Operator:

Good morning, and welcome to the General Dynamics Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Phebe Novakovic:

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.26 per diluted share on revenue of $11.98 billion, operating earnings of $1.16 billion and net income of $905 million. We enjoyed revenue increases at each of our four business segments compared to the year ago quarter. Across the company, revenue increased a strong 18%, with a 51% increase in our Aerospace segment and a 10% increase across our defense units, strong growth by any standard. Importantly, operating earnings of $1.16 billion are up almost $200 million or 20.2%, demonstrating solid operating leverage. Similarly, net earnings are up 21.6% and earnings per share up 21% over the year ago quarter. You will note, we missed Street EPS consensus by $0.02 due entirely to the slip of 4 G700 deliveries from the last week in the quarter to the beginning Q3. One has since been delivered, three are imminent. From a different perspective, the sequential comparisons are also quite favorable. Revenue was up $1.2 billion and operating earnings are up $120 million on steady margins. On a year-to-date basis, revenue of $22.7 billion is up $2.67 billion or 13.3% over last year's first half. Operating earnings of nearly $2.2 billion are up 15.4%. Net earnings of $1.7 billion are up 15.6% despite a higher provision for income taxes. In a few minutes, our CFO, Kim Kuryea, will provide you with free cash flow for the first half and remainder of the year, our strong continued order activity and backlog, as well as some additional relevant financial information. But first, I will take you through each of the segments. We'll start with Aerospace. Let me give you some comparative numbers that will show the front end of a tremendous growth surge for Aerospace that will progress favorably throughout the year. Then I will attempt to put all of this in some reasonable perspective for you. Aerospace had revenue of $2.94 billion and operating earnings of $319 million with a 10.9% operating margin. Revenue is $987 million more than last year's second quarter, a remarkable 51% increase. The revenue increase was driven by additional new aircraft deliveries, coupled with higher service revenue. We delivered 37 aircraft, including 11 newly certified G700s in the quarter. This is four fewer than we expected to deliver, but more about that in a minute. Operating earnings of $319 million are up $83 million, 35% over the year ago quarter. The 10.9% operating margin was 120 basis points lower than the year ago quarter. This was driven by G700 deliveries that carried more than expected costs from three things

Phebe Novakovic:

All right. Thanks, Kim. Let me move on to give you updated forecast for the year. The figures I'm about to give you are all compared to our January forecast, which will be posted along with today's guidance on our website. In Aerospace, we are sticking with our same earnings estimate, but we'll get there with higher revenue and about a 100 basis point drop in margins for all the reasons I mentioned to you a few minutes ago. We are still holding to our delivery estimate of about 160 airplanes. With respect to the defense businesses, Combat will have revenue of about $200 million higher than previously projected as a result of continued demand. So look for total revenue of about $8.7 billion. Margin should be about the same. All in, operating earnings will be up $30 million over the previous forecast. Marine Systems revenue should be up $1 billion of Electric Boat and somewhat at Bath. So we will have annual revenue between $13.4 billion and $13.8 billion with an operating margin around 7.4%, with operating earnings up around $45 million over the January forecast. For Technologies, we are not changing our earlier guidance to you. On a company wide basis, we see annual revenue up about $2 billion, with overall margins down about 30 basis points. So total revenue of $47.8 billion to $48.2 billion, and operating earnings up modestly. All up, that indicates EPS guidance of $14.40 to $14.50, $0.05 over prior guidance. I will note that normally, this time of year, we have solid insight into revenue and margin. In this growth environment, the upside has been difficult to predict with equal clarity. Should anything materially change in Q3, I will give you another credit guidance. That concludes my remarks, and we'll be happy to take your questions.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We'll go to our first question from David Strauss at Barclays.

Phebe Novakovic:

Sure. So very late in the certification process, we had a requirement to bind together some wires in the tail of the airplane. So relatively simple fix. For those airplanes that we had already built, we took the tails off. For those that we were building, we just didn't put them on. So this is largely behind us. And contributed to a bit to the cost impact on lot one. But I would note that it's extremely hard to discern anything meaningful looking from the outside in here. This is, as I said, largely behind us and was pretty late in the process. And not particularly difficult to do.

Phebe Novakovic:

Right. Think about the supply chain as more a question of cost than delivery.

Operator:

We'll move next to Peter Arment at Baird.

Phebe Novakovic:

Good morning.

Phebe Novakovic:

So we tried to give you some color around that. In the remarks, I'd say that we typically see in any U.S. presidential election, a slowdown around the election. And I think this won't be any different. But we do expect, as I noted in my remarks, a more robust fourth quarter because we've got the expiration of the accelerated depreciation. And the pipeline is quite good. And I gave you also some color around the geographical distribution there. So all in all, there's quite a bit of interest in our airplanes.

Phebe Novakovic:

It is, and we ought to fly very soon.

Robert Spingarn:

Hey, good morning.

Robert Spingarn:

Phebe, maybe sort of a two-parter on Marine. I wanted to ask you, first, with the recent supplemental, there was money, a little over $3 billion to help support the submarine industrial base. And you did mention last time that there were a few sole-source suppliers of complex components that were causing some of the delays. So wondering if that money has gotten to them and is resolving the issue or if you had to qualify alternate sources? And then the longer-term question is, a decade ago or maybe a little bit longer, Marine was a 10% type margin business. And given the supply chain issues, the impact to the shipbuilding workforce in the aftermath of COVID, is that a realistic target at some point in the future? And what might be the timing on that? Thank you.

Robert Spingarn:

Thank you very much.

Cai von Rumohr:

Yes. Thanks so much, Phebe.

Cai von Rumohr:

Good morning. So the tail issue at Gulfstream, does the required rework extend beyond the first 20 units in the first block? And should we be looking for a sequential build in terms of unit deliveries, so that I would assume then you have less first block impact in the third quarter than the second and even less or none in the fourth. And therefore, you should see a strong lift in the margin sequentially. Is that the way to look at it?

Cai von Rumohr:

Okay. And because of this rework, should we assume that the profitability on Block 2 for the G700 that the sequential step-up from 1 to 2 will be somewhat bigger than one might normally look for?

Cai von Rumohr:

Got it. Thank you.

Jason Gursky:

Hey, good morning everybody. Phebe, I just wanted to spend a few minutes talking about the services business in Aerospace. And just some of the trends that you're seeing there with the fleet utilization and what you're seeing in the competitive environment in that business as well?

Jason Gursky:

Okay. Great. And then turning to Technologies and maybe using a bit of your crystal ball on the pipeline and the outlook for bookings and book-to-bill there. What's the environment look like there for you all over the next, I don't know, 12, 18 months on the pipeline and the outlook for book-to-bill for the Technologies business?

Operator:

We'll go next to George Shapiro at Shapiro Research.

Phebe Novakovic:

Hi, George.

Phebe Novakovic:

Yes. So the Lot 1 consisted of about 20 or so airplanes. All five are test airplanes, they'll deliver next year. But this year, the Lot 1 costs are going to be behind us imminently. We've delivered one of the four. And I tried to give you some color on the delivery process. And the other three imminent here. So I think we're in pretty good shape on that. Does that help you?

Phebe Novakovic:

Nothing that I can put my finger on, to be quite honest, in the moment.

Phebe Novakovic:

Pretty good for us. The service business, and we expect it to continue to grow this year, which is driving a lot of the revenue increase, along with special mission.

Kenneth Herbert:

Yes, hi, Phebe. Good morning.

Kenneth Herbert:

I wanted to see if you could make some comments on Combat. And specifically, the outlook for bookings in Europe and other regions. But also, how should we think about with the orders you're booking today, the impact on the backlog and to what extent are they accretive to segment margins? Or how accretive could they be as some of the more recent bookings flow into the backlog of revenues?

Kenneth Herbert:

And just can you quantify the cash impact in the second half and the fourth quarter from the timing of some of the cash receipts on Combat?

Operator:

We'll go next to Doug Harned at Bernstein.

Phebe Novakovic:

Hi, Doug.

Phebe Novakovic:

I'd say there's good potential for higher margins along the lines that we had seen in the past. But exactly when at this point, it's hard to pinpoint. But I think we're pretty confident and pleased with long-term margin trajectory at Aerospace for all the reasons that I think you quite potently listed.

Phebe Novakovic:

Well, it's hard to look into a crystal ball much past a planning period. But we anticipate for the next couple of years, increased munitions orders as dictated by the threat environment. And we're pretty confident in that. So that's kind of how I look at it. It's awfully difficult to predict the threat environment with any kind of clarity other than pure speculation outside the next couple of years.

Phebe Novakovic:

Yes, a couple of years. I wasn't clear on that. I apologize. Yes, I'd say a couple of years of this. I'd say three, four years max, somewhere along those lines. And then we'll see. I think there have been some profound lessons learned about the criticality of munitions, ammunition. So I expect those to be incorporated in force is thinking.

Operator:

We'll go next to Myles Walton at Wolfe Research.

Phebe Novakovic:

A couple of things, including services, as I had noticed, increase in services and also an increase in special mission which are kind of lumpy, as you know, and we've talked about in the past.

Phebe Novakovic:

Planning purposes is the latter. But that's probably all the clarity we've got at the moment. It all depends on the certification process, but we anticipate, I think and reasonably anticipate that they'll come out of the gate very strong.

Phebe Novakovic:

Yes.

Phebe Novakovic:

It's typical lot quantities.

Scott Deuschle:

Hey, good morning.

Scott Deuschle:

Phebe, can you characterize the ramp-up of this new munitions facility in Texas you opened up during the quarter? I guess, are you likely to exit 3Q at a relatively full run rate? Or is the ramp more gradual from that? Thank you.

Scott Deuschle:

Great. And Kim, just to clarify your earlier comments, are you expecting working capital to be a source of cash in 3Q?

Scott Deuschle:

Okay. So modestly positive in 3Q?

Scott Deuschle:

Thank you.

Robert Stallard:

Thanks so much. Good morning.

Robert Stallard:

Phebe, a couple of physical questions for you. First of all, on the U.S., if the Ukraine supplemental were to be 0, what sort of risk could that present to GD in the future? And then second, in the U.K., a change of government over here, whether there's any implications for AJAX down the line? Thank you.

Robert Stallard:

Okay, thanks so much.

Seth Seifman:

Good morning.

Seth Seifman:

One quick specific one on Gulfstream. The out-of-station work you talked about due to late supplier deliveries, is that behind us now as well?

Seth Seifman:

Okay. Okay. And then more broadly, the comment you made at the end of the prepared remarks about potentially revisiting the guidance with the Q3 earnings. Is that because of uncertainty in any particular area or just kind of broadly across the businesses?

Seth Seifman:

Okay, very good. Thanks very much.

Ellen Page:

Good morning. Thanks for the question. Just starting on the G700. You mentioned Block 3 was at a steady-state margin. How do we think about that relative to the G650? When would that kind of peak margin?

Ellen Page:

Okay. Thank you. And then just moving to Marine. As we think about the high growth this year, how do we think about that continuing into 2025? Or should we assume?

Ellen Page:

Thank you. I'll leave it there.

Noah Poponak:

Good morning everyone.

Noah Poponak:

Phebe, I guess if I look at the funded backlog at Gulfstream, it's been relatively flattish over the last kind of year, 1.5 years. I know you have overall good demand for the new products. But how are you thinking about matching supply to demand as you're going to ramp deliveries here? Do you have visibility that the orders will keep pace with that? Do you have any concern about taking the revenue run rate above the order rate?

Noah Poponak:

Okay. How far out into the future does the pipeline go in terms of your level of visibility and confidence in what the order flow will look like?

Noah Poponak:

Okay. And Kim, did you -- I apologize if I missed it, did you provide a new free cash flow to net income conversion goal for the year? And then, I guess just any comment on how to think about that next year if there are some abnormalities this year that reverse next year?

Noah Poponak:

Okay, thank you.

Operator:

Thank you. That question comes from Matt Akers at Wells Fargo.

Phebe Novakovic:

Good morning.

Phebe Novakovic:

Well, that was a tragedy for the individual, the family and for us. From a business perspective, it's a very small line.

Phebe Novakovic:

So NASSCO learning and performance on the T-AO, the oiler is going quite well. We're delivering the seventh of the A-class ESB, and repair continues to be pretty strong as the demand from the U.S. Navy is increasing.

Operator:

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good morning, and welcome to the General Dynamics First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

Nicole Shelton:

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First Quarter 2024 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.

Phebe Novakovic:

Thank you, Nicole. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $2.88 per diluted share on revenue of $10.7 billion, operating earnings of $1.036 billion and net earnings of $799 million. These results compare quite favorably to the year ago quarter. Revenue is up 8.6% against the first quarter last year. Operating earnings are up 10.4%. Net earnings are up 9.5%. As a result, earnings per diluted share up $0.24, or 9.1% more than the year ago quarter. The operating margin for the entire company was 9.7%, a 20 basis point improvement over the year ago quarter.

Kimberly Kuryea:

Thank you, Phebe, and good morning. I'll start with orders and backlog. We had a solid quarter from an orders perspective with an overall book-to-bill ratio of 1:1 for the company. Order activity was particularly strong in the Combat Systems group with a book-to-bill of 1.6:1 and in the Aerospace and Technologies segment, which each had a book-to-bill of 1.2:1. We ended the quarter with total backlog of $93.7 billion, up slightly from year-end and up 4% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at approximately $134 billion, up 1.5% from year-end.

Phebe Novakovic:

Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate. First, Aerospace. Aerospace did very well in the absence of the G700 delivery. It had revenue of $2.1 billion and operating earnings of $255 million with a 12.2% operating margin. Revenue is $192 million more than last year's first quarter, a 10.1% increase.

Operator:

[Operator Instructions] And your first question comes from Scott Deuschle with Deutsche Bank.

Phebe Novakovic:

So let me kind of tackle that. I alluded to it in my opening statement. But we're -- we have 50 to 52 airplanes that are going to deliver in about equal amounts of the 700 in the second through the fourth quarters. So think about it that way. So I think that will help you.

Phebe Novakovic:

So the growth in Europe is clearly driven by the threat environment. We've seen increases in orders for combat, wheeled and tracked vehicles and significant bridge orders. We're also seeing increased orders coming out of various countries in Europe for Abrams through the FMS process. So we see that demand signal continuing until the threat environment, frankly, improves.

Seth Seifman:

Looking to marine. When we think about the expectation for the profit margin for the year and kind of where we started, are there kind of visible milestones that you see through the remainder of the year that bring that number higher? Or kind of is it a change in mix? Or kind of what drives the underlying margin improvement through the year?

Seth Seifman:

Right. Okay, okay. Great. And then just when we think about -- I think you mentioned some of the headwinds to demand at Gulfstream from here in terms of monetary policy, geopolitical issues. Just to kind of affirm the expectation for 160 deliveries this year and the way that the backlog will trend through the year, the expectation is that, that's a very sustainable number with potential for that to grow in the years beyond.

Operator:

And we will take our next question from Robert Stallard with Vertical Research.

Phebe Novakovic:

So let me take them in the inverse order. On the submarine side, the preponderance of the funding in the supplemental is to help stabilize the industrial base, ensuring that we continue to drive order activity on a consistent and repeatable basis. So that is really on the submarine side. In combat, I think you can see there's a fair amount of ammo funding, and we had fully anticipated that.

Phebe Novakovic:

So it is proceeding extremely well through test, continue to work with that customer, but they are very pleased with the performance of the vehicle.

Sheila Kahyaoglu:

I wanted to ask one about Aerospace, and I'm sorry for putting you on the spot with the mental math. But last year -- or last quarter, you talked about the G700 profit contribution being around 25%. So when we think about the Q1 performance, it was actually really good relative to our number of 12.1% margin. It would imply you see a deceleration in the underlying business for Aerospace just given G700 comes in at 50 units. So I guess, how do we think about the mix movement throughout the year for Aerospace?

