General Dynamics Corporation

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.

Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics third quarter 2023 earnings 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. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations 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. On the call today are Jason Aiken, Executive Vice President, Technologies, and Chief Financial Officer, and Bill Moss, Vice President and Controller. With the introductions complete, I'll turn the call over to Jason.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. The first thing I'll note is that our Chairman and CEO, Phoebe 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%. So the quarter-over-quarter results show significant growth in revenue, but 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 13 cents 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 a 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're 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 booked a bill was 1.4 to 1, and Gulfstream alone had a booked a 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 one-to-one in the fourth quarter, given our expectation of over 60 deliveries. A wild card 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 the 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 is up 10.7%. Margins at 13.5% represent a 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 margins. 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 a 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 costs 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's 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. And 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 in 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 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. So with that, let me turn it over to Bill.

Thank you, Jason, and good morning. We had another very good quarter from an orders perspective with an overall book to bill ratio of 1.4 to 1 for the company. This is particularly impressive with the strong revenue growth in the quarter. Marine systems and aerospace led the way with book to bill ratios of 2.3 and 1.4 respectively. For the second quarter in a row, this led to record level backlog of $95.6 billion at the end of the quarter, up 4.6% from last quarter, and up 7.6% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter just shy of $133 billion. Moving to our cash performance, this was another strong story in the quarter, with over $1.3 billion of operating cash flow. This brings us to $3.5 billion of operating cash flow through the first nine months of the year. Including capital expenditures, our free cash flow was $1.1 billion for the quarter and $2.9 billion year-to-date, or 126% of net income through the first nine months. This conversion rate was achieved on the strength of the Gulfstream orders, additional scheduled progress payment on Combat Systems International programs, and continued strong cash performance in technologies. We are well positioned to achieve our target for the year of a cash conversion rate over 100% of net income. Looking at capital deployment, capital expenditures were $227 million in the quarter, or 2.1% of sales. For the first nine months, we're at 2% of sales. We're still targeting to be slightly below 2.5% of sales for the full year, so that implies an uptick in capital investments in the fourth quarter. We paid $363 million in dividends and repurchased a little over a quarter million shares during the quarter, bringing the total deployed in dividends and share repurchases through the first nine months to $1.5 billion. We also repaid $500 million of debt that matured in August and ended the quarter with a cash balance of over $1.3 billion. That brings us to a net debt position of $7.9 billion, down nearly $1.4 billion from year end. Net interest expense in the quarter was $85 million, bringing interest expense for the first nine months of the year to $265 million, down from $279 million for the same period in 2022. Finally, the tax rate in the quarter was 15.6%, bringing the rate for the first nine months to 16.2%. This is consistent with our guidance last quarter to expect a lower rate in the third quarter and a higher rate in the fourth. So no change to our outlook at 17% for the full year, which again implies a higher tax rate in the discrete fourth quarter. Now let me turn it back to Jason for some final remarks.

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 out about the same place. Nicole, that concludes our remarks, so I'll turn the call back to you.

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?

Yes, thank you. And as a reminder, if you would like to ask a question, press star and then the number one on your telephone keypad. Pressing star one a second time will remove you from the queue. and we will pause for just a moment to compile the Q&A roster. And we'll take our first question from Peter Arment with Baird. Your line is open.

Yeah, thanks. Good morning, Jason and Bill. Jason, sounds like there's just obviously a lot of moving parts for Q4 at Gulfstream. Is there a cutoff date, you know, if certification happens in December versus November about your ability to kind of push out those deliveries and then any commentary on just I know you've had a long-term forecast of 170 deliveries for 24 whether you still think that holds obviously if certification slips you know there'd be more potentially but maybe just some commentary there thanks yeah 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 early to mid December time frame, then we've got a good shot at getting the planned deliveries of G 700 out out the door this year. Obviously, if that pushes further to the right, that pushes puts that a little bit at risk. To your point about 2024. Probably not appropriate to get into specifics about next year till we go through our plan period, which will which will 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. And 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. And I think we'll have a better sense of that. when we come back to you with guidance in January.

Appreciate the call. Thanks, Jason.

Yep. And we will take our next question from David Strauss with Barclays. Your line is open.

Thanks. Good morning. Morning, David. Hey, Jason. So at the beginning of the year, you guys had forecasted marine and combat to be relatively flat. You know, at this point, we're looking at probably double-digit growth for both of those businesses this year. Does any of that, as we start thinking about how those businesses could look next year, does any of this represent any sort of pull forward that would potentially moderate the growth that we could see out of those two businesses next year?

Yeah, 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 four to five hundred million on average per year uh year-over-year growth in that business obviously this year's 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 uh the hiring and and retention uh dynamics have really improved faster than we thought so that's really driven a lot of the revenue acceleration uh into 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 downish 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.

