General Dynamics Corporation

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 thank you operator and good morning everyone welcome to the general dynamics fourth quarter and full year

2022 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 10K, 10Q, and 8K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliation to comparable GAAP measures, please see the press release and slides that accompany this webcast, which are available on the Investor Relations page of our website, InvestorRelations.gd.com. With my introduction complete, I turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.

Thank you, Howard. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.58. for diluted share on revenue of $10 billion, $850 million, operating earnings of $1 billion, $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 19 cents, or 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 32 cents, a 9.8% improvement. As promised, that it would be, the final quarter is our strongest of 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 improvements. 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 64 cents, 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.

Yes, thank you, Phoebe, and good morning. Order activity and backlog were once again a very strong story, with a 1.2 to 1 book-to-bill ratio for the company for the fourth quarter and a 1.1 times for the full year. Order activity in the marine and aerospace groups led the way. We finished the year with a total backlog at an all-time high of $91.1 billion and total estimated contract value, which includes options and IDIQ contracts, of nearly $128 billion. I should note that foreign exchange rate fluctuations continued to be a headwind, reducing year-end backlog by nearly $600 million, with the vast majority of the impact in combat systems. Turning to our cash performance for the quarter and the year, It was another solid quarter with operating cash flow of $669 million, which brings us to $4.6 billion of operating cash flow for the year. After capital expenditures, our free cash flow for the year was nearly $3.5 billion, a cash conversion rate of 102%, slightly ahead of our target for the year of 100% of net income. As discussed on previous calls, Gulfstream enjoyed particularly strong cash performance throughout the year on the strength of its order activities. and the Technologies Group once again delivered outstanding cash performance. That said, when we talked with you in October, we discussed three potential constraints to cash in the fourth quarter, the pending outcome of congressional action on the tax treatment of R&D expenditures, the timing of resumption of cash collections on the AJAX program in the UK, and an anticipated uptick in capital expenditures as we progress through our ongoing facility index. As it turns out, the Congress did not act to remedy the requirement to capitalize R&D costs. We did not receive any payments from the UK, though we now expect payments to resume this quarter. And our capital investments were, in fact, elevated, consistent with expectations. I'll discuss that in more detail a little later in the call. The net result was a lighter fourth quarter from a free cash flow perspective, but slightly better than we had expected, and rounds out a very strong year in terms of cash performance, despite the headwinds I discussed. I should also point out that free cash flow per share has grown at a 22% compound annual growth rate from 2019 through 2022. 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 planned 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 defaults 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 is staggering 68% over the past two years. As we go into the new year, the sales pipeline remains strong and sales activity is at a solid pace. At mid-year 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 FAA 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 margins, 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 MPF, very strong international demand for the Abrams main battle tank, as well as growing demand on the munitions 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 $2,970,000,000 is up 3.4% over the year-ago quarter. Revenue is also up 7.2% sequentially and 4.9% for the full year. Operating earnings are up about 1% over the year ago, off less than a half a percent 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 booked bill, including the receipt of a $5.1 billion contract modification to Columbia. Our forecast to you in July of last year anticipated revenue of about $10.8 billion, operating margins 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's 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.