Phebe Novakovic:

So think about it this way. This is ultimately going to be a very profitable program. But as I explained in my remarks, the first lot of 20 or so carries with it additional cost. We'll see those in -- largely in Q2. So think about Q2 as an increase in revenue of about $1 billion to $1.1 billion and in earnings of about $100 million to $110 million, and then progress nicely thereafter. And again, that's all impacted by the multiplicity of factors in our Aerospace business that drive margins.

David Strauss:

Phebe, so Rob's question on the supplemental and the submarine industrial base money, so there's money there. There's a lot of money in the base budget, it appears. You're spending additional CapEx today that you'll eventually recover through working capital, profit. How does -- I mean, it's a lot of money. I mean how does that manifest itself in your numbers as we think about over the next couple of years?

Phebe Novakovic:

So the way we think about share repurchases, and this will be true going forward, is really in the regular order. Recall what we were facing in Q1. And that was we're looking down the throat of a potential, and at some point looked very likely, government shutdown. And so I think that prudence and conservatism in the face of that kind of uncertainty is really key. But the cash performance for the remainder of the year is going to be very strong, and we will act accordingly.

Noah Poponak:

Phebe, what's the framework for the pace of G700 deliveries beyond this year compared to this year? Not asking for quarterly numbers or anything like that, but just given this year's had some abnormalities compared to a recurring airplane. And then, Kim, just what's the updated view on free cash flow to net income conversion for the year?

Operator:

We will take our next question from Myles Walton with Wolfe Research.

Phebe Novakovic:

So what drove margin in the first quarter were two things

Phebe Novakovic:

I don't think that's the way to look at it. But why don't Nicole get back to you on that? But we didn't have any particular notable cancellations. So let us unpack that one with you a little later.

Ronald Epstein:

So Phebe, with the increased demand on munitions and so on and so forth, I mean, what are you doing to mitigate any of the issues that could arise from growth in those markets, just like we've seen in the Navy markets given all the demand and growth? There's been supply chain issues. Are you expecting...

Ronald Epstein:

Got it. Got it. And then maybe back to the kind of the naval side of the house and the supply chain. Could you give us any color on where there are actual weaknesses in the supply chain where investment has to be made?

Operator:

And we will take our next question from Doug Harned with Bernstein.

Phebe Novakovic:

So I think you've articulated what the Navy has said. I will tell you, our throughput and productivity has been strong on Columbia. It enjoys the highest national security priority. So we have done pretty well on Columbia and are increasing our throughput on Columbia. So then it's really those pacing items that are out there. And we're working with our Navy customer to see if there are additional things we can do to recover some schedule and if there are any workarounds. But this is going to be a bit of a slog for the supply chain.

Phebe Novakovic:

Yes. So I think you've known over the years, I tend not to comment on individual service budgeting. But inflation certainly has been a factor. And to the extent that we can increase throughput to offset some of that, we will. But the Navy is well aware of the inflation impact and I think is working hard with the whole shipbuilding industrial base to adjust some of that.

Kristine Liwag:

Phebe, following up on the marine question. In addition to the delay in the Columbia class, the DoD did request one less Virginia class for the fiscal year '25 budget request. So I mean, if we take all this into perspective, can you provide some context on what this means for marine revenue growth over the next few years? And does the margin with a 7 handle on it, is that more the new norm for this business?

Kristine Liwag:

The revenue cadence, including the just one Virginia class for fiscal year '25.

Operator:

And we will take our next question from Ken Herbert with RBC.

Phebe Novakovic:

So it's a good planning assumption. It is how we are thinking about our internal planning. But let's see how we do as we start to significantly ramp up production and deliveries. So -- but as I said, that's a good planning assumption.

Kimberly Kuryea:

Yes. That's pretty much what you should assume.

Robert Spingarn:

Phebe, you said recently that with the -- even though the aerospace supply chain is improving, your ramp this year could challenge that improvement. I was wondering if you could elaborate on that a little bit.

Robert Spingarn:

Okay. And then also, I think you commented you had good bookings in Aerospace in the quarter, reflecting strong demand. But I think you've said the U.S. has been very strong. How is aircraft demand elsewhere in the world?

Operator:

And we will take our next question from Peter Arment with Baird.

Phebe Novakovic:

Yes. So our ramp there is more about increasing the facilities that we have. And as I noted in my remarks, the opening of our Texas facility, which we worked very, very hard to expedite and frankly did it in almost record time, was very important because it increased the throughput and the productivity of the number of shells by 83%. So we're on track with the Army to get where we need to be, and our objective is to move even faster. And so far, we have been. But the Army has been a critical and extremely important partner here in what is really a national security imperative.

Phebe Novakovic:

So we had anticipated the impacts on the 280 in our guidance too, but I will tell you that they are doing quite well and are slightly ahead of our schedule. We're still sticking to our deliveries, but I think it's notable that they're managing pretty well in this tough environment.

Cai Von Rumohr:

Good quarter.

Cai Von Rumohr:

So could you update us on the status of the G400? How is it doing? And is it fair to assume that it might have a gap of approximately 12 months between its certification and that of the G800?

Cai Von Rumohr:

Excellent. And then your R&D was up a fair amount in the first quarter. Could you give us some color of the pattern of the R&D at Gulfstream this year and looking forward? How should we think about that?

Operator:

And we will take our next question from Jason Gursky with Citigroup.

Phebe Novakovic:

So the pipeline remains robust. And I look to that as encouraging, a good sign. It's been that way for a while. People want our airplanes, and that's driving demand.

Phebe Novakovic:

Yes. So we have been investing in AI to support our customers, and particularly at GDIT and somewhat at Mission Systems. And I would say that there, we're working closely with our customers. They define what the art of the possible is for them in AI. And as you all know, there are some government -- governance challenges around that. But the more sophisticated we get and our ability to tailor AI solutions, I think the more comfortable our customer becomes and will ultimately drive some increased revenue.

Operator:

Our final question today comes from Gavin Parsons with UBS.

Phebe Novakovic:

Nice try. So look, yes, I think once you get through the first lot, our performance from a margin standpoint will continue to improve. And you'll see that, third quarter will be significantly better than second quarter, and fourth quarter will be even better still. But we will update you on our regular order. We kind of keep our discipline, as you well know, around updating guidance, and I think that, that's appropriate.

Kimberly Kuryea:

I think right now, we're just focused. Given the steep ramp in the second half of the year, we're really focusing on trying to hit that mark at this point in time.

Nicole Shelton:

Great. Well, thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have additional questions, I can be reached at (703) 876-3152.

Operator:

Good morning and welcome to the General Dynamics Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] I'd now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Phebe Novakovic:

Thank you, Nicole. Good morning, everyone and thanks for being with us. Earlier this morning, we reported earnings of $3.64 per diluted share on revenue of $11,668,000,000, operating earnings of $1,288,000,000, and net earnings of $1,000,000,000. Revenue is up $817 million, a strong 7.5% against the fourth quarter last year. Operating earnings are up $61 million, and earnings per share are up $0.06, or 1.7%. The year-ago quarter had $52 million more of other net income, which helps explain the more modest earnings per share growth. In short, the quarter-over-quarter results compare quite favourably, particularly revenue and operating earnings. The sequential results are even better. Here, we beat last quarter's revenue by $1,097,000, a very strong 10.4%, operating earnings by $231 million, or 21.9%, net earnings by $169 million or 20.2%, and EPS by $0.60, a 19.7% improvement. As we promised that it would be, the final quarter is our strongest of the year in both revenue and earnings. In fact, revenue, earnings per share, operating earnings, and net earnings improved quarter over the previous quarter throughout the year. It was a nice steady progression of sequential improvement. For the full year, we had revenue of $42.3 billion, up 7.3%, and operating earnings of $4.25 billion, up 0.8%, and earnings per fully diluted share of $12.02, down $0.17, a 1.4% decrease, mostly as a result of below-the-line items like other income, which was higher, and the tax provision, which was lower in 2022. The fourth quarter in the year are $0.04 and $0.09 respectively, below consensus. It is important to note that consensus lowered during the two weeks before this earnings release, as the sell side became aware of Gulfstream's deliveries from public sources. This miss was exclusively because the G700 did not certify before year end. As a result, Gulfstream was unable to deliver 15 G700s as we and the sell side had anticipated. I will have more to say about this in my segment remarks. While we miss consensus and our own expectations for reasons beyond our control, it should not distract from an otherwise good quarter and year. Let me ask Jason to provide some detail on our strong cash performance for the quarter and the year, overall order activity, and backlog, and any other items you might like to address.

Phebe Novakovic:

Thanks, Jason. First, aerospace; the story in aerospace is found in sequential and year-over-year improvement, continuing strong demand for Gulfstream aircraft, the overall strength of Gulfstream service business, and the continuing growth of jet aviation. In the quarter, aerospace had revenue of $2.74 billion and earnings of $449 million. This represents a 12% increase in revenue and a 33% increase in earnings on a quarter-over-quarter basis. The sequential numbers are even stronger, with a 35% increase in revenue coupled with a staggering 68% increase in operating earnings. The important point here is the dramatic increase in the delivery of in-service airplanes in the quarter, 39 versus 27 in the third quarter of 2023. A strong mix favoring large aircraft, strong pricing in the backlog, better overhead absorption, and improved supply chain response, leading to less out-of-station work, all contributed to a 16.4% margin in the quarter. For the full year, revenue of $8.62 billion is up only $54 million from the prior year, and operating earnings of $1.18 billion, improved by $52 million on a 50-basis point improvement in operating margin. Nevertheless, aerospace revenue and earnings are less than we anticipated for the quarter in the year because, as I mentioned earlier, we did not receive the certification of G700 in the fourth quarter and did not deliver 15 aircraft we had ready to go. That deprived us of slightly over a billion dollars of revenue and close to $250 million in earnings. These, of course, are orders of magnitude figures. We were also unable during the course of the year to increase production of in-service aircraft as planned because of well-known supply chain issues that began to resolve in the fourth quarter. So, where are we in our journey toward G700 certification? We are almost complete with the final technical inspection authorization. FAA function and reliability flight testing is almost done, and almost all of the paperwork associated with the process has been submitted. In the meantime, we are asking customers to schedule their pre-delivery inspections contemplating delivery this quarter. All that having been said, let me turn to the demand environment. The book-to-bill was 1.2 times in the quarter and 1.2 times for the year. Backlog increased $395 million sequentially and $938 million for the year. So, aerospace demand remained strong for both aircraft and services at Gulfstream and jet aviation. I should add that strong order intake was interrupted for a two- to three-week period twice during the year, once for a macroeconomic event and the second for a geopolitical event. I refer to the regional bank failures earlier in the year and the conflict initiated by the Hamas attack on Israel and the resultant conflict in Gaza. In each case, order intake resumed after a brief pause. As we go into the New Year, the sales pipeline remained strong and sales activity is at a solid pace. Aerospace backlog is up 72% since the first quarter of 2021 when we first detected a measurable uptake in order activity. In summary, aerospace results are in line with our original forecast, excluding the G700 certification delay. We look forward to a significant increase in deliveries in 2024 and improved operating margin, but I'll say more about this as we get to guidance. We also expect continued growth and margin improvement at Jet Aviation to perform well in the year. Next, combat systems. Revenue in the quarter of $2.36 billion is up 8.5% from the year-ago quarter. Operating earnings of $351 million are up 5.7% on a 40-basis point decrease in operating margin, but still a very good 14.8%. The majority of the growth in the quarter was at ordnance and tactical systems and European land systems. It was largely driven by higher artillery and propellant volume, including programs to expand production volume, higher volume of piranhas, bridges and eagles in Europe, and new international tank programs. Not surprisingly, the sequential comparisons are even better. Revenue is up $140 million or 6.3% and earnings are up $51 million or 17% on the strength of 130 basis point improvement in margins. From an order perspective, combat had a very good year with a 1.1 times book-to-bill, driven by very strong international demand for the Abrams main battle tank, growing demand on the munitions side of the business, and particular strength in Europe. By the way, combat's performance for the year significantly outperformed our expectations. 2023 revenue was up 13% against a flat forecast provided earlier in the year. Operating earnings are up $72 million or 6.7%, with operating margin at 13.9% for the year. In short, this group had a wonderful quarter and a year with strong revenue growth, strong margin performance, good order activity, and a strong pipeline of opportunity as we go forward. Turning to marine, the powerful marine system's growth story continues. Fourth quarter revenue of $3,408,000,000 is up 14.8% over the year ago quarter. Revenue is also up 13.5% sequentially, and 12.9% for the year. This was driven by Columbia class construction and engineering volume, TAO volume, and service contracts at bat. Operating earnings are down 8.4% over the year ago quarter on a 160 basis point reduction in operating margin attributable to EAC rate decreases at electric boats. These rate decreases similarly impact the sequential and annual comparison with respect to operating earnings. The EAC decreases were primarily driven by two factors, later than promised material to EB [ph], which drove additional out of station work at EB, and quality problems from several vendors. On the positive side, we are continuing to work with the Navy and the Congress to help further stabilize the supply chain with additional funding for work. We are also working with certain suppliers to set up process improvements where we can. EB also needs to continue to improve its productivity to help offset some of the financial impacts from the supply chain. Marine Systems had a one-time book-to-bill for the year, a good result for a group of shipyards that began the year with a total backlog of nearly $46 billion. Jason will now give you some color on the Technologies group for which he has responsibility, and then I'll return for our outlook for 2024.

Phebe Novakovic:

So let me provide our operating forecast for 2024 with some color around our outlook for each business group and then the company-wide roll-up. In 2024, we expect aerospace revenue of about $12 billion, up around 40% over 2023. Operating margin is expected to be up 130 basis points to 15%. Gulfstream deliveries will be around 160, materially over the 111 delivered in 2023. This is about 10 fewer deliveries than we anticipated in the multiyear forecast we gave you in January of '22. The mix will include about 50 G700 deliveries and fewer G280s as a result of the Gaza conflict's impact on our Israel-based supplier. As I just noted, we anticipate a 15% operating margin for the year, weaker in the first half, particularly in the second quarter, and then well over 15% in the third and fourth quarters. While the ramp-up is slightly less than previously anticipated, it is not without supply chain challenges. In combat systems at this time last year, we had anticipated revenue to be flat in '23. With a changed threat environment, we had a 13% increase in revenue. For '24, we expect revenue to be up about 3% to $8.5 billion, coupled with a 50 basis point improvement in operating margin to 14.4%. The outlook is the result of the strong order activity we saw in '23 and the demand signals we see in Europe. To the extent that these demand signals start to convert into order activity, we could see some opportunity for additional revenue later in the year, particularly in our armaments and munitions business. As I noted earlier, the Marine group has been on a remarkable growth journey. In 2023, revenue came in much stronger than expected, almost $1.6 billion against a flattish forecast. Our outlook for this year anticipates revenue of about $12.8 billion, with operating margin improvement to 7.6%, which should result in a meaningful improvement in earnings in 2024. In technologies, 2023 revenue was stronger than anticipated in both businesses. 2024 revenue is expected to be up about 1% to $13 billion. Within the group, GDIT will be up low single digits, emissions systems will be down slightly due to a transition from legacy systems and a slow ramp up on new programs. Operating margins are expected to improve 20 basis points to about 9.5%. We see long term low single digit growth for the group and continued industry leading margins. So for 2024 company wide, we expect to see revenue of approximately $46.3 billion to $46.4 billion, an increase of around 9.5%. We anticipate operating margin of 11% up 100 basis points from 2023. All this rolls up to an EPS forecast of around $14.40. A reasonable range would be $14.35 billion to $14.45 billion. On a quarterly basis, the first two quarters look a lot alike with very strong third and fourth quarters. In summary, as we go into this year, we feel very good about the demand environment across all of our businesses. It has been some time since I have seen stronger demand signals and better promise of organic growth. We also have some very good opportunities across the business to improve operating margins. All we must do is execute. It almost goes without saying that we will be laser focused on operations. Nicole, back to you.