And as a follow-up, the IRS came out with updated guidance on Section 174 R&D. What impact does that have on your cash flow outlook?

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.

And we will take our next question from Ken Herbert with RBC Capital Markets. Your line is open.

Yeah, hi. Good morning, Jason and Bill. Morning. Maybe just start, Jason, again on Gulfstream. Last quarter you called out sort of 19 is the expected 700 delivery number, you know, depending upon cert timing this year. Is that still a number we should expect into the fourth quarter, assuming you get certification in time?

can you just comment on any potential risk around 280 production levels considering uh some of the uncertainty in the middle east yeah so as far as the g700 is concerned 19 is the number that we have targeted and uh are still striving to get to again as you note that is predicated on timing of cert what i can tell you in terms of a little bit of color behind that is we've got 15 of those 19 that are ready to go and are in good shape and we're working toward the others so again Predicated on when the CERT comes, we should be in good shape to be somewhere in that range for delivery this year. As it relates to the 280s, what I would tell you is the modest downtick that I talked about earlier this morning in terms of our overall 2023 deliveries, that five or six aircraft reduction from our previous guidance in July, that is largely related to G280s. I would tell you that what we plan to deliver this year, we now have in hand at our Dallas facility for completion, so there's really not any incremental risk to 2023. We will have to see, obviously, how the events in Israel play out and what impact that may have in 2024, but a little premature to get into that at this point.

Okay, great. Thanks, Jason. You're welcome.

And we will take our next question from Robert Stallard with Vertical Research. Your line is open.

Thanks very much. Good morning. Good morning, Rob. Jason, on the supply chain, maybe I'm just reading too much into this. It sounds like it actually got a bit worse than what you talked about last quarter. So I don't know if you could elaborate on what you've been seeing, whether there are any specific pinch points that are causing you trouble.

Rob, I'm going to guess you're talking about supply chain and 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'll 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 the other direction of what your intuition is pointing you to.

Good to hear. Just as a follow-up, I was wondering if you could elaborate on where you stand on supply chain. I think mission systems had a few issues, and also in the labor situation at Marina, that seems to improve.

Sorry, I broke up there, Rob, at the end. You said mission system, supply chain, and then labor.

And marine.

Oh, labor and marine. Okay. So on the mission system 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 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, in 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.

And we will take our next question from Scott Duschel with Deutsche Bank. Your line is open.

Hey, good morning. Morning. 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.

I'd say you nailed most of the high nail items there for next year. And again, the G700 is a big piece of it. Obviously, we've talked about how that'll come into service with favorable entry level margins, accretive entry level margins for the group. So that's a big driver. I think the other major one, and you alluded to it, really is the resolution and straightening out of the supply chain issues. One of the things Gulfstream has really worked toward here and planned toward, I think very effectively, and we'll see it over time, is driving the efficiency of the operation with this new family of aircraft between the facilities that have been built, the commonality between the airplanes, the ability to service those airplanes efficiently. That is really what we are driving toward and one of the major underpinnings behind the long-term trajectory back to the mid to high team margins for that group. Obviously timing of when those things get straightened out in the supply chain will be important because that's really what's sort of inhibiting us getting to that point of efficiency. We will see a little bit of a modest downtick in R&D. I wouldn't call that a major factor, but you should expect to see that tick down a little as we finish up the 700 this year and get through the 800 next year. But again, have 800 and 400 to go. So we're not out of things yet from an R&D standpoint there. Those are the major puts and takes, I'd say. All in all, we would expect to see revenue, or excuse me, margin continuing on its trajectory, again, toward that mid to high teen rate. We'll see improvement here in the fourth quarter, and I expect to see good improvement in 2024.

Okay, great. And then as a follow-up, are there any major company-funded growth CapEx projects still underway in 2024 and 2025, or is most of that complete this year? And if it does complete this year, does the nearly billion dollars of CapEx included in current Bloomberg consensus for 24 and 25 make directional sense? Because that's basically still in line with 23, I think. Thank you.

Yeah, the major internal CapEx projects are done this year. We've got a little bit of trailing costs and activity going on in the shipyards as we finish out that capacity expansion, particularly at Electric Boat. But that will wrap up next year. The investments we're making on the Army side from an artillery perspective, that's being funded by the customer. And so bottom line, we ought to see our CapEx level trend back toward 2%. We'll be below 2.5% this year, which is directionally headed the right way. And we'll be back toward, if not at 2%, headed toward 2% next year.

And we will take our next question from Christine Lewag with Morgan Stanley. Your line is open.