The technologies group as a whole had a very strong finish to a solid year in a very challenging operating environment. Revenue in the quarter of $3.25 billion was up 9.3% over the prior year and up 6% sequentially. Operating earnings of $340 million were up about 2% over the fourth quarter of 2021 and sequentially were up an impressive 19%. The main driver of the fourth quarter performance was Mission Systems' ability to overcome some of the logjam in its supply chain and deliver some of the product that was held up at the end of the third quarter. While these issues have not been completely resolved, the fourth quarter performance gives us good reason for optimism that they're starting to see their way through this. For the year, revenue of $12.5 billion was up just slightly from 2021. Breaking that down, GDIT once again grew in the low single digits. up 1.6% after 2.2% growth in 2021. Mission Systems was down 2% despite the strong end to the year. Earnings for the year of $1.23 billion were down 3.8% on a 40 basis point contraction and margin to 9.8% as a result of the mixed shift between product and service revenue as GDIT reported its highest margin since the CSRA acquisition and its highest ever earnings but Mission Systems was down for the reasons discussed. With respect to backlog, the technologies group had a solid year, notwithstanding an ongoing trend of customer solicitations pushing to the right and recurring award protests. GDIT received over $11 billion in awards during the year, almost 20% higher than 2021, representing more new work than any year since the CSRA acquisition. And Mission Systems finished the year with a 1.1 times book-to-bill and a capture rate in excess of 80%, putting them in a good position to emerge from the supply chain headwinds they've been facing. With that, I'll turn to some of the financial particulars before turning it back over to Phoebe to give you our guidance for 2023. Starting with capital deployment in 2022, capital expenditures, as I noted, were elevated in the fourth quarter at $494 million, or 4.6% of sales. That brings us to $1.1 billion for the full year. At 2.8% of sales, full-year capital expenditures are slightly higher than our original expectation due strictly to timing. We expect capital expenditures to start to step back down below 2.5% in 2023 and continuing to trend toward historic levels. We also paid $345 million in dividends in the fourth quarter, bringing the full year to $1.4 billion. And we repurchased approximately 440,000 shares of stock in the quarter, bringing us to over 5 million shares for the year for $1.2 billion at just under $226 per share. With respect to our pension plans, we contributed $50 million in 2022, and we expect that to increase to approximately $200 million in 2023. This includes a modest voluntary contribution to one of our commercial plans, which was made this month and fully funds a plan that had a funding gap of more than $500 million within the past two years. Concurrently, we shifted the investment mix to hedge the plan's $2 billion of liabilities, thus eliminating any funding risk associated with market volatility or discount rate fluctuations. However, as a result of the change in investment mix, our pension income will be lower in 2023. Following this de-risking activity, We expect our corporate operating expense for 2023 to be approximately $140 million and our other income to be approximately $80 million, a combined reduction of roughly $125 million in non-operating, non-cash income from 2022. Speaking of pension income, the fourth quarter had higher than anticipated other income as we benefited from higher discount rates for measuring liabilities on our non-qualified pension plans, which are marked to market at the end of the year. We also repaid $1 billion of fixed rate notes in the fourth quarter. After all this, we ended the year with a cash balance of over $1.2 billion and a net debt position of $9.3 billion, down approximately $600 million from last year. We have $1.25 billion of debt maturing in 2023. Our net interest expense in the fourth quarter was $85 million, bringing interest expense for the full year to $364 million. That compares to $93 million and $424 million in the respective 2021 periods. Pending our decisions with respect to the scheduled debt maturities, we expect interest expense in 2023 to remain essentially consistent with 2022. Turning to income taxes, we had an 18.1% effective tax rate in the fourth quarter, which brings our full year rate to 16%, consistent with our guidance. Looking ahead to 2023, we expect the full-year effective tax rate to increase to around 17%, reflecting higher taxes on foreign earnings. The sum total of these below-the-line items versus the comparable levels in 2022 is a net negative impact on 2023 diluted earnings per share of $0.63. And finally, with respect to our outlook for free cash flow, following a strong 2022, we expect cash conversion in 2023 to be better than 100%. roughly in the 105% range, assuming the presumption of Ajax receipts in the first quarter, as I mentioned earlier. That concludes my remarks. I'll turn it back over to Phoebe.

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 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 multi-year 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 2023 with revenue of $7.3 billion and operating margin once again toward the high end of their reliable 14% to 15% range at 14.7%. The improved outlook is the result of strong order activity we saw in 2022, including the NPF 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 munitions business. As I noted earlier, Marine Group has been on a remarkable growth journey, averaging $600 million a year. Our outlook of $400 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 will 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 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 would yield an 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 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.

Thanks, Phoebe. 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?

This is the lead operator. To ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Miles Walton with Wolf Research. Thanks. Good morning.

Hi, Miles.

I was hoping maybe you could touch on a couple of things. One, Jason, your new role and how you sort of think about balancing the app between the CFO and the operating segment. roles and responsibilities, which you intend to focus on there. And then maybe on a capital deployment front for 23, even at 105%, obviously you've got a lot of excess cash. Should we expect you to pick up repurchase activity in 23 versus 22 or relatively similar?

Morning, Miles. 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, you know, I'm humbled and honored to have this opportunity dual responsibility. Fortunately, entering my 10th year in the role as CFO, so I feel confident about the ability to handle both at the same time.

So with respect to our capital deployment, we will continue to invest in our business where prudent. We'll continue to maintain our dividend and we'll repurchase shares accordingly. So I don't see any big change in the priorities or our execution.