Operator:

[Operator instructions] We will take our first question from Myles Walton at Wolfe Research.

Phebe Novakovic:

So we have 15 airplanes ready to go and the hope is that we deliver them this quarter. The notifications that Gulfstream made earlier, I guess, this week, are in the regular order and really have no material impact on the certification process. I tried to give you as much clarity as I could around the certification and where we are.

Phebe Novakovic:

So we're not going to go into what we've assumed for any given airplane in our guidance. So let me give you guys some perspective about this. For the last about eight years, we've tried to give you some clarity about a process over which we have no control and it's kind of like sticking your fingers in a light socket to predict a process that we just don't control. So I think we're going to be silent as we go forward about any specificity around certification timing because then we hear words like slip and miss and these planes are going to get certified, but get certified on the FAA schedule.

Operator:

We'll move next to Ron Epstein at Bank of America.

Phebe Novakovic:

So let's step back a minute and talk a little bit about the shipbuilding industrial base in general and the submarine industrial base in particular. These are very heavily manpower-driven businesses and industry and an entire supply chain and manpower availability was impacted significantly as a result of COVID in two respects. First, we had a really stunning increase in the timing and the number of retirements of seasoned workers throughout the industrial base. That, coupled with the post-COVID labor shortages, caused considerable perturbation in the supply chain. Those will begin to remedy. We've already seen some stabilization in the labor market. Those won't remedy, but there's clearly learning that has to happen throughout the supply chain. I'd say with respect to capacity, at Electric Boat, we are nicely sufficient capacity at the moment to deal with the demand that we have -- we see at the moment, but should that demand signal increase in the near term, we'll work closely with our Navy customer. I think key to the stabilization of the supply chain is improved delivery and improved quality and that happens as new workers come down their learning curves. We've benefited from Electric Boat because they have a very robust training system in which our new workers come out at a higher level of proficiency, but still they need to come down their learning curves and they're doing so nicely. I think to add a little bit of perspective to that, Electric Boat, we increased our velocity and throughput on Virginia by about 10% this year in '24% and about 30% on Columbia. So Electric Boat is continuing to do well. They just need to continue to improve their productivity, so we can continue to offset some of these financial impacts that we're seeing from the supply chain. But I would finally mention the Navy has been a very good partner in recognizing these challenges and working hard to get orders and certainty of demand into the supply chain and that helps the entire supply chain plan.

Phebe Novakovic:

So I think we're going to look at all of that with the Navy, but let me tell you, the best thing we can do for AUKUS in the moment is get back to two-a-year production. That's one step at a time.

Jason Gursky:

I was wondering if you could talk a little bit about the G400 and how that plane seems to be performing from a market acceptance perspective and kind of the pipeline that you're seeing for that aircraft. I'm just kind of curious how that segment of your market is shaping up there as we come into the New Year.

Jason Gursky:

Okay, great. And then your comments on combat and the potential for some orders converting into revenue coming out of Europe in the second half of the year, that doesn't sound like it's implied in your guidance, but I'm just kind of curious that how far into the year can we go to get those orders and actually convert them into revenue?

Operator:

We'll go next to Davis Strauss at Barclays.

Phebe Novakovic:

So we have factored in all known funding into our plan and should we see an extensive and continuing resolution, we'll have to see what impact that has on our faster transaction businesses because every CR plays out a bit differently and to the extent that we have a sequester then we have factored some of that, but apparently, clearly you can't do all of it into your plan. So we'll adjust accordingly, but we are hopeful that the Congress is able to pass a critical defense bill, particularly in these times given the threat environment.

Jason Aiken:

Yeah, so when you think about free cash flow, we are anticipating to continue in the 100% conversion range in '24 and beyond. Obviously, we outperformed that a bit in 2023, but that doesn't affect what we expect in '24. So, the good news is a lot of the larger scale moving parts around cash flow are starting to settle down a little bit. We've experienced some big headwinds and then some corresponding tailwinds over the past several years, but right now if you look ahead, I think you can expect for the aerospace group a fairly steady conversion at or slightly above 100% conversion. When you think about it, we got a pretty big tailwind when they were building the significant backlog over the past few years and all the deposits were coming in. So that more than offset any effective inventory build. So as you transition into a period where you're starting to deliver off that inventory, but then you assume a steady one-to-one book-to-bill, you should be in a pretty regular burn rate at 100% conversion plus or minus for that business. Combat systems, on the other hand, should continue to see tailwinds as they work through some of the receivables and work in process on the international programs that we've made some great progress on in recent years. So that'll continue for a couple of years. The technologies group is a steady provider, well above 100% conversion and the marine systems group, as we noted, is still finishing up some of the large capital projects. We're coming through that now and we'll see what the future holds as Phebe alluded to in terms of Navy investment. But when you kind of net all those together, we're right about 100% for the coming year. If you look at capital deployment, as you noted, there's not a lot in terms of commitment. We've got $500 million in notes that mature out in November of this year. So we've got plenty of time to kind of see how things play out and decide what we want to do with that maturity. No rush on that decision and we'll look at all options as we always have. I think we've got great opportunity for stepped up share repurchases as more, I should say, as uncertainty sort of moves out of the environment. We looked at the last half of last year, the last quarter of last year, and the significant threat of a government shutdown sort of hung over the environment and that factors into our thinking as we think about how we preserve cash and deploy capital. So if we can get past that in March, then I think it provides a lot of optionality for us as we look ahead on the capital deployment front.

Operator:

We'll move next to Sheila Kahyaoglu at Jefferies.

Phebe Novakovic:

Hey, can you repeat the last part of your question? It was kind of coming in.

Phebe Novakovic:

Yeah, the G700 comes in at accretive margins, but as you all know, and many of you are quite expert in this, we've talked about over the years, including on this call, the margin performance at Gulfstream is driven by a host of issues and as I noted in my remarks, mix, pricing, out of station work, all impacted. So I think, again, as I mentioned earlier, the way to think about our plan is a really balanced plan. Not quite the question you asked, but I'd stick with that and I'd think about it that way. But these new airplanes are coming in at very nice margins.

Phebe Novakovic:

Combat is seeing some of it, but I tried to give you some perspective earlier on the impacts of what happened to the industrial base in the Marine group, and it also impacted Gulfstream as a result of COVID. So for us, it's really a question of operating excellence, operating excellence, operating excellence. We're going to focus on that very heavily. So we drive increased profitable growth. That's the value proposition that we're looking at right now.

Seth Seifman:

Okay, thank you very much, and good morning, everyone. I wanted to start off asking about combat and just the 3% growth guide. I guess even if we adjust for some seasonality, I might have thought that the activity levels that we're seeing here in the earlier, what we saw in the second half of '23 would lead to some really quite robust growth in the first half, perhaps even double digit, and then being at 3% would imply something like flat or down in the second half. Am I not thinking about that cadence properly, or is there some reason for the growth to really step off or come down in the second half?

Seth Seifman:

Sure, sure. Okay, excellent. And then on aerospace, I guess it's probably about two years ago that you gave us a multi-year look at the aerospace business and the expectations there as the demand started to gather. Since that bunch of stuff has happened, I think demand has probably been a little stronger than expected. We've also seen some supply chain issues, some certification pushouts. As we think about a multi-year outlook for aerospace in terms of deliveries and profitability, is that something you can update at this time?

Operator:

Our next question comes from Noah Poponak at Goldman Sachs.

Phebe Novakovic:

Well, look, I don't see us particularly burning through backlog given the robust backlog we have and given the robust pipeline that we have. We're off to a good start this year. So I don't see anything that particularly drives an unhealthy burn through the backlog. We have believed for some time and it is turning out to be the case that new clean sheet airplanes drive incremental demand and we're certainly seeing that and we don't see much of an abatement in that.

Phebe Novakovic:

Well, look, our order rate has been quite healthy and quite wholesome and we would expect additional orders supported by the pipeline to come in this year. So we're not going to give you any real granularity around orders per quarter, but we see nice demand, continuing interest, and a very solid pipeline. To me, those are the sort of foundational elements that we rely on for looking on a going forward basis, looking at what production can ultimately be.

Cai von Rumohr:

Yes, thank you very much, Phebe. Good, good numbers. So Gulfstream, two issues. First, you mentioned the Hamas attack and the impact on the G280. Maybe tell me the status of that and what that means in terms of your ability to get deliveries. And secondly, I think the bigger question is, by my quick math, it looks like your guidance for '24 implies an 18% incremental margin at Gulfstream, which seems low given the good margins you should be getting on the G700.

Cai von Rumohr:

So is that, I still don't quite understand, the 18% margin, is that sort of a P&L drag, the fact that there's -- they can't get enough or the timing?

Operator:

We'll move next to George Shapiro at Shapiro Research.

Phebe Novakovic:

Hey, you guys are reverse engineering incremental margin and it's almost impossible to deal with in the complexity of this business. I would infer nothing from it. Look, let's talk about the underlying capabilities. Gulfstream has a lot of operating leverage. They've always been a good since we acquired them at GD years ago. They have been strong operating performers, with very good margin performance and gross margins coming out of their operations. That won't change, but the mix of business, the level of any given quarters, timing around supply chain and its impact on out-of-station work and mix of service, jet aviation, all of those things are contributing. So, there is nothing systemic other than those issues that you know, and they are temporary and we will work through the supply chain issues, but there's nothing systemic that should concern you about where we stand on Gulfstream and its ability to increase margins, earnings and revenue over time here.

Jason Aiken:

It's a little bit Ajax and it's a little bit of the ongoing payments on our other large international program of combat systems. Those are the two big pieces. Yes, George.

Robert Spingarn:

Phoebe, Phebe the marine guide implies about $340 million in sales growth and in the past, you've talked about Columbia driving $400 million to $500 million of growth per year. So, could an economic price adjustment for Virginia-class be a meaningful source of sales and operating income for Marine in 2024?

Robert Spingarn:

So just to be clear, there's nothing in there for an adjustment yet?

Robert Spingarn:

Fair enough. Thank you.

Operator:

Thank you. We'll take that question from Peter Arment at Baird.

Phebe Novakovic:

So we have been pretty well resourced by the Navy and for many, many years in anticipation of particularly the Columbia and Block 5. So I think from our perspective where we really need some assistance and continued assistance from the Navy is stabilization of on-time delivery and quality coming out of the out of the supply chain. So I think that as we go through this year, I'm sure there'll be additional opportunities for us to work with the Navy and find some ability to relieve those pain points that remain in the supply chain.

Phebe Novakovic:

Hey, and listen, before we leave, I just wanted, this is for many of you may know, this is Jason's last earnings call, and I wanted to thank him for his excellent years of service as a CFO. He will be missed, but his work will continue at Technologies. So I'm sure all of you will join me in congratulating Jason on a superb CFO job well done over the years.

Operator:

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, good morning and welcome to the General Dynamics third quarter 2023 earnings conference call. All participants will be in a listen-only mode, and please note that this event is being recorded. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, one a second time. Thank you, and I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Jason Aiken:

Thank you Nicole. Good morning everyone and thanks for being with us. The first thing I’ll note is that our Chairman and CEO, Phebe Novakovic, is under the weather today, so I’ll be conducting today’s call along with Bill. Earlier this morning, we reported earnings of $3.04 per diluted share on revenue of $10.6 billion, operating earnings of $1.06 billion and net income of $836 million. Revenue was up $596 million or 6% against the third quarter last year. Operating earnings were down $41 million or 3.7%. Net earnings were down $66 million and earnings per share were down 6.7%. The quarter-over-quarter results show significant growth in revenue but a 100 basis point contraction in operating margin. On the other hand, sequential results are quite good across the board. Here, we beat last quarter’s revenue by 4.1%, operating earnings by 9.9%, net earnings by 12.4%, and EPS by 12.6%. From a different perspective, we beat consensus by $0.13 per share on higher revenue and better operating earnings than anticipated. Operating margin is about the same as expected. The beat came almost entirely from operations. On a year-to-date basis, revenue was up 7.2%, operating earnings were down less than 1%, and diluted earnings per share were down 2.6%. We had another very strong quarter from a cash perspective. Net cash flow provided by operating activities was $1.32 billion and free cash flow was $1.1 billion, which is 131% of net earnings. This follows very good cash performance in the first half. Order performance was good in the quarter in all segments and particularly strong at Gulfstream and the marine segment. You’ll hear more detail on cash and backlog, as well as some of the other financial particulars from Bill in just a minute. In short, we enjoyed a strong quarter, particularly so in light of the supply chain and program mix headwinds that time will cure, so let me move right ahead with some color around the performance of the business segments. First, aerospace. Aerospace had revenue of $2.03 billion and operating earnings of $268 million with a 13.2% operating margin. Revenue was down $315 million from the year-ago quarter, driven by fewer deliveries at Gulfstream due to supply chain constraints. Operating earnings were down $44 million on lower revenue and a 10 basis point contraction in margin. The sequential comparison is much better - revenue was up $79 million or 4%, and operating earnings were up $32 million or 13.6% on 110 basis point improvement in margin. There were 27 deliveries in the quarter, three more than in the second quarter. To provide some additional color here, Gulfstream has made 72 aircraft deliveries through the end of the quarter. We are on track to deliver between 40 and 45 currently in-service aircraft in the fourth quarter. All-in including G700s, we anticipate in excess of 60 deliveries in the quarter, assuming we’re granted FAA certification before the end of the year. That said, as you can tell, there’s a considerable amount of uncertainty as we get closer to certification. Moving to the demand environment, this was yet another positive quarter reflecting continuing strong demand. Aerospace book-to-bill was 1.4 to 1, and Gulfstream alone had a book-to-bill of 1.5 to 1. We continue to have vibrant sales activity going into the fourth quarter and expect strong orders. It would, however, be a stretch to get to 1 to 1 in the fourth quarter, given our expectation of over 60 deliveries. A wildcard in the quarter will be the conflict in Israel and its impact on demand, if any. The period of significant increased aircraft demand began in mid-February of 2021, over two and a half years ago. In 2021, Gulfstream’s book-to-bill was 1.7 to 1, in ’22 it was 1.5 to 1, and year-to-date 2023 it’s 1.3 to 1. This includes the first quarter of 2023, when there was a three-week hiatus in orders as a result of the failure of several regional banks. In that quarter, we still managed a 0.9 to 1 book-to-bill. All of this leads quite naturally to an astonishing build of the aerospace backlog. It grew from $11.6 billion at the end of 2020 to $20.1 billion at the end of the third quarter 2023, an increase of over 70% in two and three-quarter years. This all speaks to me of the underlying strength of the market for our products. The G700 flight test and certification program continues to move closer to its ultimate conclusion. We continue to plan for certification in the fourth quarter of this year, largely dependent upon the availability of FAA resources and a credit the FAA may allow for company flying. We currently are spending most of our engineering time on final reports and data submission. Operationally, Gulfstream continues to make good progress under difficult circumstances, but as a result of the supply chain issues that we’ve previously discussed, we plan to deliver 10 to 12 fewer aircraft this year than the 145 we had originally forecast in the beginning of the year. On the other hand, we continue to expect more service revenue than initially predicted. Next, combat systems. Combat systems had revenue of $2.22 billion, up a stunning 24.4% over the year-ago quarter with growth at each of the business units, but particularly at OTS and European land systems. Earnings were $300 million, which was up 10.7%. Margins at 13.5% represent 170 basis point reduction versus the year-ago quarter, so once again we saw powerful revenue performance coupled with more modest operating margins in large part attributable to mix and new program starts. Some of our revenue increase is a result of facilities contracts to increase our artillery production capacity taken at lower margin. As you’d expect, these contracts will result in additional production at accretive margins over time. On the subject of munitions, we’re working very closely with our government customer and have accelerated production faster than planned. The large capacity expansion that we’re putting in place today will further increase production. We have a ways to go, but we’re making progress. The increase in combat revenue also came from new international vehicle programs, the ramp-up of the M10 Booker, higher artillery program volume, and higher volume on Piranha and Eagle vehicles in Europe. On a sequential basis, revenue was up $300 million or 15.6%, and earnings were up $49 million or 19.5% on a 50 basis point improvement in margin. Year-to-date, revenue was up $775 million or 15.1% and operating earnings were up $53 million or 7.1% over last year, so the numbers are quite impressive quarter-over-quarter, sequentially and year-to-date. Combat systems experienced very good order performance. Orders in the quarter resulted in a one-to-one book-to-bill, a very strong performance given the increased revenue and evidencing strong demand for munitions and international combat vehicles. Year-to-date, the book-to-bill is 1.3 to 1, which fully supports the growth outlook. Turning to marine systems, once again our shipbuilding units are demonstrating impressive revenue growth. Marine systems revenue of $3 billion was up $233 million or 8.4% against the year-ago quarter. Columbia-class construction and engineering drove the growth. Operating earnings were $211 million, down $27 million versus the year-ago quarter with 160 basis point decrement in operating margin. The year-ago quarter had a number of favorable EAC adjustments which did not repeat this quarter. Sequentially, both revenue and operating earnings were down somewhat. Importantly, year-to-date revenue was up $982 million, 12.2%; however, earnings were essentially flat on a 90 basis point contraction in operating margin. The real driver of the margin difficulty has been the late deliveries at Electric Boat from the supply chain, which causes out-of-station work and internal scheduling disruptions. Electric Boat has continued to improve its throughput, but not fast enough to offset the cost of late material. We continue with the help of the Navy to work this issue. At Bath, while we’re seeing signs of improved productivity, it has yet to manifest in the business’ financial performance. All that said, we’re looking for slow but steady incremental margin growth over time. Importantly, marine systems enjoyed a very good quarter from an orders perspective with a 2.3 to 1 book-to-bill. This is a very large enduring backlog. Lastly, technologies. It was another strong quarter with revenue of $3.3 billion, which is up 8% over the prior year and continues to build on the strong first half of the year. That growth was spread pretty evenly between GDIT and mission systems; in fact, each business grew both year-over-year and sequentially. At GDIT, we’re seeing particular strength in the defense and federal civilian portfolios as our technology accelerator investments and capabilities like zero trust, artificial intelligence, digital engineering and 5G are really resonating with customers and driving increased demand. At mission systems, the cyber and naval platform markets have been particularly strong. The production and delivery cadence on the hardware side appears to have stabilized, so we expect their results to be somewhat more predictable despite the lingering fragility in the supply chain that will continue to be the new normal. Based on the strength of the first three quarters, the group is on track to achieve our increased sales forecast of $12.7 billion for the year. Operating earnings in the quarter were $315 million, up 10.5%, yielding a margin of 9.5% - that’s up 20 basis points year-over-year and up 70 basis points sequentially, so a very solid performance on strong revenue growth in the quarter. This is a drumbeat we expect to see continue in the fourth quarter. Backlog at the end of the quarter was $12.7 billion. Through the first nine months, the group achieved a book-to-bill ratio of 1 to 1, keeping pace with the strong revenue growth across the business. Prospects remain strong with a qualified funnel of over $125 billion in opportunities they’re pursuing across the portfolio. Let me close with a review of the defense units in aggregate. As a whole on a quarter-over-quarter basis, defense had revenue of $8.54 billion, up $911 million or 11.9% over the year-ago quarter. On the same basis, earnings of $826 million were up $32 million or 4%. On a sequential basis, the pattern is similar - revenue was up $340 million or 4.1% and earnings were up $57 million or 7.4%. Year-to-date against the same period last year, revenue of $24.7 billion was up 10.2% and operating earnings were up $60 million or 2.6%. In short, our defense businesses are experiencing significant growth in revenue and to a lesser degree in earnings; however, we need to continue to work with our supply chain in order to achieve appropriate operating leverage. With that, let me turn it over to Bill.

