on the Space & Airborne Systems (SAS) segment, specifically the scale of challenges on classified programs relative to successes with SDA contracts, and when the negative margin impacts might dissipate.

Answer

Executive Kenneth Bedingfield stated the challenges on a couple of legacy fixed-price development programs are in the 'tens of millions' and are expected to be resolved in 2025 or early 2026 as the programs near completion. CEO Christopher Kubasik added these 'legacy' programs predate the merger and will pave the way for future, more profitably bid work. Bedingfield also highlighted the successful SDA business model, where profitability has increased with each successive tranche award.

Douglas Harned questioned the Communications Systems (CS) segment's 2025 margin guidance of below 25%, given positive drivers like software sales, exports, and LHX NeXt savings.

Answer

CFO Kenneth Bedingfield stated the guidance reflects a risk-adjusted view early in the year and the fluctuating mix between U.S. DoD and international sales, which impacted Q4 margins. CEO Christopher Kubasik added that while the segment is seeing more system-level opportunities, it also faces the highest supply chain inflation pressure, which must be offset.

Douglas Harned asked about the modernization cycle for next-gen radios, inquiring what 'inning' the U.S. Army/Marines and NATO are in. He also followed up on the outlook for the ENVG night vision goggle program.

Answer

CEO Christopher Kubasik estimated the U.S. military is in the 'third or fourth inning' of its radio modernization, while NATO is even earlier, perhaps in the 'second inning,' driven by a critical need for interoperability. CFO Kenneth Bedingfield added that of the nearly 500,000 radios in the U.S. cycle, L3Harris has won about 75% of the 150,000 awarded so far. Regarding ENVG, Kubasik expressed optimism, noting that funding is now in the budget and the product remains superior to struggling competing systems, leading to continued majority wins for L3Harris.

Douglas Harned from Bernstein asked about the demand from corporate customers, balancing economic uncertainty against incentives like bonus depreciation. He also inquired about the direction of R&D spending at Bell.

Answer

Scott C. Donnelly, Chairman, CEO & President, stated that the net effect on corporate demand is positive, with healthy activity and strong flight hours. Regarding Bell's R&D, he explained that spending is focused on completing the commercial 525 program and supporting the development of the high-speed VTOL program, particularly following the DARPA SPRINT selection.

Douglas Harned asked about the five-year R&D and CapEx investment profile for Textron Aviation and inquired about the primary supply chain bottlenecks following recent improvement efforts.

Answer

CEO Scott Donnelly outlined a strategy of continued investment in a mix of product upgrades and new aircraft, with R&D expected to be stable or a slight tailwind as a percentage of sales. He noted that while parts and labor were key constraints, the company's production ramp plan remains on track for revenue growth in 2025 above original 2024 guidance.

Douglas Harned of Bernstein inquired about the trajectory for Raytheon's operating margins to reach the company's 12%+ goal, considering the mix of fixed-price development programs and growing international demand for mature products.

Answer

CFO Neil Mitchill attributed the strong Q2 margin performance to a favorable program mix, with a nearly $500 million year-over-year increase in higher-margin FMS and DCS sales. He stated that new orders are being booked at higher margins that reflect the current cost environment and that the increasing foreign composition of the backlog provides a clear tailwind on the journey toward the 12%+ margin target.

Douglas Harned questioned why Raytheon's mid-single-digit growth outlook appears low relative to its significant backlog growth, asking about the timing of backlog conversion to revenue and the impact of the 'buy European' movement.

Answer

CEO Christopher Calio stated that RTX's strong European partnerships and co-production agreements position it well to capture increased European defense spending. CFO Neil Mitchill added that while the overall segment growth is mid-single-digits, the land and air defense systems business is growing at a strong double-digit rate, offset by expected timing-related headwinds in development programs.

Douglas Harned of Bernstein & Company noted the strength in Raytheon's missile defense business and asked about the strategy for its more challenged airborne and space systems segments.

Answer

Executive Christopher Calio acknowledged that these areas have been more challenged. He stated that RTX is conducting a portfolio evaluation to determine where to invest or potentially divest. He emphasized a strategic focus on playing to the company's strengths, such as space protection and ISR, while avoiding unprofitable business like fixed-price development contracts in difficult domains. He noted that pivoting strategy in these long-cycle businesses will be a thoughtful, multi-year process.

Douglas Harned asked about production increase plans for major programs within Missiles and Fire Control (MFC) given its strong backlog growth, and whether the segment could achieve sustained high single-digit growth.

Answer

Evan Scott, CFO, confirmed strong demand and production ramps for JASSM/LRASM, PAC-3, and GMLRS. James Taiclet, CEO, added that programs like PrSM, Fleet Ballistic Missile (FBM), and NGI also have strong, long-term growth outlooks, with FBM potentially seeing double-digit CAGR. He emphasized that these advanced missile systems are difficult for competitors to replicate.

Douglas Harned of Bernstein questioned the company's confidence in maintaining the F-35 production rate of 156 aircraft per year, considering potential U.S. budget pressures versus strong international demand.

Answer

CEO James Taiclet expressed high confidence in the 156 rate, citing strong U.S. and international demand. He emphasized the F-35's critical role in deterrence against adversaries like China and its unique networking capabilities enabled by TR-3. CFO Jesus Malave added that the aging U.S. fighter fleet, with an average age over 25 years, necessitates recapitalization with the F-35.

Douglas Harned asked for an assessment of the confidence in completing F-35 Tech Refresh 3 (TR-3) in Q4, its interplay with Lot 18/19 negotiations, and the resulting cash flow implications for 2025.

Answer

CEO James Taiclet detailed that TR-3 is being managed via software releases, with full combat capability being certified through 2025, making it a timing issue. He described the Lot 18/19 negotiation delay as a separate cash flow timing issue. CFO Jesus Malave quantified the 2024 cash headwind at ~$600 million, which was offset by other working capital efficiencies, and projected a positive cash impact of $300-$400 million in 2025 from higher deliveries and released withholds.

Asked how Spirit is balancing long-term process redesign with the immediate need to identify quality issues in already-produced items, and requested an update on their progress and confidence in current deliveries.

Answer

Management is using a two-pronged approach: the Quality Management System for product quality and the FAA's Safety Management System for product safety. The near-term focus is on human factors (proficiency, compliance, mistake-proofing) and harmonizing inspections with Boeing to catch issues before shipment.