Hey, good morning, Jason and Bill. Yeah, so maybe first on the President's $106 billion supplemental request, it includes $3.4 billion for the submarine industrial base. With this request out there now and with respect to AUKUS, can you talk more about what this means for GD? Does this change the timing at all?

You know, bottom line, Christine, 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. You know, 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 Columbia's, 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 this 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.

And following up on your comments on the fragile supply chain, has there been changes in your contracting terms for the customer to reflect this? And how do we think about long-term margins?

So 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. And an 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.

And we will take our next question from Seth Seifman with JP Morgan. Your line is open.

Hey, thanks very much, and good morning, everyone. Good morning, Seth. Good morning. Morning. Maybe just to follow up on that last topic, you know, 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 kind of the margin that we ended up seeing? And I guess, 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?

In the quarter, Seth, nothing material in terms of EACs in the quarter. What you're seeing there, obviously, we are still experiencing changes. pressure from delayed material coming out of the supply chain that's affecting electric boats schedule and delivery and man hour in the yard. But the other implication that you're seeing is having reduced the margin rates through the earlier EAC adjustments, we're now seeing the aggregate impact of that in the booking rates that we are recognizing on the programs today. So it's sort of the aggregate confluence of all those factors are driving the margin rate that you see in the quarter. But again, as we start to continue to improve the throughput and improve the efficiency in the yards, we do expect to see incremental improvement in the margin starting in the fourth quarter. In terms of supply chain changes, I don't know that it's anything changing. I think it's As we go to contract, we have 20-20 hindsight or full visibility, if you will, into the current state of affairs. And so we're working through that with our customer, and they understand the situation we're in. So we're basically incorporating the current state of the supply chain as well as the implications of increasing cost of skilled labor, as you've seen with a lot of the labor negotiations going on out in the market. So it's those types of factors that are being incorporated into that we're putting into the new contracts and that we feel like will put us in a good position to perform from a margin perspective as we look ahead.

Okay. Okay. Thanks. And then just for a clarification, when you talked about the overall company and, you know, 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, you know, 60 plus in Q4. If, you know, if the G700 wasn't to be certified this year, I assume that that's kind of a different story and kind of what's the last date that roughly that you could see that certification happen and still kind of deliver, you know, I don't know, double digits. G700s?

Yeah, so the EPS reaffirmed at 1265 is based on the updated Gulfstream delivery number that I mentioned earlier. As I said, that's mostly the reduced number from the July outlook is mostly associated with G280s, so not as significant an earnings impact to that. As you can imagine, some puts and takes, none of which are particularly material, across the rest of the portfolio are including some upward pressure across the defense businesses from a revenue perspective, as you might imagine, improved customer service revenue at the aerospace group and so on, some below-the-line things like lower interest expense and share count, net-net kind of putting us in the same place. So that's sort of why the guidance stays where it is. In terms of the 700 outlook, I think the key issue is, and the question so many people have around why the uncertainty is, we don't have a date certain. This is the FAA's process. We need to let them go through that process. We are supporting them in that process. They're going through flying now, and we're doing the necessary paperwork and reporting to support that. And so we have a path. We have an expectation to get there in early to mid-December, but there's not like a red line or a date certain on the calendar that we're looking at at this point.

And we will take our next question from Doug Harnett with Bernstein. Your line is open.

Good morning. Thank you. Morning, Doug. I wanted to go back to marine because when you look at electric boat, your backlogs have built way up. As you mentioned, the Navy wants to be at two VCS deliveries per year. Can you describe what scenarios you can even look at here? My understanding is it's about 1.2 now. It's way off what... clearly Congress wants, what the Navy wants. Are there scenarios that you think about in terms of how soon in a good situation we might get to that two per year? Or what would be a negative scenario? What's the range of outcomes here?

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, 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.

And then as a follow-up, if you add one more factor into this, which is Columbia class, obviously in a very different stage in the program, but also you've got an overlapping supply chain. How does... progress on the Columbia class right now look and how does that affect your ability to push forward on this VCS ramp?

Yeah, Columbia, as you know, is the Navy and the DOD's number one priority. So that's going to continue to be the case, and I don't see that being a tradeoff 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 date. that first boat we've still got obviously about four years to go before delivery so a lot a lot of the way to go and a lot can happen between now and then but 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 got to be able to manage both of those within the yard and within the teaming 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.

And we will take our next question from Kai Von Rumer with TD Cowan. Your line is open.