Jason Aiken:

Thanks Bill. As far as year-end guidance is concerned, we’re holding at $12.65 for the year. There will be a number of puts and takes from what we published last quarter, but it should all come about the same place. Nicole, that will conclude our remarks, so I’ll turn the call back to you.

Operator:

Yes, thank you. [Operator instructions] We will take our first question from Peter Arment with Baird. Your line is open.

Jason Aiken:

Yes, thanks Peter. As it relates to certification, I think what we’ve said for some time now is that if we can achieve certification in the, call it early to mid December time frame, then we’ve got a good shot at getting the planned deliveries of G700s out the door this year. Obviously if that pushes further to the right, that puts that a little bit at risk. To your point about 2024, it’s probably not appropriate to get into specifics about next year until we go through our plan period, which we’ll engage in coming up here in the next month or two, but I think the way to think about this is a lot of what we’ve been talking about this year between the supply chain challenges, as well as the G700 cert timing, is really timing issues, and to your point, to the extent some of the deliveries that we anticipated this year don’t happen, that really just pushes into next year, so that naturally is an adder to the outlook for 2024. But what we can’t do yet is declare victory on the supply chain issues and say that by early next year, they’re going to be completely solved, so a lot remains to be seen as to the timing of how that ultimately works itself out. I think it’s that that will determine the net impact to 2024, so I think a little bit more time is going to be needed to see between what pushes out of 2023 into 2024 and the timing of the supply chain fix, what the net impact is to that ’24 outlook. I think we’ll have a better sense of that when we come back to you with guidance in January.

Operator:

We will take our next question from David Strauss with Barclays. Your line is open.

Jason Aiken:

Good morning David.

Jason Aiken:

Yes, so I think as it relates to marine systems, David, nothing has really fundamentally changed from the narrative that we’ve talked about for some time, which is to expect roughly $400 million to $500 million on average per year, year-over-year growth in that business. Obviously this year has turned out to be quite a bit different than we originally anticipated, and that’s largely attributable to the increased throughput that we’ve seen at Electric Boat in particular as the hiring and retention dynamics have really improved faster than we thought, so that’s really driven a lot of the revenue acceleration into this year. That backlog is so large and so long term, I don’t really see that having a direct effect on next year or any given year, but obviously again we’ll have to go through the specific planning period that we’re about to engage in before we get too specific about next year, so we’ll be back with more on that, but not a direct correlation in my mind from that marine systems increase in throughput. On combat systems, to your point, we had been expecting sort of flat to down-ish revenue before the threat environment really took a turn in the opposite direction, and as you’ve seen through the first part of the year, up 15% so far year-to-date, almost 25% in the quarter - that certainly was well beyond what our original expectations were, and frankly we don’t see that demand signal slowing down. When you think about the munitions side of the business as well as the international demand we’re seeing, along with the new program starts in the U.S., I don’t necessarily see that as being a pull forward or something that creates a headwind into 2024. Again, not being specific about that outlook because we’ll get into the planning period and get back to you in January.

Jason Aiken:

Really, nothing other than what we’ve told you before. We’ve actually been pretty consistent on this throughout the drama on this issue over the years. We didn’t originally anticipate the law to be changed, so our guidance was predicated on the law as it is. It turned out not to be changed, and our expectation of what that would mean for us, ultimately you can call it lucky or good, we expected the net impact from a cash perspective to be right on course with what we’re seeing right now.

Ken Herbert:

Yes, hi. Good morning, Jason and Bill. Maybe just to start, Jason, again on Gulfstream. Last quarter, you called out sort of 19 as the expected 700 delivery number, depending upon cert timing this year. Is that still a number we should expect into the fourth quarter, assuming you get certification in time, and can you just comment on any potential risk around 280 production levels, considering some of the uncertainty in the Middle East?

Ken Herbert:

Okay, great. Thanks Jason.

Operator:

We’ll take our next question from Robert Stallard with Vertical Research. Your line is open.

Jason Aiken:

Morning Rob.

Jason Aiken:

Rob, I’m going to guess you’re talking about supply chain in aerospace, and if so, I would tell you that actually we’re seeing modest signs throughout the quarter that things are actually getting better. It’s not, as you’d imagine, a straight line to the finish line on this issue, so there will be some bumps in the road and some curves along the way, but things are starting to trend better. What we saw here was a specific issue in terms of, as I mentioned, G280s in terms of the reduced in-service aircraft production, but on the large cabin aircraft, we are starting to see things trend in the right direction, so I think it’s a little bit maybe in the other direction of what your intuition is pointing you to.

Jason Aiken:

Sorry, it broke up there, Rob, at the end. You said mission systems supply chain and then labor--?

Jason Aiken:

Oh, labor at marine - okay. On the mission systems side, I feel very good about what they’ve done. The supply chain, to be completely candid with you, remains, and I think we expect it to remain what I’d call fragile. I don’t think that that’s going to get back to what we saw pre-pandemic for the foreseeable future, but the fact is the team at mission systems has fully incorporated that new reality into their outlook, and so I expect their future to be a lot more stable and predictable as they’ve incorporated the new normal, if you will, on supply chain on the electronic side for them. In terms of the labor side on marine systems, as I mentioned earlier, I think we’ve seen stabilization in both attraction and retention of labor in the shipyards at a faster rate than we anticipated, so that’s an encouraging sign. That drives the throughput in the yard, and over time as those new shipbuilders become more tenured, more experienced, more proficient, we would expect at that point, that’s one of the factors that will really drive over time the margin improvement in the shipyard, so it’s an encouraging start for them. We’ve just got to see that play out, because as you know, shipbuilding is a long term venture.

Scott Deuschle:

Hey, good morning.

Scott Deuschle:

Jason, can you walk through some of the high level puts and takes for aerospace incremental margins next year, and I guess maybe to ask another way, are the right things to focus on from our perspective the G700 mix, less out-of-sequence work, the learning curve on G700, and then presumably R&D either leveling off or coming down, or is there anything else here that we should be considering? Thank you.

Scott Deuschle:

Okay, great. Then as a follow-up, are there any major company-funded growth capex projects still underway in ’24 and ’25, or is most of that complete this year? If it does complete this year, does the nearly billion dollars of capex included in current Bloomberg incentives for ’24 and ’25 make directional sense, because that’s basically still in line with ’23, I think? Thank you.

Operator:

We will take our next question from Kristine Liwag with Morgan Stanley. Your line is open.

Jason Aiken:

Bottom line, Kristine, I think the short answer is no. Obviously any additional support that can be provided in terms of that supplemental or other funding to shore up the industrial base is helpful. There’s a lot of talk around AUKUS and obviously we’re going to do everything we can to support our customer in that regard, but the fact is this supply chain still remains very fragile. We’ve got a lot of work to do to get this whole industry back to--from a submarine perspective, back to two per year. We’ve got to get to that point on Virginia while delivering Columbias, and I think we’ve got some more work to do to get there, and so any additional funding and support, whether it’s through the supplemental or other Navy support, would be extremely helpful, but that’s our focus today, is to get to that two per year plus Columbia, and then we’ll look to AUKUS beyond that.

Jason Aiken:

I think the main way this has been reflected in our contracting with the customer is to recognize the impacts that we’ve had and to price that in, and accommodate what is this current state of affairs in our contracting. One example of that is the DDG multi-year that we just saw awarded in the quarter - we feel like that’s been appropriately considered there, and we’ll continue to consider the state that the industry is in as we go forward. I wouldn’t point to necessarily any other macro or overarching contract structures or other terms that have changed. In terms of margins, we expect them to get better, frankly. My expectation is that this quarter would be the trough for the group. We expect to see improvement in the fourth quarter and we expect to see modest sequential incremental improvement over time in this group. That said, this is a challenging task. Shipbuilding is a challenging endeavor and so it’s not going to be straightforward, but our expectation, to be completely straightforward, is to have gradual increasing margins in this group over time as we march back toward that 8% to 9%-plus margin range.

Seth Seifman:

Hey, thanks very much, and good morning everyone. Maybe just a follow-up on that last topic. The Q3 margin in marine, similar to Q1. In Q1, we know there were some charges on Virginia, I believe Block 4 and Block 5. Were there significant negative EACs on Virginia in the third quarter that drove the margin that we ended up seeing, and I guess any--I know you talked about supply chain at Electric Boat, but any additional color about what assumptions have really changed there, and with the new assumptions, how that affects your ability to expand margins?

Seth Seifman:

Okay, okay, thanks. Then just for clarification, when you talked about at the overall company and despite some changes, the EPS outlook being unchanged, was that sort of--that was based on that new Gulfstream delivery outlook that you talked about with the 60-plus in Q4. If the G700 wasn’t to be certified this year, I assume that that’s kind of a different story, and what’s the last date roughly that you could see that certification happen and still deliver, I don’t know, double-digit G700s?

Operator:

We will take our next question from Doug Harned with Bernstein. Your line is open.

Jason Aiken:

Morning Doug.

Jason Aiken:

No, you point out the landscape appropriately, Doug. I think the way I think about that is prior to COVID, if you look at the couple quarters leading up to 2020, we were--as a team, we were right on the threshold of getting to two per year on the Virginia-class program, so it is imminently doable in terms of the industrial base and the team that’s working that program. Obviously COVID set us on our heels, as well as the generational changeover in shipbuilders in terms of retirements and new hires. I think the way to think about that now is there’s a number of factors that are going to help us get back to that point. One is, again, the maturing and tenuring of that new workforce to get the efficiency in the workforce, to get us back to where we were. The investments that the Navy is making in the industrial base, which are extremely helpful to stabilize that, and then other initiatives like what we call strategic sourcing, where we’re trying to take bottlenecks out of the shipyards and move subsystem construction and capacity into other facilities and other yards around the country, so that we can take some of the pressure off of the two main production and assembly yards. Those are the types of things that are going to drive us back toward two per year. I’d be remiss to try and give you a timeline on when it’s going to be to get there - this is long term, challenging stuff, but I think with us and our partner and the Navy all working in the same direction and in a very strong partnership, I feel optimistic about our path to get there.

Jason Aiken:

Yes, Columbia, as you know, is the Navy’s and the DoD’s number one priority, so that’s going to continue to be the case. I don’t see that being a trade-off necessarily to get to two per year for Virginia. Right now, we’re a little over 40% complete on the first boat, and we’re right on schedule for the targeted completion of that first boat. We’ve still got obviously about four years to go before delivery, so a lot of the way to go and a lot can happen between now and then, but all the resources that can be brought to bear are on that priority. I think the way to think about it is because of its priority position, it is essentially a headwind to those other factors that I gave you about what we’re trying to do on Virginia class, and we’ve got to be able to manage both of those within the yard and within the team arrangement and with our customer, but those are some of the puts and takes. Columbia will be the priority, and it’s our job to make Virginia happen notwithstanding that priority.

Cai von Rumohr:

Yes, thank you very much, and good quarter. Jason, you said you’re still looking for 12.7 in technologies, but when I look at all of your defense numbers, you really beat in revenues across the board, so maybe if you can--you know, if I look at where the model was before, it looks like we have a softer fourth quarter to get us home, but that doesn’t seem realistic given the spectacular revenues you had here in the third quarter, so maybe update us, if you could, on where you’re looking for revenues in each of the defense sectors for the year, and should we feel a bigger step-up next year?

Cai von Rumohr:

Very helpful, and then maybe a quick comment on Israel - Hamas has created additional demand, we have this $106 billion request from the President. Can you give us some general color in terms of areas where you think you could see incremental acceleration in demand?

Nicole Shelton:

Abbie, I think we have time for just one more question.

Ron Epstein:

Hey, good morning.

Ron Epstein:

Maybe just two. On land systems, given truly the surge in demand relative to where everybody thought it would be, from a capacity point of view, from a labor point of view, how are you guys set up there to handle it all?

Ron Epstein:

Then maybe just changing gears a bit, nobody really asked a heck of a lot about GDIT.