Our next question comes from David Strauss with Barclays.

Thanks. Good morning.

Hi, David.

Hey, Phoebe. Phoebe, could you touch on, you know, you mentioned three deliveries that slipped out. Was that customer preference? Was that supply chain related? And then it doesn't appear that you're going to, you know, your prior guidance was 148 deliveries this year. Now you're talking 145, so it doesn't seem to make up there. And then last thing, the 170, I think you forecasted for 24 deliveries. Does that still hold? Thanks.

Yes, so let me go in order. We had, as I noted, three airplanes that flipped 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.

Thank you.

Our next question comes from Seth Seifman with JP Morgan.

Thanks very much. Good morning. Hi, Seth. 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, you know, further deterioration in schedules.

So let's deconstruct that. And I think we have to posit a few truths. We went into COVID with schedule variance on Virginia. Virginia is also about a third of electric boats revenue. COVID had a profound impact on many aspects of our lives, but a particularly lasting one on the workforce. We had labor discontinuities throughout the United States, and we also experienced something that we had not anticipated, an abnormally large retirement of experienced workers. In a business that is heavily manpower-dependent, these impacts had a disproportionate effect on additional schedule variance. We're working with the Navy who's been quite active and engaged in helping develop a plan and a really detailed action list on how to address these issues and, you know, Shipbuilding and the supply chain are fixed by incremental improvements over time. So what do we see in the moment? We see stabilization in the workforce. I think across the nation, we've got a little bit better labor dynamics than we did immediately coming out of COVID. We also have additional experience in what some of the challenges have been. So the way I look at it, this year will give us a bit of a chance to further sequence the velocity of the material coming into electric boats. And that ought to be a good thing for all involved, despite and notwithstanding the considerable issues around schedule. I would note that the submarine industrial space delivered two submarines last year. We're going to deliver two more this year. So I think maintaining that cadence of delivery is important. But in much of shipbuilding, milestones are difficult to identify really until you get the ship in the customer's hands. So as I said, we're working very closely with the Navy to ensure that we can just get back some of that schedule variance on the remainder of the Block 4 ships and on the Block 5 ships.

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

So we're about 30% done on the first ship, and we are ahead of the contract schedule.

Thank you very much.

Our next question comes from Peter Arment with Baird.

Thanks. Good morning, Phoebe. Good morning. Phoebe, maybe just to stay on Seth's line of question, just on marine, maybe you could just, there's been a lot written about just the industrial base, and you just mentioned it. How are you thinking about just maybe, you know, the CAPEX profile, and in particular, if things start to get unveiled on AUKUS, what the plans might be there. Should we expect any further step up in CapEx?

Thanks so much. Not with respect to AUKUS. 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 issue. series of discussions and agreements, and we will, of course, support whatever the Navy plan is going forward.

Okay, and just as a quick follow-up, just maybe just in general on the supply chain, you talked about the constraints of marine and some of the issues in mission systems. Has it gotten worse at mission, or do you think it's actually kind of stabilized and it is what it is, what's going on in the marketplace?

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, 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. When they saw that 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 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.

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

Good morning. Good morning, Ron. 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. 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?

So if you look at the services funding over, I'd say, in the modern era, post-World War II, the Army gets funded when there are tactical challenges and tactical problems, either a hot war or relatively cold war preparedness. This is an issue where we've got both strategic challenges in which the Navy and the Air Force tend to get funded and, as I noted, the threat environment has materially changed. So that has driven increased interest in a number of Army and land forces capabilities. And we've begun to see those show up in our backlog and in our order book, but we've got more room to grow and more room to go there as some of this demand converts into actual orders. So when I think about what's going on in Europe, our European combat vehicle programs, business has done quite well in securing a number of contracts, both historically but increasingly recently, and what we expect on a going forward basis. They've been active in Poland, Romania, Switzerland, Germany, Denmark, Spain. Sweden, Luxembourg. By the way, I wrote all those down because that's a lot of countries. So I think the closer you are to the threat, the more urgent you feel your funding requirements. So all of which to say we have changed our expectations for combat systems growth. By the way, overarching all of this is a need to increase our ammunition and projectile output, and we've been working with the Army for the last three, four, five months on exactly that kind of plan. So, as we've always posited, the threat environment really drives demand for defense products, and we're seeing some of that now.