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, you know, all of your defense numbers, you really beat in revenues across the board. So, maybe if you could, you know, kind of if I look at where the model was before, it looks like, you know, we have a softer fourth quarter to get us home, but that doesn't seem realistic given on 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 you know have should we feel you know a bigger step up you know next year so i think the way to think about the fourth quarter kai is is there's as i alluded to earlier

There is obviously some upward pressure on the revenue on the defense side nothing to get too specific about and I don't know that it's particularly material with. You know just a couple months to go here in the year, but one way to think about this is this year let's talk let's talk group by group. In technologies, you may remember last year we had a significant surge in the fourth quarter, because we had had a big backup. on the supply chain side, admission systems through the third quarter, and a lot of that flowed through in the fourth quarter. So really a big hockey stick or upswing in the fourth quarter. That's not the pattern this year. As I mentioned before, they've been on a more regular order and a more regular drumbeat, and so we'll see a more steady state revenue pattern for technologies in the fourth quarter. In combat, likewise, it's historically for some time now been sort of the traditional seasonal pattern for combat to rise throughout the year and have its biggest quarter in the fourth quarter, and we saw that again last year. In this case, in 2023, it's a much more steady drumbeat. Again, steady demand, strong volume, but not the traditional sort of seasonal fourth quarter uptick in combat. And in Marine, again, we've already seen tremendous volume, well in excess of our expectations. We're up a billion dollars almost through the first nine months, which is roughly what we expect for the year. And so, again, I'd say more stable quarter to quarter. So to summarize, we're seeing more stable volumes across all three of the defense segments from first quarter to fourth quarter, whereas in the past they've risen from first to fourth. So a little bit of an aberration in the pattern. I do expect, again, not to get ahead of the planning process we're going through, but I expect each of the businesses to show growth going into next year. Can't get too much more specific about that at this point, but you should see growth in the defense business across all three of the segments going into 2024.

Very helpful. And then maybe a quick comment on, you know, Israel, Hamas has created, you know, additional demand. We have this $106 billion request. from the president. You know, can you give us some general color in terms of areas where you think you could see incremental acceleration in demand?

You know, the Israel situation obviously is a terrible one, frankly, and one that's just sort of evolving as we speak. But I think if you look at the incremental demand potential coming out of that, the biggest one to highlight and that really sticks out is probably on the artillery side. Obviously, that's been a big pressure point up to now with Ukraine, one that we've been doing everything we can to support our Army customer. We've gone from 14,000 rounds per month to 20,000 very quickly. We're working ahead of schedule to accelerate that production capacity up to 85,000, even as high as 100,000 rounds per month. And I think the Israel situation is only going to put upward pressure on that demand. So that's the biggest stick out that I can see.

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

Excellent, thank you. We will take our final question from Ron Epstein with Bank of America. Your line is open.

Hey, good morning. Morning, Ron. Maybe just two, right? 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?

You know, I have to give a hand to the guys in the combat systems group in general and land systems specifically. They really not heard us talk about supply chain bottlenecks, labor capacity or other issues in that group. And that does not mean they have not faced them. They are just – they stand out amongst even a spectacular crowd in the way they've handled it. So I don't have any expectation that we'll see any issues as we look ahead, even as the demand for their product both here U.S. domestically as well as internationally continues to grow.

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

Thank you for that. Finally.

Let's talk about that. It's a big piece of the company, right? You know a lot about it, right? In particular. So 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 GD IT together kind of make sense? Because there's this bigger demand for

software driven solutions and software and hardware and you're seeing you know this this synergy coming out particularly with You know the application of AI to you know the legacy systems and so on and so forth So on the margin side just to be clear as I think about double digit technology double digit margin for the group Not specifically GDI T. It's the mix of the two of them together I absolutely expect this group to be on the march back to low double digit margin. It's where they've been and Historically, I think if anything I could articulate as a headwind to that, it's to the extent that the GDIT side grows faster than the mission system side. That obviously creates a bit of a macro mix issue that could be a little bit of a headwind in terms of how long it takes us to get there. But frankly, I expect to see us get back into the double-digit margin range here in the fourth quarter, and we'll see how quickly we can get there in the outlook as we look at 24 and beyond. But I do expect them to get back on the trajectory toward low double-digit margin. In terms of integration, the way we see this is these are, while they're very symbiotic businesses and they are dealing with a market that's dealing with a convergence, and to your point, in terms of their capabilities, we think that having them separate is appropriate because the investment thesis and the way you run an inherently people business versus an inherently technology development hardware and production business are fundamentally different and take different leadership, different priorities, and sort of different investment thesis. The good news is that by having them together in the same group and in a coordinated way, we are making investments and addressing the evolving technologies jointly as a group, and we are making sure we're being efficient at that and effective at that, not duplicative, not missing anything, and bringing the requisite skills, to your point, from end to end, whether it's the hardware side, the services, the software capabilities, solutions as a service, software solutions, and so on, together in joint capabilities. So I think we get the best of both worlds that way in terms of the way we manage and run the businesses, but also the way we can bring combined capabilities to the customer set.

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.

And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.