Ron Epstein:

Let’s talk about that, it’s a big piece of the company, right? You know a lot about it in particular. When we think about a path to double-digit margins, how do we get there, and then maybe from an operational point of view, why does not integrating mission and GDIT together kind of make sense, because there’s this bigger demand for software-driven solutions and software and hardware, and you’re seeing this synergy coming out particularly with the application of AI to legacy systems, and so on and so forth.

Nicole Shelton:

Great. Everyone, thank you for joining our call today. As a reminder, please refer to the General Dynamics website for the third quarter earnings release and highlights presentation. If you have additional questions, I can be reached at 703-876-3152.

Operator:

Good morning, and welcome to the General Dynamics Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead.

Phebe Novakovic:

Thank you, Howard. Good morning, everyone, and thanks for being with us. Before I discuss the quarter, I want to take a moment to acknowledge the loss of our long-time Board member and Lead Director, Jim Crown. Jim has a record of distinguished service on the GD Board for over 35 years. Throughout that time, Jim provided guidance to more than five different management teams. We mourn his passing, and our prayers are with his family. Earlier this morning, we reported earnings of $2.70 per diluted share on revenue of $10.2 billion, operating earnings of $962 million and net income of $744 million. We enjoyed revenue increases at each of our four business segments. Importantly, we had a 12% revenue increase across the Defense segments, with a more modest 4.6% increase at Aerospace. While revenue is up by $963 million or 10.5%, operating earnings are down $16 million and net earnings are down $22 million against last year’s second quarter. So, we had significant revenue increase but lower operating margin against the year-ago quarter. From a different perspective, we beat consensus by $0.14 per share on significantly higher revenue and modestly lower operating margin than anticipated by the sell side. The earnings beat was exclusively operations-driven. We enjoyed very nice sequential improvement. Revenue was up $271 million, and operating earnings are up $24 million on identical operating margins. On a year-to-date basis, revenue of $20 billion is up $1.45 billion or 7.8% over last year’s first half. Operating earnings of $1.9 billion are up less than 1% and net earnings are down $22 million, largely as a result of below-the-line items, including a higher provision for income taxes. As Jason will amplify, cash from operating activities and cash after capital expenditures in the quarter continued at a very good pace. For the first half, free cash flow was 123% of net income. Obviously, we are off to a very good start from a cash perspective. As is clear from the press release, we also had a powerful order quarter across the business, extending our already large backlog. Jason will provide full color around that item as well. In summary, this is from a revenue perspective, a very strong quarter and a good first half. Supply chain issues and past COVID labor issues have impacted operating margins, but there is relief in sight. We expect improvement as we progress. At this point, let me ask Jason to provide some detail on our strong order activity, growing backlog and very strong cash performance as well as commentary about the Technologies group in the quarter.

Phebe Novakovic:

Thanks, Jason. Now, let me continue to review the quarter in the context of the other business segments and provide color as appropriate and guidance for the full year. First, Aerospace. Aerospace had revenue of $1.95 billion and operating earnings of $236 million with a 12.1% operating margin. Revenue was $86 million more than last year’s second quarter on the strength of additional new aircraft deliveries, coupled with higher Gulfstream service center volume, partially offset by less volume in Jet Aviation’s completion center. The 24 deliveries are modestly fewer than planned and are a result of supply chain issues. On the good news side of the equation, supply chain conditions are improving. We still have a significant backlog of late parts, but processes are in place to catch up, deliveries are trending positive and we have greater transparency. In short, the suppliers are more predictable and are complying with catch-up schedules. This will help both revenue and margins as we do less out-of-station work. Operating earnings of $236 million are $2 million behind last year’s second quarter as a result of a 60 basis-point reduction in operating margin. Operating margin in the quarter was off largely as a result of the supply chain issues and higher R&D expense. The shortage of parts continues to cause significant out-of-station work, impacting efficiency. As mentioned earlier, we see improvement here, and that should help as we go through the second half. Sequentially, Aerospace had a 3.2% increase in revenue and a 3.1% increase in operating earnings on identical operating margins. Moving to the demand environment. Aerospace had a very good quarter with a book-to-bill of 1.3:1 in dollar terms and even higher for Gulfstream aircraft alone. Vibrant sales activity and strong pipeline replenishment were evident in the quarter. The U.S., particularly large corporations, led the way with the Mid East and Asia participating to a lesser degree. The 700 flight test and certification program continues to progress. The aircraft design, manufacturing and the overall program are very mature. However, we now target certification in the fourth quarter and see no major obstacles in our path. To give you a little more insight, we will complete our FAA Type Inspection Authorization in September. This is a flying we are required to do pursuant to FAA requirement and plan. When we are finished, the FAA will fly some confirmatory flight tests to verify portions of our results. That will be followed by a brief period of paper submission, followed by FAA review. As most of you know, we had planned to deliver considerable number of G700s in the third and fourth quarters. That has now flipped into the fourth quarter. We now expect to deliver 27 aircraft in the third quarter, with a rapid increase in the fourth quarter deliveries. In short, we are making good progress under difficult circumstances. However, we expect to deliver 5 to 6 fewer aircraft than the 145 we forecast at the beginning of the year. On the other hand, we expect more service revenue than initially anticipated. I’ll have more on this later in my remarks. Next, Combat Systems. Combat had revenue of $1.92 billion, up a stunning 15.5% over the year-ago quarter with growth in each of the business units. Earnings of $251 million are up 2.4%. Margins at 13% represent a 170 basis-point reduction over the year-ago quarter. So, we saw powerful revenue performance, coupled with more modest operating margin, in large part attributable to mix. The increase in revenue came from international vehicle programs at both Land Systems and European Land Systems. OTS has also enjoyed higher artillery program volume, including programs to expand production capacity for the U.S. government. These programs carry dilutive margins, but will result in more production at accretive margins over time. On a sequential basis, revenue is up $168 million or 9.6%, and earnings are up $6 million or 2.4% on a 100 basis-point reduction in margin for the reasons described. Year-to-date, revenue is up $339 million or 10.1%, and operating earnings are up $24 million or 5.1%. We also experienced very strong order performance. Orders in the quarter resulted in a 1.4:1 book-to-bill, evidencing strong demand for munitions and domestic combat vehicles. International programs also contributed to the strong book-to-bill. So, a very exciting first half for Combat. Turning to Marine Systems. Once again, our shipbuilding group is demonstrating impressive revenue growth. Marine Systems revenue of $3.1 billion is up $408 million, a robust 15.4% against the year-ago quarter. Columbia-class construction and engineering volume drove the growth, and to a lesser degree, TAO growth. Operating earnings are $235 million, up $24 million over the year-ago quarter, with a 30 basis-point decrement in operating margin. We anticipate that all of our yards are now well positioned for slow but steady incremental margin growth over time with fewer perturbations. On a sequential basis, revenue was up $67 million or 2.2%, and operating earnings are up $24 million or 11.4% on a 60 basis-point improvement in margin. For the first half, revenue was up $749 million or 14.1% and earnings are up $24 million or 5.7%. So, a good quarter and first half. So, let me move on to give you our updated forecast for the year. The figures I’m about to give you are all compared to our January forecast, which I won’t repeat. There is, however, a chart with respect to all of this, will be posted on our website, which should be helpful. In Aerospace, revenue will be down almost $200 million due to the 5 or 6 fewer aircraft deliveries, offset in part by stronger service activity. So look for revenue of $10.2 billion. We also expect margins to be down from a projected 14.6% to 14.1%. This implies operating earnings of $1.4 billion. With respect to the Defense businesses, Combat Systems will have revenue of $400 million to $500 million higher than previously projected due to new program starts and an increased threat environment. So look for the total revenue of around $7.75 billion. Margins will be down 50 basis points from 14.7% to 14.2% on mix. All-in, operating earnings will be up $25 million over the previous forecast. Marine Systems revenue should be up $900 million or $1 billion on acceleration of work throughout the yards. This is a leading indicator of improving efficiency. So, we will have annual revenue around $11.8 billion with an operating margin around 7.6% for the reasons I have previously described to you. Operating earnings for the year should be up $20 million over the previous forecast. Technologies revenue will be $100 million to $200 million better than previous guidance, but operating margin will be 9.4%, 10 basis points lower than previously forecast. So for the group, we expect annual revenue of about $12.7 billion, with operating earnings around $1.2 billion, steady with prior guidance. There is some opportunity here to capture 10 to 20 basis points of margin. On a company-wide basis, we see annual revenue higher than our initial guidance and an overall operating margin about 40 basis points lower. So look for total revenue to be around $42.45 billion, about $1.2 billion up from previous guidance. Operating earnings should be down modestly from prior guidance, but below-the-line items and lower share count will leave our EPS guidance the same. One final note before I conclude my comments. Howard has informed the Company that he intends to retire later this year. So, this will be his last earnings call. We are grateful for the excellent work that Howard has done since joining our team. I hope many of you will join me in congratulating Howard on a job well done. Nicole Shelton, whom some of you know already, will be taking over the mantle with the third quarter call. That concludes my remarks, and we will be happy to take your questions.

Operator:

[Operator Instructions] Your first question comes from the line of Seth Seifman from JP Morgan.

Phebe Novakovic:

Yes. So, I think you’ve put your finger on a nub of an issue. So, what we have given you with respect to Aerospace is Gulfstream’s plan, and the guidance that we gave you reflects their plan. Our January guidance, just for context, contemplated a very high Q4 delivery rate. That rate increased with the certification delay on the 700. 700 will be fully built and ready for delivery. Remember, too, our new planes are all built in purpose-built facilities. We’ve expanded our wing line. In short, we’ve facilitized for increased production. And finally, the fact that we have planes -- and you can see this from the increase in inventory that are awaiting parts, we now have a schedule, and all of that taken together allows us to -- will give us the ability to deliver. With respect to margin, we’ve got a number of higher-margin airplanes, as you would expect, delivering in the fourth quarter. So, that provides significant uplift. So, we kind of explained how we intend to get the revenue through the deliveries, and the margin is really a question of mix of higher deliveries of higher-margin -- greater deliveries of higher-margin airplanes.

Phebe Novakovic:

So, as I noted in my remarks, our supply chain is increasing its transparency, improving its processes. And we have reliable -- increasingly reliable schedules. That said, they’re more likely -- likely to anticipate more catch-up in the fourth quarter, which will allow us to complete a number of those airplanes, but they’re still impacting the third quarter deliveries.

Robert Stallard:

I can’t believe Howard’s retiring. He’s so young.

Robert Stallard:

Anyway, I’ve got a couple of questions for you, Phebe. First of all, on the revised Aerospace guidance, you mentioned that you’ve increased your expectations for services for the full year. I was wondering if you could square this with what we’ve been seeing in Biz Jet flight hours year-to-date, which have been down year-on-year. And then secondly, a great Combat Systems order quarter, but how do you expect these orders to flow through to revenue growth over the next couple of years? Thank you.

Operator:

Your next question comes from the line of David Strauss from Barclays.

Phebe Novakovic:

Well, we’ll get into next year, next year. But the deliveries are lower, are -- 5 to 6 deliveries that won’t deliver this year are not 700s. So, it’s other airplanes.

Phebe Novakovic:

Yes. So mix in this instance is comprised of two elements. One is the capacity expansion, which I noted carries lower margin. And then it’s really the transition from more mature programs to newer programs, and those margins will improve as we come down our learning curves.

Cai von Rumohr:

Terrific. Thanks so much. So -- and Howard, let me say, you’ve been terrific to work with and a great friend, and I wish you all the best.

Cai von Rumohr:

So, Phebe, how many 700s are you assuming to deliver in the fourth quarter? And what kind of margin for error is there in terms of timing in terms of...

Cai von Rumohr:

No, no, no. I just -- so -- and next -- I didn’t mean -- I meant how much time-wise, a cushion you have in the schedule if the certification slips.

Cai von Rumohr:

Yes. I mean, is your best guess that you certify in the middle of November, in middle of December, which could impact the amount number of planes you get out…

Cai von Rumohr:

Got it. And with all of these deliveries in the fourth quarter, maybe, Jason, can you give us some color in terms of the cash flow profile? I mean, do we have just a momentous fourth quarter cash? And is there any upside to the 105%?

Operator:

Your next question comes from the line of Myles Walton from Wolfe Research.

Phebe Novakovic:

Yes. So, the demand in the second quarter was at the same level as the demand in the first quarter. It felt very, very similar. As you quite rightly note, we had a three-week hiatus coincident with the banking -- many banking crisis. But the demand levels have remained about the same. And as we enter Q3, we have a very strong pipeline. And so far, activity is quite good in Q3. We had six defaults in the quarter, but nothing that is notable to us. And the backlog is holding up very, very well.

Jason Gursky:

Congrats, Howard. I look forward to getting some postcards from our in distant places. Phebe, just sticking with Gulfstream for one last question, hopefully here. On the pipeline and kind of what you see from a bottom-up perspective, can you give us a little flavor from a geographic perspective and customer type? How is high net worth doing versus corporate? And are we beginning to see some green shoots in geographies outside the United States?

Jason Gursky:

Okay, great. And then, Jason, over to you on Technologies. It sounds like you’ve got a robust pipeline of opportunities in front of you. Can you talk a little bit about the mix of that? We had some margin degradation here in the quarter. I’m just kind of curious, as you look out at that pipeline, do you see anything that would suggest we’re going to see a departure in any -- either higher or lower from a margin perspective as you bid on this work and bring it in?

Operator:

Your next question comes from the line of Ron Epstein from Bank of America.

Jason Aiken:

Ron, it’s always tough in this business to point to a singular event or a contract that is going to drive the overall business. As you know, it’s a wide portfolio of literally thousands of contracts. I think -- the thing I would tell you is, when you look at Mission Systems on the one hand, they are really seeing strong support in their -- what I’d call, their Navy platform support businesses, whether it’s the strategic side or the mission computing side. They’re also seeing really great support in their cyber portfolio. So, those are two areas I would expect to see continued growth in particular out of that business. When you look at GDIT, they’re seeing strength in all three of their customer segments

Phebe Novakovic:

We’re thinking in the higher teens when we get on a steady state with upside potential.

Louie DiPalma:

Howard, thank you for your deep aerospace-defense expertise in your current position and your former position on the sell side, your high standards raised the level of those around you. For Jason, for the Army’s CHS-6 $8 billion recompete that should be announced, I think, very soon. GD Mission Solutions is teaming with GDIT. Do you feel these synergistic joint bids between IT and Mission will become more common and a significant strategic advantage for you? And could it help return the overall Technologies segment to mid-single-digit growth over the long term?

Operator:

And your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Phebe Novakovic:

So, Technologies and Combat are simply a question of mix. And I suspect Combat will quickly return to its normal operating leverage. The Marine Group has significant supply chain challenges that have impacted for the Virginia-class in particular. That’s going to take some time to resolve. We’ll talk about that in a little bit more detail. So, as I noted, we expect slow quarter-over-quarter margin growth in the Marine Group, perhaps an occasional perturbation by quarter, but slow and steady improvement over time.

Ken Herbert:

Congratulations, Howard. Phebe, I just wanted to dig into Marine again a little deeper. The full year guide implies a pretty significant deceleration in growth into the back half of the year. Two questions, really. First, as we go back six months, you were talking about a much more conservative outlook for the top line in Marine. And clearly, maybe any comments on really what’s changed because the first half has really been much stronger than expected. But then also, as you think about the remainder of the year, what will drive the significant step down and how much conservatism does the Marine outlook reflect in terms of the growth?

Operator:

Your next question comes from the line of Peter Arment from Baird.

Phebe Novakovic:

The supply chain in the Combat group has been less of an issue. I suspect that the -- at least for the foreseeable future, the munitions portion of the business will remain about that, same as we see uplift in all of our all three businesses. We’ll see OTS at about that same level. We’ve already increased munitions capacity and working with the federal government and the Army and OSD in particular, we have a very detailed plan to further increase capacity, which will allow us then to increase production very rapidly and move to the left, the munition availability to meet the United States’ needs and, frankly, external needs as well.