Got it, got it. Thank you.

Our next question comes from Jason Gursky with Citi.

Thank you, and good morning, Phoebe and Jason. Good morning. Jason, I wanted to take the opportunity to ask you a question about the technologies group. I know you've been in the seat for just a small amount of time, but I'm curious to know, as you settle into your seat, the kinds of investments that you think you might want to make, either in technologies or new products and services or in processes, ED, in order to accelerate revenue. Just kind of get your first impressions on the needs there in the group and what might change with you now taking over leadership of that group. Thanks.

Sure. 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 you know, 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'll continue to be the case. As you know, I'll say what I know Phoebe 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 small bolt-ons and mission systems during that time, but nothing in GDIT's space. 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 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. Great. Thanks.

Our next question comes from Kayvon Rumor with Cowan.

Thanks so much. Your margin was up a little bit sequentially at Gulfstream, and yet my understanding was you'd had some software warranty charges in the second and third quarter associated with the G500 and 600. Were there any other – what were the reasons the margins weren't a bit better there in aerospace?

I thought the margins were pretty darn good. We outperformed what we had told you, and so we were pretty pleased with that. I would note that one of the headwinds is R&D. So the additional work that has been required – from the Airworthiness Directive and the new FAA requirements as a result of the MAX have driven increased R&D and we'll continue to see some of that and then that'll begin to unwind. But I think those are very strong margins and better than we had anticipated in our guidance to you.

Okay, great. Thank you. And Jason, you know, the guide for mission systems margins is down, you know, over 200 bps from where you've been. You know, once things start to sort out, where do you see mission systems margins can go? Can they go back to where they were?

So I want to make sure I think you're saying technologies as a whole because we don't really give business unit specific margin guidance. within the group, but given what you're saying, I think if you look back to prior to the CSRA acquisition when the IT services side of the business became, frankly, our largest business group and the lion's share, the sort of two-thirds, if you will, or more of the technologies group, we used to, the combined margin of those businesses used to be in the, we'll call it the low double-digit range, usually between 10% and 11% on a fairly consistent basis. Since we acquired CSRA, we've averaged over the past five years 9.8% margin for the group. So what we're seeing right now is really just a shift in the moment where we've had GDIT come through that significant integration effort for the first couple of years, followed immediately on the footsteps of that with the impacts of COVID. They've really embarked on a nice steady trajectory now of low single digit growth. for several years now, and we expect to see that continue. As mission systems in the moment is dealing with the supply chain issues that have been, I think, well addressed, their volume's down a bit. So what we're seeing in terms of the group's margin, aggregate margin, is really nothing more than a shift in the mix between the two. So that's with the increased service side of the business and the lower volumes on the product and hardware side of the business. So As Mission Systems comes through this and gets back on track to a growth level, which we do expect to see happen once they come through these issues, you ought to see the margin on an aggregate basis tick back up. And, oh, by the way, that shouldn't overlook the fact that GDIT on its own is continuing to improve and harvest its margins as it grows. I think I said before they had their highest margin as a business since we acquired CSRA and their highest earnings contribution to the company ever. Everything, I think, is headed in the right direction. Just got to come through the supply chain issues at Mission Systems, and that will help influence the mix, and we ought to see a trend back up toward the 10% level over time.

Our next question comes from Pete Skibitsky with Alembic Global.

Hey, good morning, everyone. Good morning. Phoebe, just following on to Ron's question earlier on combat, and that was setting the flat outlook for this year, but, you know, you talked about the international demand, and it seemed like Congress added quite a bit of money for Stryker and Abrams to the 23 budget. So can you give us any sense of kind of the CAGR that you think is a reasonable expectation, you know, after 2023 when things begin to, or when the demand begins to actually convert for you?

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

Okay. Thank you.

Our next question comes from Sheila Kayaluklu with Jefferies.

Good morning, Phoebe, Jason. How are you? Hi, Sheila. Morning. Hi. 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?

So I think that's more in 24. One of the big issues there, as I said, is Virginia. But, look, the way I look at the defense portfolio, we have an extremely strong backlog, and now it's just a question of executing across that portfolio. So I'm not too worried about growth on the defense side at all, nor on the aerospace side. You know, there is one thing that I think we're focused on, we should be focused on, and I neglected to mention this earlier, But with respect to execution, one of the things that we can do on Virginia and, frankly, at EB in general is to continue to improve our operating performance. That provides us more ability to cover some of the perturbations that are coming out of the supply chain. So I really think about all of this as execution. Growth comes when it comes. We've got the backlog to support it. And so I like the position we're in, frankly.