Operator:

And our final question for today comes from the line of George Shapiro from Shapiro Research.

Howard Rubel:

George, it’s over 40, just counting.

Phebe Novakovic:

So I think you know we have very strong terms and conditions that you forfeit some of your value in the airplane when you cancel. I don’t actually know the context of the default, that won’t -- nothing that was of note or interest, otherwise, I’d know it.

Jason Aiken:

Actually, George, we did receive additional payments on schedule as per the plan that was set forth several years ago. And I’m actually happy to tell you that at this point -- and maybe this terminates this line of dialogue for the foreseeable future. The arrears that you all may remember from many years ago on that Canadian international program has now effectively been paid down, and we are down to what I would call a normal run rate of operating working capital on that program. So I’m pleased to report that we’ve passed through that phase. In terms of what we expect to receive for the balance of the year, there are some more progress payments to come in, but I don’t have that quantified off the top of my head.

Howard Rubel:

We’ll follow up on that.

Howard Rubel:

Operator, that now ends the call. And for those that are interested in connecting later, we’ll have follow-up questions. Please don’t hesitate to call me. Thank you for joining our call today. As a reminder, please refer to the General Dynamics website for the second quarter earnings release and highlights presentation. And as I said, if you have any additional questions, I can be reached at 703-876-3117. Thank you.

Operator:

Good morning, and welcome to the General Dynamics First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference call over to Howard Rubel, Vice President of Investor Relations. Please go ahead.

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 $2.64 per diluted share on revenue of $9.9 billion, operating earnings of $938 million and net earnings of $730 million. Revenue is up $489 million or 5.2% against the first quarter last year. Operating earnings are up $30 million and net earnings are flat against the year ago quarter. This increase in operating earnings was offset by a $31 million increase in the tax provision. Recall that the first quarter 2022 tax provision was only 14%. Nevertheless, earnings per share are up $0.03 as a result of the stronger operating earnings and a lower share count. The operating margin for the entire company was 9.5%, 20 basis points lower than the year ago quarter. This reflected lower operating margins in Aerospace and Marine, which I will address in some detail later in these remarks. Revenue was $489 million better than first quarter '22. All of the defense units were up and Aerospace down slightly, less than 1% on fewer aircraft deliveries. We beat consensus by $0.05 per share. We have roughly $550 million more in revenue than anticipated by the sell side and lower-than-anticipated margins, leading to operating earnings basically consistent with expectations. The earnings per share beat was largely attributable to below the line items. As Jason will amplify, cash from operating activities and cash after CapEx was very strong. This is particularly impressive following a very strong cash performance in '22 and not at all typical for us in the first quarter. Obviously, we were off to a very good start from a cash perspective. This is an important respects, a strong quarter, a good foundation for the year, subject to some supply chain issues that I will try to eliminate as we discuss the business segments. At this point, let me ask Jason to provide detail on our order activity, solid backlog and very strong cash performance as well as commentary about the Technologies group in the quarter.

Phebe Novakovic:

Thanks, Jason. Now I may review the quarter in the context of the other business segments and provide detailed color as appropriate. First, Aerospace. Aerospace held its own in a very difficult operating environment. It had revenue of $1.9 billion and operating earnings of $229 million with a 12.1% operating margin. Revenue was $11 million less than last year's first quarter despite the delivery of 4 fewer aircraft. The fewer aircraft deliveries were almost completely offset by higher ball stream services, debt aviation volume and special missions work at Gulfstream. The 21 deliveries in the quarter are 3 fewer than planned, two 280s did not deliver because of late engine deliveries. The other plan, a large cabin for an international customer didn't deliver because of simple bureaucratic registration delays in the owner's country. Importantly, this is the first quarter in which we have missed an airplane delivery as a result of supply chain issues. Up until now, we have managed to work around late to schedule parts delivery. Operating earnings of $229 million or $14 million behind last year's first quarter as a result of a 70 basis point degradation in operating margin. Operating margin in the quarter was under pressure as a result of fewer new airplane deliveries, a less attractive mix, severe supply chain issues, some modest cost increases from suppliers and the prebuild of G700. Let's take a look at some of these elements in greater detail. The shortage of parts to schedule from the supply chain, especially from Honeywell has created significant out-of-station work, which is inherently less efficient. We have a young, well trained and capable workforce. They have, however, never previously been exposed out of station work. They are doing well. I am pleased to report, but it had an impact. The other impact of latest scheduled parts deliveries, apart from cost growth is that we cannot increase our build rate until the supply of parts is more predictable. The good news is that there is light at the end of the tunnel. We see the vast majority of this problem resolving early in the third quarter, but for 2 large suppliers who will take a little longer to resolve. As most of you know, we plan to deliver a considerable number of G700s in the third and fourth quarters. To do that, we must build them now and incur some period costs without the related revenue. This has impacted the first quarter and will impact the second quarter, but relief is in sight as deliveries commence. Aerospace had a decent quarter from an order perspective with a book-to-bill of 0.9:1 in dollar terms and 1:1 in units. The quarter was looking quite good until the 2 regional bank failures in early March. This created a pause in the market for about 3 weeks. I am pleased to report that normal activity has resumed. Strong sales activity and customer interest is evident in this quarter. The U.S. has been strong and the Middle East as well. China remains slow. The G700 flight test and certification program continues to progress well. The aircraft design, manufacture and the overall program are very mature. We continue to target certification of the G700 for late summer this year. Gulfstream remains committed to a safe and comprehensive certification test program. Production of customer G700 is well underway, and we are preparing for entry into service. We will deliver a mature, high-quality aircraft. Looking forward to the next quarter, we expect to deliver 26 aircrafts with rapid increases in the third and fourth quarter deliveries, as we have previously indicated. In short, the Aerospace team did a good job under difficult circumstances. Next, Combat Systems. Combat had revenue of $1.76 billion, up 4.8% over the year ago quarter. Earnings of $245 million are up 7.9% and margins at 14% represent a 40 basis point improvement over the year ago quarter. So we saw a strong operating performance coupled with a nice revenue uptick. At Land Systems, Increased revenue came from the MPF ramp-up, Stryker SHORAD and new international vehicle programs for Poland and Australia. At European Land Systems, we had higher Parana volume and OTS enjoyed higher artillery program volume. So we saw increased revenue performance at each of the businesses. Here's a little additional color on Combat Systems revenue results. Foreign exchange fluctuations negatively impacted Combats revenue in the quarter due to the strength of the dollar versus the Canadian dollar, Euro and the British pound. But for the FX headwind, Combat Systems revenue growth would have been up 7.1% over the last year rather than the 4.8% we have just reported. We also experienced very strong order performance at Combat. Orders in the quarter are at their highest level in more than 8 years, evidencing the strong demand for munitions and international combat vehicles. There is clear upward pressure on our forecast for Combat Systems revenue and earnings in the year. Turning to Marine Systems. Once again, our shipbuilding units are demonstrating impressive revenue growth. As an aside, let me repeat a little recent history. The first quarter of 2020 was up 9.1% against the first quarter of '19. The first quarter of '21 was up 10.6% over '20 and first quarter 2022 was up 6.8% over '21. Finally, this quarter revenue of almost $3 billion is up 12.9% over 2022. This is an impressive growth ramp by any standard. This quarter's growth was led by Columbia class construction and engineering, DDG-51 construction and some T-AO volume. Operating earnings are $211 million in the quarter, exactly the same as a year ago, but with a 90 basis point decrement in operating margin. The primary driver of lower margins during the quarter was a charge on the Virginia program to reflect cost pressure within our supply chain and efficiency impacts at electric boat as a result of late material deliveries. This was partially offset by Colombia margin improvement. Other modest margin impacts included an earnings decline at Bath as a result of a onetime pickup in the year ago quarter and cost inflation reimbursement that does not carry profits. Overall, earnings are what we expected, but revenue was higher, resulting in lower margins. We anticipate that this will improve as we progress through the year. As you know, we never update guidance at this time of the year. I would say, however, that our quarterly progression differs from prior years and that the second quarter will be our lowest quarter because of mix and volume across the business. Nonetheless, we look forward to very strong third and fourth quarters. We will give you a comprehensive update at the end of next quarter as is our custom. This concludes my remarks with respect to what was a challenging but in many respects, rewarding quarter.

Operator:

[Operator Instructions]. Your first question comes from the line of Seth Seifman from JPMorgan.

Phebe Novakovic:

So we think that we plan to have Q1 as our lowest margin quarter. And we'll continue to work to that. Virginia is -- it will stabilize once we get the schedule and supply chain issues resolved. But at this point, it's some comment on electric boat to continue to do better to offset those costs. So with respect to revenue, there's clearly some upside pressure there, but we're going to hold any other additional comment for the moment. So let's go to Colombia. And I think just the Navy has clearly articulated it -- firmly articulated that we are ahead of the contract schedule. The contract schedule is what matters. So let's put a little context on this. We are on the Colombia. We are 16 years into the 20-year lead ship schedule. I think within that context, it's indicative of the actions we have taken heretofore and those that we will continue to take to keep this program on schedule.

Robert Stallard:

Phebe, I may be wrong, but it sounds like these supply chain issues in Q1 got worse. So I was wondering if you could comment on that. And also, what sort of mitigation plans you're putting in place to correct these problems?

Robert Stallard:

Well, it seems like it's Aerospace and the Virginia-class submarine and marine.

Operator:

Your next question comes from the line of Doug Harned from Bernstein.

Phebe Novakovic:

We have been working very closely with DoD and the Army to ensure that we increase production and move...

Phebe Novakovic:

Hello, can you hear us?

Operator:

He appears to have lost audio.

Phebe Novakovic:

Let me answer, Doug. Can the rest of the call here us?

Phebe Novakovic:

Okay. So let me answer Doug's question. We've been working very closely with DoD and the Army to increase production and throughput. And we've done that in a couple of ways, upgrading existing facilities increasing the number of shifts and building new facilities with more modern equipment. So to, again, accelerate production, we have already done so and are quite confident in our ability to do even more. So we are -- we've been receiving adequate and -- completely adequate funding to execute all of this. And we are quite confident that we will move throughput much quicker and will expedite the delivery of this critical capability to the Army.

Peter Arment:

Phebe, thanks for the color on Gulfstream. Just on the overall demand kind of restrengthening in the quarter post the banks in the Middle East and certainly the U.S. Are you still seeing kind of broad interest across all the models? I know you've mentioned G650 in particular the last like 2 years has been very strong.

Peter Arment:

Yes, sure. No, I appreciate that. Just staying within Gulfstream. Just I know that you're not going to update kind of guidance, but I -- the deliveries that you missed this quarter, are they expected to recover in the second quarter? How are we thinking about that? Or is this all kind of second half related?

Operator:

Your next question comes from the line of Myles Walton from Wolfe Research.

Phebe Novakovic:

So implicit in your question is the fact that Colombia enjoys a higher national rating in terms of urgency than Virginia. We had fully contemplated that with the U.S. Navy when we negotiated the most recent block of Virginia that was in concert timing wise with the Columbia negotiation. So we're working with the Navy to ensure that the language that we had incorporated into the Virginia contract to accommodate any such impacts on Virginia from a Columbia prioritization could be addressed. And the Navy has been working very closely with us. So we were mindful of that and have been for some time.

Phebe Novakovic:

I'm not going to speculate on how this will be addressed ultimately with our customer. But, this is more of a future issue rather than in the moment issue. That was not the primary driver of the quarter.

George Shapiro:

If you hadn't had the loss of 3 weeks from the bank failures, I assume then the book-to-bill would have been above 1 in the first quarter. And is that likely to continue then in the second quarter where you're saying we are seeing significant strength now?

George Shapiro:

Okay. So the delivery expectations for next year would still be the same as what you had laid out before?

Operator:

Your next question comes from the line of Louie DiPalma from William Blair.

Phebe Novakovic:

Yes.

Jason Aiken:

It absolutely is. We saw a good trajectory and gaining some traction in the quarter. That's part of the reason why volume was up nicely in the quarter, and they seem to be on a good path to overcoming that bottleneck in their system. So gives us confidence for the opportunities we have in the second half of the year.

Kristine Liwag:

Phebe, per new plans unveiled last month under the August pack, it looks like Australia could buy up to 5 Virginia-class submarines potentially in the early 2030s. So with the backlog now of 17 Virginia is delivering through 2032, how are you thinking about this opportunity? And what's the production capacity required to meet this demand?

Kristine Liwag:

And if I could sneak another one, maybe switching to combat. Look, it seems like the Army is pushing significantly to ramp artillery production, particularly the 155-millimeter shells and planning to double monthly production to about 24 per month by year-end. And then increasing production 6x over the next 5 years. How are you thinking about this opportunity? And again, do you see -- what do you need to do in order to meet this demand? Should it materialize? And are you seeing the orders come through?

Operator:

Your next question comes from the line of Matt Akers from Wells Fargo.

Phebe Novakovic:

Well, I think during the height of COVID, there was so much disruption at all labor markets that we may have seen some issue then. But frankly, it didn't impact us. We're not seeing anything at the moment that is impacting our ability to fly, our customers' ability to fly or frankly, flying hours.

David Strauss:

The G700 is in there. Is software validation, the pacing item still? And if so, how far are the way through that are you?

David Strauss:

Okay. A quick follow-up. Jason, you mentioned 8 resumptions of the AJAX payments. Can you update us on kind of the schedule for the liquidation there? How you expect that to play out and also on the Canada program?

Operator:

Your next question comes from the line of Ken Herbert from RBC Capital Markets.

Phebe Novakovic:

I think you may need to think about the second quarter being our lowest quarter and then with a very steep and executable ramp-up in third -- third and fourth quarter, I tried to give you guys an awful lot of color in the remarks about the puts and takes on all the margins with respect to Aerospace. But we -- we'll get through the second quarter. And frankly, these first 2 quarters are aberrational in terms of Gulfstream margins, and then we ought to see nice pickup in third and fourth quarter.

Phebe Novakovic:

So we've been doing that for some time. As you all know, the supply chain on the Aerospace side has been taxed for quite a bit of time. So they were not taking any new actions that we haven't already executed, and we're just ramping up some of those actions as we -- in the first quarter and then as we go into the second. But we have, as I said earlier, a very clear line of sight into the third and fourth quarters and the majority of these suppliers fully anticipate getting better. And we'll work with the remaining ones to ensure they've got the resources to execute the contract.

Ronald Epstein:

Maybe just a quick question, maybe 2. What are the synergies so far from merging the 2 businesses in kind of mission Tech? How has that gone?

Ronald Epstein:

Got it. Got it. And then maybe just one quick follow-on. How much of the free cash flow in the quarter can be attributed to AJAX?

Jason Aiken:

Yes. So I want to make sure I understood your question correctly. It was a roughly GBP 480 million payment that was received. And to Phebe's point, that the net impact of that after paying out supply chain elements on the program, all of that's factored into the outlook that we have for the year. So that 105-ish percent conversion rate for the year that we talked about is now intact and all that much more certain based on the activity in the first quarter.

Peter Skibitski:

The issues on the Virginia supply chain, it seems like it's been a little bit of a black box. So just -- I was wondering if I can get more detail. Does it relate to multiple suppliers? And can you give us a sense of what parts are involved? And then are we feeling good that as the mix shifts to the Block 5 that margins will improve there?

Peter Skibitski:

That's fair. And kind of one follow-up Phebe. How is the -- how are you judging the pace of hiring and the labor risk kind of through the midterm at EB, just given the kind of the huge increases in volume that are required there?

Operator:

Your next question comes from the line of Robert Spingarn from Melius Research.

Phebe Novakovic:

So when you look at historically Combat orders, they tend to be pretty lumpy. I think the important way to think about it is the underlying credit could exist, let's say, it is an increasingly insecure and threat-driven environment, and that will drive additional orders, when those execute, will be a little bit lumpy, but we have -- we expect to see a continued demand, including on the munition side. But we have planned in -- for our plan this year, we've executed, we've anticipated margins that are pretty consistent with what they've been doing. It's just executing, operating, ensuring that we've got operating leverage, including on these new facilities that we're putting in place. But recall, this is a group that has extremely strong operating leverage and based on their efficiency and blocking and tackling on the shop floor. So we'll expect to see margins continue.

Operator:

Certainly, your final question comes from the line of Cai von Rumohr from TD Cowen.

Phebe Novakovic:

I tried to be pretty clear that we do not anticipate any -- at Gulfstream, the margin performance in these 2 first quarters replicating in third and fourth quarter. In fact, we see a fairly strong ramp to increase margins. These margins are aberrational and we do expect some additional perturbations on the supply chain and out of station work Gulfstream as well as mix issues. With respect to Marine systems, it's material timing between first and second quarters. And in technologies, it's transitioned from mature programs that are winding down and being replaced by some follow-on new starts. So in each one of these groups, we are seeing a convergence of in the quarter, particularly lower margins and lower earnings and sales than we typically see. We usually have a steady build through the year. This is rather, as I said, aberrational, but we'll get through this. And importantly, we don't see these issues leading into third and fourth quarter, we anticipate a very strong third and fourth quarter, and that is unchanged.

Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good morning, and welcome to the General Dynamics Q4 2022 Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the call over to Howard Rubel, Vice President of Investor Relations. Please go ahead.

Phebe Novakovic:

Thank you, Howard. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.58 per diluted share on revenue of $10,850 million, operating earnings of $1,230 million and net earnings of $992 million. Revenue is up $559 million or 5.4% against the fourth quarter last year. Operating earnings are up $41 million or 3.5%. Net earnings are up $40 million or 4.2% and earnings per share are up $0.19 to 5.6%. So, the quarter-over-quarter results compare very favorably and are in most respects consistent with our forecast and sell side consensus. The sequential results are even better. Here, we beat last quarter's revenue by $876 million or 8.8%, operating earnings by $129 million or 11.7%. Net earnings by $90 million or 10% and EPS by $0.32, a 9.8% improvement. As promised that it would be, the final quarter is our strongest for the year in both revenue and earnings. In fact, earnings per share, operating margins, net earnings and return on sales improved quarter over the previous quarter throughout the year. It was a nice steady progression of sequential improvement. For the full year, we had revenue of $39.4 billion, up 2.4%, net earnings of $3.4 billion, up 4.1% and earnings per fully diluted share of $12.19, up $0.64, a 5.5% increase. So overall, the year was also reasonably consistent with our forecast and modestly better than the sell side. It was a very solid year in a difficult environment. Let me ask Jason to provide detail on our overall order activity, very strong backlog and cash performance in the quarter and the year.

Phebe Novakovic:

Thanks, Jason. Now let me review the quarter in the context of the business segment, paying modest attention to the quarter-over-quarter sequential and annual comparisons that are rather straightforward and set out in the press release. First, Aerospace. The story in aerospace is found in the sequential and year-over-year improvement as well as a continuing strong demand for Gulfstream aircraft, along with the overall strength of Gulfstream service business and the continuing improvement of Jet Aviation. In the quarter, Aerospace had revenue of $2.5 billion and earnings of $337 million. This represents a 4.4% increase in revenue and an 8% increase in earnings on a sequential basis. For the full year, revenue of $8.57 billion is up $432 million from the prior year, even though we delivered only one more aircraft than we did in 2021. The increase in both revenue and earnings was driven by higher service revenue at both Gulfstream and Jet Aviation. Earnings were also helped by somewhat higher margins on delivered aircraft. Fourth quarter revenue and earnings comparison on a quarter-over-quarter basis aren’t as attractive because three aircraft we plan to deliver in the fourth quarter slipped into the first quarter this year. Gulfstream had 38 deliveries in the quarter when we had planned to deliver 41. As a result, Aerospace revenue and earnings are somewhat less than anticipated by the sell side for the quarter and for the year, but generally consistent with our forecast. I should also point out that Aerospace margins improved consistently quarter-over-quarter throughout the year. Aerospace demand remained strong. The book-to-bill was 1.2 times in the quarter and 1.4 times at Gulfstream alone. Orders in the quarter were $3 billion, up from $2.7 billion in the third quarter. The aerospace book-to-bill for the year was 1.5 times. To give you a little more color, Gulfstream received 430 new aircraft orders over the past two years, over 400 net orders after default and backlog adjustments as a result of the settlement of a case in arbitration. All said and done, aerospace backlog is up 20% in 2022 and a staggering 68% over the past few years. As we go into the new year, the sales pipeline remains strong and sales activity is at a solid pace. At midyear 2022, we told you to expect revenue of about $8.6 billion and an operating margin of around 12.9%. We actually finished the year with a 13.2% operating margin. In short, we were spot on with respect to revenue and 30 basis points better on operating margin, which led to a $25 million more than forecast in operating earnings. With respect to G700 development, we estimate it will certify this upcoming summer but much depends on available FFA resources. So far, the effort has been very collaborative and is proceeding according to plan with no surprises. In summary, Aerospace exhibited very strong performance in the quarter and for the year. We look forward to a significant increase in deliveries in 2023 at Gulfstream and improved operating margin, but more about that as we get into guidance. We also expect continued growth and margin improvement at Jet. Next, Combat Systems. After a relatively slow start to the year, Combat Systems finished with a powerful fourth quarter. In fact, the fourth quarter of 2022 proved the highest revenue and earnings for Combat Systems in over 10 years. Revenue in the quarter was $2.18 billion, and it's up 15.5% from the year ago quarter. Operating earnings of $332 million are up 18.1% on a 30 basis point increase in operating margin. OTS alone captured more than one-third of its revenue and earnings in the fourth quarter. The revenue growth was largely driven by Mobile Protected Firepower, Abrams for Poland and the large international order in Canada. OTS enjoyed higher revenue across all lines of business with particular strength in artillery rounds. Not surprising, the sequential comparisons are even better. Revenue is up $391 million or 21.9% and earnings are up $61 million or 22.5% on the strength of a 15.2% operating margin. From an orders perspective, Combat had a very good year in 2022 with a book-to-bill of 1.1 times, driven by MPS, very strong international demand for the Abrams main battle tank as well as growing demand on the munition side of the business. By the way, Combat's annual performance is fairly consistent with the forecast we provided you earlier in the year. Revenue and operating earnings are up somewhat and operating margin is a little lower. In short, this group had a wonderful quarter, continued its history of strong margin performance and had good order activity and a strong pipeline of opportunity as we go forward. Marine Systems. The Marine Systems growth story continues. Fourth quarter revenue of $2,970 billion is up 3.4% over the year ago quarter. Revenue was also up 7.2% sequentially and 4.9% for the full year. Operating earnings are up about 1% over the year ago, of less than 0.5% sequentially and up 2.6% for the full year. Once again, this is the highest full year of revenue and earnings ever for the Marine group. A little perspective may be of assistance here. Marine Systems has grown revenue from $8 billion in 2017 to $11 billion in 2022, this is a 5.3% compound annual growth rate with an average increase of $600 million per year. Earnings have grown from $685 million in 2017 to $900 million in 2022, a 5.5% compound annual growth rate. In addition, Marine had strong orders in the quarter, generating a 2.2 times book-to-bill, including the receipt of a $5.1 billion contract modification to Colombia. Our forecast to you in July of last year anticipated revenue of about $10.8 billion, operating margin of 8.3% and operating earnings of $896 million. We came in above that for revenue, a little lower on the predicted operating margin and right on the forecasted earnings. So, Jason is going to give you a little color on the Technologies Group, his new responsibility, provide a bit of perspective on balance sheet, other income and expense items, and I will close with our outlook for 2023.

Phebe Novakovic:

Thanks, Jason. So, let me provide our operating forecast for 2023 with some color around our outlook for each of the business groups and then a company-wide roll-up. In 2023, we expect Aerospace revenue to be around $10.4 billion, up between $1.8 billion and $1.9 billion. Margin is expected to be up 140 basis points to 14.6%. Gulfstream deliveries will be around 145, up a little over 20%. This is all consistent with the multiyear forecast we gave you in January of 2021 and at the end of Q2. In Combat Systems, at this time last year, we had anticipated revenue to be down slightly in 2023, following a modest decline in 2022 with a return to low single digit growth later in our planning horizon. Since then, the threat environment has clearly changed. Continuing the better-than-expected performance in 2022, we expect the group to hold steady again in '23 with revenue of $7.3 billion and operating margin once again towards the high end of their reliable 14% to 15% range at 14.7%. The improved outlook is a result of strong order activity we saw in 2022, including the MPF Award and growing international demand, particularly the tank order in Poland, which came in sooner than had been anticipated. We're seeing demand signals resulting from the war in Ukraine, but we've only just begun to see that manifest in our backlog at this point. To the extent those demand signals start to convert into order activity, we could see some opportunity for additional revenue in the latter part of the year, particularly in our armaments and munition business. As I noted earlier, Marine Group has been on a remarkable growth journey, averaging $600 million a year. Our outlook of $400 million to $500 million per year over time remains unchanged. However, the supply chain constraints of the Virginia program will drive some annual variability this year. As a result, the group's revenue for 2023 will remain essentially flat at $10.9 billion as well their operating margin rate at 8.1%. We anticipate a return to growth in 2024 and 2025 at around $600 million a year. We expect revenue in the range of $12.5 billion to $12.6 billion in the Technologies Group. To give you a little color behind this outlook, GDIT will continue to grow at a low single digit pace consistent with the past two years. Mission Systems, however, will be challenged from a revenue perspective, particularly in the first half of the year as they work through the lingering supply chain issues they've been dealing with for the past 18 months. As a result, their revenue will be down slightly compared with 2022. The resulting shift in the group's revenue mix, with stronger service activity but lower hardware volume was yield in operating margin in the 9.5% range, sustaining their industry leading performance, albeit slightly lower than 2022. So, for 2023, company-wide, we expect to see approximately $41.2 billion to $41.3 billion of revenue, an increase of almost 5%. We anticipate operating margin of 10.9%, up 20 basis points from 2022. This all goes up to a forecast range of $12.60 to $12.65 per fully diluted share. On a quarterly basis, we expect a pattern similar to what we've seen in recent years with sequential increases in revenue and operating margins throughout the year. As always, this forecast is purely from operations. It assumes we buy only enough shares to hold the share count steady to avoid dilution from option exercises. Beating our EPS guidance must come from outperforming the operating plan and the effective deployment of capital. Let me close with an observation. Our forecast comes from our operating plan. It is conservative as it must be in this environment of unpredictable financing of the government. However, the threat environment suggests increases in defense spending. In short, I see more opportunity than risk in our forecast. With that, I'll turn it over to Howard to start the Q&A.

Operator:

[Operator Instructions]. Our first question comes from Myles Walton with Wolf Research.

Jason Aiken:

Myles, I think with respect to your first question, looking at the new responsibility and that opportunity. First and foremost, it's important to remember that these businesses are run by two excellent and accomplished presidents. And frankly, I have the highest level of confidence in them and their teams. When I look back over recent history in this role, Chris Marzilli, really helped steer this business through a period of remarkable change and transformation, not to mention COVID. And I don't think as I look ahead that this market is going to become any less dynamic. So I think the focus really is on continuing to make sure that the businesses continue to focus on their bottom line, earnings and cash as always but frankly, also finding our way to a sustainable top line growth trajectory, and that will really be the emphasis. In terms of balancing the two, I'm humbled and honored to have this dual responsibility, fortunately entering my tenth year in the role as CFO. So I feel confident about the ability to handle both at the same time.

Operator:

Our next question comes from David Strauss with Barclays.

Phebe Novakovic:

So let me go in order. We had, as I noted, three airplanes have slipped into this quarter. One was simply an issue that we just couldn't get it completed in time and two of them were customer preferences for international deliveries. With respect to the production next year, we are confident that we can make that and our trajectory going forward past this year remains the same. So directionally and we're right on track, and we're comfortable we get there.

Seth Seifman:

I wonder if you could talk a little bit more about Marine and the supply chain challenges at Electric Boat. And specifically, what we should be looking for in terms of any particular metrics, whether it's hiring or deliveries or certain milestones to get a sense that things are firming there and kind of also what the risk is of further deterioration in schedules.

Seth Seifman:

And maybe just to follow up specifically on that. Most of the discussion -- our discussion today and then the trade press has been about Virginia. How's the Columbia schedule holding up?

Operator:

Our next question comes from Peter Arment with Baird.

Phebe Novakovic:

Not with respect to ACAS. And I think we have, as I've said on earlier calls and to many of you in person, we'll just take our lead from our Navy customer on how they want us to respond to all of this. So this is really an intergovernmental series of discussions and agreements and we will, of course, support whatever the Navy plan is going forward.

Jason Aiken:

So I think with respect to Mission Systems, we have to really focus on what it is we're talking about here, which is really chips and microelectronics, right? So unlike some of the other parts of the business, which are heavily labor and availability of workforce driven. So this is really, obviously, for Mission Systems an issue that's impacting industries much broader than just us or us in the Aerospace and Defense side. And I think when these issues first surfaced, Mission Systems did a really nice job of developing workarounds, right? Finding alternate sourcing, certifying substitute parts and so on. So, all of those actions were predicated on the expectation that the supply chain would kind of come through this and get over the hump within, call it, a year plus or minus. But frankly, as we've continued to work our way through it, it's become clear that we're not always at the top of the priority list for some of these sources of supply. So when they saw the bottlenecks we were dealing with were going to persist somewhat longer than expected, the team really adapted to this new normal with a whole new set of tactics. That includes procuring key components with longer lead times anywhere from 12 to 18 or even 24 months, as well as working with key suppliers to improve the forecasting that we were giving them and the reliability of demand so that they could have confidence in where we were going and allocate additional capacity to us and our priorities. So, all of that is in place and underway. As you might imagine, some of those things take a little longer to yield results. So that's why we're expecting that to kind of come through in the second half of this year. But we do feel like they've got a good plan in place, they've taken great corrective actions, and we just need to see that all sort of roll out and to get to the other side of this, but it's likely to be toward the second half back into this year before that all takes hold.

Ron Epstein:

You've talked about this a little bit in your prepared remarks about the impact that the Ukraine could potentially have on Land Systems. Maybe from a bigger strategic point of view, it seems like in the past, the logic had always been the Army was a bill payer for the Navy and the Air Force. Is that -- are we learning a different lesson now out of the Ukraine and what kind of implications potentially does that have for your Land Systems business?

Operator:

Our next question comes from Jason Gursky with Citi.

Jason Aiken:

So I think the way to think about this group between GDIT and Mission Systems, technologies taken together, is that we currently are and have been for quite some time, in a model and of the capability set that a lot of the peer companies out there are trying to get to. That is a well balanced and comprehensive set of offerings between the traditional federal IT services offerings as well as cyber, hardware and other elements of that portfolio. And so I don't think we have to necessarily play catch up as much in that game. I think there's always opportunities to refine and enhance the portfolio. As I mentioned earlier, this is not going to stop being a dynamic environment. We are, as always, have continued to invest internally in new technology capabilities, that will continue to be the case. As you know, I'll say what I know Phebe would say if she were talking right now. We're not going to speculate about M&A. There's always the possibility for bolt-on acquisitions. I would note, by the way, since you brought up the point that since we acquired CSRA in 2018 and essentially transformed the face of this group with the size and capability of our federal IT services business. There have been -- if I look at GDIT's competitor group, call it, the top five or six main peers, there have been some 40 to 45 acquisitions in that space that those companies have taken on and we have not done any. We've done a couple of small bolt-ons in Mission Systems during that time, but nothing in GDIT space. And so it's interesting to see how the others are behaving in the aftermath of that activity and a lot of the consolidation that's happened in the industry. But I think we put ourselves in very good stead and we see a lot of a lot of others following suit. So I don't think there's a massive sea change in what we have planned ahead, but we'll continue to focus on maintaining our leading position in the market.