Great. And then if I could ask one more. I don't know if you provided it. Can you give us an update on the G700-800 certification processes?

So we still expect the 700 to convert or get certified this summer. And the G800 will be about six months after that, so we don't see any change in that. And the relationship has been going very well with the FAA, so we are continuing to look forward to, you know, finishing all the certification processes. Now that, I will tell you, that is outside our complete control. You know, a lot of this is FAA resources and their ability to focus, given all the other demands that they have on them, but so far so good.

Our next question comes from Ken Herbert with RBC. Yes, we lost him.

Operator. Yeah, hi, good morning. Oh, okay.

Go ahead, Ken.

Yes. Sorry about that. I was muted. Good morning, Phoebe and Jason. Wanted to first ask, within aerospace, really good growth in the services 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?

We expect low single-digit growth in our service side, and we continue to invest prudently when we see the need for more service capacity. But at the moment, We're pretty, nothing really outstanding in that regard. We've got the capacity to accommodate what we see as reasonable steady growth.

Okay, that's helpful. 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 summertime frame?

I think the FAA has done a good job managing its portfolio and its series of complex and multifaceted requirements, and so far we are sticking to what we believe is a reasonable expectation for the certifications.

Our next question comes from Robert Stallard with Vertical Research.

Thanks so much. Good morning. Morning. Just a couple of quick ones from me, Phoebe. First of all, on Ukraine, it looks like they're going to get Abraham's tanks. At what point does capacity in some form or other, particularly staffing, become an issue? And then secondly, just for Jason, what sort of book to bill have you assumed in an aerospace for 2023 in your cash flow guidance? Thank you.

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 U.S. government intends to execute any contracts with respect to some of these bilateral agreements that they are developing, it's well within the capacity of the industrial base to accommodate that.

And then, Rob, with respect to your second question, as it relates to aerospace book-to-bill, much like going into 2022, we've assumed a return to a one-to-one book-to-bill, and that is one of the predicates for our cash flow forecast.

So to the extent they outperform, obviously that could provide some upside.

Our next question comes from Scott Duschel with Credit Suisse.

Hey, good morning. Thanks for taking my question. Stevie, you touched on it a bit in your prepared remarks. I was curious if you could comment a bit more in depth on the sales pipeline at Gulfstream and the latest trends you're seeing there, both from individual buyers and the corporate buyers. And then for Jason, I was just wondering if you could identify what the unbilled receivable balance was on AJAX at the end of the year and how much of that you expect to burn down this year. Thank you.

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. Mideast has picked up. Southeast Asia, not China, has been increasingly active. So we've got a good demand across all of our offerings and all of our aircraft.

And then on your second question, as it relates to the Ajax unbilled, that's at the end of the year roughly $1.7 billion is where we stand right now. I don't want to get into the specifics of how much we expect to collect this year. That's part of ongoing discussions with that customer. But needless to say, as I mentioned in my remarks, we do have good reason to expect those cash receipts to resume before the end of this quarter. And so we'll start to see that unbilled balance come down.

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

Very good. Our final question comes from Robert Spengard with Mellius Research. Good morning.

Thanks for the time. Phoebe, going back to an earlier question on entry into service for 700 and 800, when 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?

So I think we expect R&D to begin to go down at the end of next year. And look, we have, Gulfstream is an extremely high-performing, operationally strong company. company and so I think we have demonstrated incremental improvement in margins as our operating efficiency and discipline and in our supply chain engineering and really on the shop floor all of that has improved. So I think there's upward over time margin opportunity but we're not going to get into parsing specifics until we have good clarity but we're very comfortable that we will improve steadily and repeatedly.

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

Yeah, I think that that's a broader question than I'm able to answer. What I can tell you is that our relationship and working relationship with the FAA has matured significantly and we think we all have a very clear understanding of what the new requirements are and how to execute them.

Okay, thank you very much.

And thank you all for joining us today on this call. As a reminder, please refer to the General Dynamics website for the fourth quarter earnings release, highlights presentation, and outlook. If you have any additional questions, I can be reached later today on my office at 703-876-3117. 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.