Cai von Rumohr:

So you margin was up a little bit sequentially at Gulfstream and yet my understanding was you had some software warranty charges in the second and third quarter associated with the G500 and G600. So were there any other -- what were the reason the margins weren't a bit better there in Aerospace?

Cai von Rumohr:

And Jason, the guide for Mission Systems margins is down over 200 bps from where you've been. Once things start to sort out, where do you see Mission Systems margins can go? Can they go back to where they were?

Operator:

Our next question comes from Pete Skibitski with Alembic Global.

Phebe Novakovic:

So I think what we're looking at now is low single digit growth. So if we see anything over time that accelerates that, we'll certainly let you know that that's our best planning in the moment in consultation with our customer.

Sheila Kahyaoglu:

Maybe overall on the defense portfolio as a whole, all three segments. When you think about it, you're guiding the business flat on the top line perspective and EBIT as well. The budget is up 10 and you have some pretty good programs in there. How do you think about that delta and when it catches up to the budget and EBIT growth resumes?

Sheila Kahyaoglu:

And then if I could ask one more. I don't know if you provided it. Can you give us an update on the G700, G800 certification processes?

Operator:

Our next question comes from Ken Herbert with RBC.

Ken Herbert:

Sorry about that. I was muted. I wanted to first ask, within Aerospace, really good growth in the services business. What's the outlook for services growth in '23 as part of the aerospace guide? And can you talk a little bit about investments that you're making in that business?

Ken Herbert:

And just a quick clarification on the 700 certification this summer. As obviously, you commented you're working with the FAA closely and a lot of this is -- or some of this is out of your control. How would you characterize your visibility or sort of the ongoing risks around I guess, FAA capacity to support that? I mean do you feel like you're well through that risk retirement or is there still substantial uncertainty and risk associated with that summer time frame?

Operator:

Our next question comes from Robert Stallard with Vertical Research.

Phebe Novakovic:

Staffing is not an issue here. There is plenty of capacity on the combat vehicle side, both tracked and wheeled. So to the extent that the US government intends to execute any contracts with respect to some of these bilateral agreements that they are developing, we can -- it's well within the capacity of the industrial base to accommodate.

Operator:

Our next question comes from Scott Deuschle with Credit Suisse.

Phebe Novakovic:

With respect to our pipeline, I noted that it remains strong. I would also say that corporate America has been very active, both public and private companies, high net worth individuals. Europe remains slow. Mid East just picked up. Southeast Asia, let's say, not China, has been increasingly active. So we've got a good demand across all of our offerings in all of our aircraft.

Howard Rubel:

Operator, this is Mr. Rubel. We'll take one more question, please and then we'll wrap the call up.

Robert Spingarn:

Phebe, going back to an earlier question on entry into service for 700 and 800. When would might we expect the R&D to decline, I don't know how much the 400 would use, and what would the incremental margins at Gulfstream look like once that happens? I imagine that's 24 or is it 25?

Robert Spingarn:

And just a clarification on the FAA, you talked about it earlier. Are they still in the discovery process as they evolve their system after what's happened at peers over the past couple of years, or is there a set process that is in stone at this point?

Robert Spingarn:

Okay, thank you very much.

Operator:

There are no further questions at this time, which concludes today's conference. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning and welcome to the General Dynamics Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note, that this event is being recorded. I would now like to turn the conference call over to Howard Rubel, Vice President of Investor Relations. Howard, please go ahead.

Phebe Novakovic:

Thank you, Howard. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.26 per diluted share and revenue of $10 billion. Operating earnings of $1.1 billion and net earnings of $902 million. Revenue is up, $407 million or 4.3% against the third quarter last year. Operating earnings are up $18 million or 1.7%. Net earnings are up 4.9% and earnings per share are up 6.2%. So the quarter-over-quarter results compare favorably. The sequential results are even better. Here we beat last quarter's revenue by 8.6%, operating earnings by 12.3%, net earnings by 17.8% and EPS by 18.5%. We beat consensus by $0.11 per share on somewhat higher revenue than anticipated by the sell side. Operating margin is about as anticipated. Most of the beat came from various other items including a lower tax rate than anticipated by the sell side. On a year-to-date basis, net earnings are up $93 million or 4% and earnings per share are up $0.45 a strong 5.5%. We also had another very strong quarter from a cash perspective, net cash flow provided by operating activities is $1,280 billion. Free cash flow was $1.03 billion, a 114% of net income. This follows a very strong cash performance in the first half. Order performance was good in the quarter across all segments and particularly strong at Gulfstream. You will hear more detail on cash and backlog from Jason a little later. In summary, we enjoyed a strong quarter particularly so unlighted supply chain foreign exchange and inflation headwinds. So let me move right into some color around the performance of the business segments. First Aerospace. Aerospace had revenue of $2,350 billion and operating earnings of $312 million with a 13.3% operating margin. Revenue is $281 million more than a year ago quarter up 13.6%. Operating earnings up $50 million more, up 19.1% on higher revenue and a 60 basis point improvement in margins. The sequential improvement is even better, revenue is up $480 million or 25.7% and operating earnings are up $74 million or 31.1%. To be fair, the prior quarters revenue and earnings were somewhat lower as a result of the inability to deliver for Aircraft, due the airworthiness directive, which was fully resolved in the third quarter. From an audit perspective, this was yet another good quarter reflecting continuing strong demand. The Aerospace book-to-bill was 1.15:1, Gulfstream Aircraft alone had a book-to-bill of 1.3:1 and 1.9:1 year-to-date. The first point and perspective since the end of the third quarter of 2021, Aerospace total backlog has grown $4,362 billion, to reach a very robust $19.1 billion. Despite apparent macroeconomic headwinds, we continue to experience a strong level of interest, good activity and a replenishing pipeline, Certainly, demand in the quarter was not as super-heated as prior quarters, but still the book-to-bill was very good against a significant increase in deliveries. Only time will tell about the macroeconomic impact, but we continue to see strong interest in Gulfstream aircraft and services. From a product perspective, the G500 and G600 of now seen FAA removed the wind-related airworthiness directive right on the schedule we had previously forecast. Almost the entire fleet had received the installation of the upgraded software by the end of the quarter. We have delivered 188 of these aircraft to customers through the end of the quarter. The G500, G600 together led the quarter in orders follow closely by G650. This is a very successful program with real market momentum. With respect to G700 development, the control law software validation is scheduled to begin FAA-type inspection authorization during the first week of November. We estimate we will certify this upcoming summer but much depends on available FAA resources. Gulfstream had 35 deliveries in the quarter. If everything goes as planned, we'll deliver 40 to 41 aircraft in the fourth quarter. I haven't said much about Jet Aviation, but suffice it to say, it performed well in the quarter with improving margins in its MRO activities. In short, Aerospace exhibited very strong performance in the quarter and should have an even stronger fourth quarter. Next, Combat. Combat Systems had very similar results on a quarter over year ago quarter basis, but with strong improvement sequentially. The Combat Systems revenue of $1.790 billion is up 2.5% from the year ago quarter. earnings are down 1.8% on a 60 basis point reduction in operating margin. Nevertheless, the operating margin in the quarter is an impressive 15.2%. On a sequential basis, Combat Systems revenue is up $122 million or 7.3%, while operating earnings are up a very significant 10.6% on a 50 basis point improvement in operating margin. Demand across the segment provided a book-to-bill of 1.3:1 with a large order for Abrams main battle tanks for Poland, orders for $370 million for munitions and ordinance, and in order for 39 labs from the Canadian government. We also received our first order related to the Ukraine at our munitions business. All of this increases the Combat Systems total backlog to $13.8 billion. In summary, this was an impressive new business quarter with strong operating performance once again by the Combat Systems group. Next, Marine. Revenue of $2.8 billion is up $132 million, 5% over the year ago quarter. This quarter's revenue growth was distributed fairly evenly between electric boat and NASCO. Revenue is also up $118 million or 4.5% sequentially. Year-to-date revenue is up $415 million or 5.4%. Revenue in this group has been up for the last 20 quarters on a quarter-over-quarter basis. This is very impressive continued consistent growth. Operating earnings are $238 million in the quarter, up $9 million or 3.9% on operating margins of 8.6%. On a sequential basis, operating earnings are $27 million or an impressive 12.8% on a 60 basis point improvement in margin. At Electric Boat, the Columbia first ship remains on cost and on contract schedule. The ship is more than 25% complete. NASCO had a particularly good quarter with improved TAO revenue and better margins across the board. From an orders perspective, Electric Boat received a large maintenance and modernization order for the USS Hartford. NASCO received orders for an additional ESB and 2 TAO oilers. As a result, book-to-bill was 1.1:1, leading to a $400 million increase in backlog. Throughout the group, we have a solid backlog of new construction and repair work. Our programs are also well supported in the FY '23 budget. In summary, revenue growth is clearly visible. And as I've said before, the real opportunity given the steady revenue visibility is margin improvement over time. Moving to Technologies. This segment has revenue of $3.71 billion in the quarter, down $49 million from the year ago quarter or 1.6%. The revenue decrease was fairly evenly split in dollar terms between Mission Systems and IT. Mission Systems suffered from nagging supply chain disruptions and the failure of some government customers to obligate funds for authorized and appropriated products. In the case of IT services, it was largely timing and program mix. Operating earnings of $285 million are down $42 million or 12.8% on a 120 basis point reduction in operating margin, exclusively attributed to Mission Systems and largely related to the issues impacting revenue. Total backlog remains relatively consistent over all comparative periods with a book-to-bill of 1:1 in good order prospects on the horizon. The pipeline remains very active at both businesses. GDIT enjoyed another solid operating quarter with healthy earnings and particularly strong cash in part due to good results in the federal civilian division. While we continue to see procurement delays, GDIT's year-to-date wins exceeded full year 2021 awards in dollar terms. These wins highlight the nice momentum in the business as GDIT begins to realize the benefits from targeted investments in the technical differentiation of its offerings. And this, despite the more than $3.5 billion tied up in prolonged protest and nearly $17 billion pending adjudication at the end of the third quarter. On the people front, GDIT remains focused on attracting and retaining the very best technology talent. The culture of this business has created. One of empowerment, accountability and inclusivity is a clear differentiator and a fiercely competitive talent market. Mission Systems experienced a series of challenges in the third quarter, additional supply chain disruptions, inflation, labor availability and select intel programs and customer contracting delays. Many mission system customers have a serious shortage of contracting officers that have hampered their ability to execute on programs of record. In addition, quite understandably, customer focus has been redirected in some areas to meet the more urgent demands of the Ukraine. The business has offset some of the bottom line impact by productivity improvements and cost-cutting initiatives. They will make every effort to catch up in the fourth quarter. Nonetheless, we anticipate these fact of life realities to continue for a while. I have more to say on that subject in a moment. That concludes my remarks with respect to a solid quarter for the entire company. So as we look toward the end of the year, we expect performance to be largely in line with the update to guidance that we gave you on the last call. As I just referenced, we expect technologies to fall short of our previous estimates, but we expect aerospace to run somewhat ahead of our previous forecast. All up, they should offset each other. In all other respects, our guidance remains the same. We stand by our previous EPS guidance. I'll now turn the call over to our CFO, Jason Aiken, for further remarks.

Howard Rubel:

Thanks, 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?

Seth Seifman:

Thanks very much. Good morning. Sorry, Jason, to waste a question on pension here, but you guys are a little bit different than your peer group in terms of the way that you account for things. When we think about where interest rates and asset returns are year-to-date and we think about the income below the line next year, where that might migrate to you. And when we think about the cash impact if any, in terms of the contributions that you would expect. Can you give us an update on that?

Seth Seifman:

Okay. Just to clarify, the $40 million or so of income below the line each quarter, that kind of continues?

Seth Seifman:

Okay. Okay. And then maybe as a quick follow-up, we saw some news during the quarter about the Australian sub and the potential to do some work on that outside of Australia. And we all kind of know about the capacity constraints on sub building right now. Maybe could you talk a little bit about your thinking on that topic?

Seth Seifman:

Okay, great. Thanks very much.

David Strauss:

Thanks, good morning. Phebe, were there any unusual costs at the Aerospace segment in the quarter related to the 500, 600 software fix?

David Strauss:

Okay. And it's completely behind nothing lingering in Q4, Jason?

Jason Aiken:

That's correct. It's behind us at this point.

Jason Aiken:

Yes. As you point out, the cash flow has been particularly strong through the first 9 months. So as I said in the opening remarks, we're very comfortable with the 100-plus percent for the year. To be completely candid, there's probably some opportunity for some upside there. If I look at the things that we're monitoring, number one, to the first 9 months, we've had a significant benefit from working capital reduction. Some of that's timing. So some of that could turn in the fourth quarter. We'll watch that. The other big piece is, as I noted, we're still expecting or forecasting CapEx for the year to be in the 2.5% of sales range. So that implies a pretty meaningful uptick in CapEx in the fourth quarter. I'll acknowledge that often chased our CapEx forecast and rarely hit it. So there could be some upside opportunity there if we don't get everything in, in the year. But if we do that, that's a headwind to the fourth quarter. And frankly, the third item is something that everybody continues to monitor and that is we need to resolve our situation on the Ajax program. So those are some of the things we're monitoring for the fourth quarter. We come through all that. And certainly, to your point, we have some opportunity for some upside.

Operator:

Our next question today comes from Ron Epstein of Bank of America. Ron, you may begin.

Phebe Novakovic:

So we've had a fair number of supply chain challenges on the aerospace side, which we have accommodated heretofore. But supply chain remains a potential challenge going forward. And as we go through our planning process in the fourth quarter, we get a lot more clarity airplane by airplane of what the supply chain is able to do. But we have so far managed. There are, however, as you quite rightly note, a fair number of headwinds out there. On the defense side, we have accommodated most of the supply chain perturbations, except obviously in the Marine group. But most profoundly in the quarter and most impactfully is at Mission Systems. And while they had with a lot of the more pedestrian supply chain challenges, specialty chips continue to dog them and the additional delays that they experienced in the quarter were very, very hard for them, in fact, impossible for them to overcome. Mission Systems is a very high-performance organization, and they produced several high-value complex products that have experienced delays before, but again, even beyond some of the chip problems, some of the specialty products going into that production those production lines were also impacted. So the Mission System is credit. They have taken a lot of cost-cutting and restructuring initiatives to offset the margin impact and earnings impact of the revenue decline, but we're going to have to work through some of that. And so more to come as we look into the fourth quarter and then into next year.

Phebe Novakovic:

Yes. So there are some across the businesses, there are some specialty engineering and specialty fields that have had some headwinds on labor, but those are beginning to resolve in terms of manufacturing, we had some perturbation in -- we've had a lot of perturbation in the labor market, but felt that particularly at constant point, but that's beginning to resolve itself. When you think about shipbuilding, shipbuilding is a very complex, high touch labor business. And when you have a nationwide perturbation in the labor market is going to be impacted. I mean while we kept open, not all of the supply chain did, but we also lost a number of experienced shipbuilders as well as experienced people manufacturing folks in the supply chain. So all of that at a higher level than we normally experience. And I don't think that we are alone in that. People took the opportunity in the middle of the pandemic to retire. So we've got to work through some of that. But ultimately, we do not see and I think this is an important point here. We do not see labor as constraint for our revenue growth at the moment. Certainly not in the longer term.

Operator:

Our next question today comes from Rod Stallard of Vertical Research. Rod, please proceed.

Phebe Novakovic:

You talking about combat?