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

Thank you, operator, and good morning everyone. Welcome to the General Dynamics third quarter 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 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 slides that accompany this webcast which are available on the Investor Relations page of our website, investorrelations.gd.com. With that completed, I turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Thank you, Howard. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.26 per diluted share and revenue of $10 billion. Operating earnings of $1.1 billion and net earnings of $902 million. Revenue is up $407 million or 4.3% against the third quarter last year. Operating earnings are up $18 million or 1.7%. Net earnings are up 4.9% and earnings per share are up 6.2%. So the quarter-over-quarter results compare favorably. The sequential results are even better. Here we beat last quarter's revenue by 8.6%, operating earnings by 12.3%, net earnings by 17.8%, and EPS by 18.5%. We beat consensus by $0.11 per share on somewhat higher revenue than anticipated by the sell side. Operating margin is about as anticipated. Most of the beat came from various other items including a lower tax rate than anticipated by the sell side. On a year-to-date basis, net earnings are up $93 million or 4% and earnings per share are up $0.45, a strong 5.5%. We also had another very strong quarter from a cash perspective; net cash flow provided by operating activities is $1.280 billion. Free cash flow was $1.03 billion, a 114% of net income. This follows a very strong cash performance in the first half. Order performance was good in the quarter across all segments and particularly strong at Gulfstream. You will hear more detail on cash and backlog from Jason a little later. In summary, we enjoyed a strong quarter particularly so light of supply chain foreign exchange and inflation headwinds. So let me move right into some color around the performance of the business segments. First Aerospace. Aerospace had revenue of $2.350 billion and operating earnings of $312 million with a 13.3% operating margin. Revenue is $281 million more than a year ago quarter, up 13.6%. Operating earnings up $50 million more, up 19.1% on higher revenue and a 60 basis point improvement in margins. The sequential improvement is even better; revenue is up $480 million or 25.7% and operating earnings are up $74 million or 31.1%. To be fair, the prior quarter’s revenue and earnings were somewhat lower as a result of the inability to deliver Aircraft due to the airworthiness directive, which was fully resolved in the third quarter. From an audit perspective, this was yet another good quarter reflecting continuing strong demand. The Aerospace book-to-bill was 1.15:1, Gulfstream Aircraft alone had a book-to-bill of 1.3:1 and 1.9:1 year-to-date. The first point and perspective since the end of the third quarter of 2021, Aerospace total backlog has grown to $19.1 billion. Despite apparent macroeconomic headwinds, we continue to experience a strong level of interest, good activity, and a replenishing pipeline. Certainly, demand in the quarter was not as super-heated as prior quarters, but still, the book-to-bill was very good against a significant increase in deliveries. Only time will tell about the macroeconomic impact, but we continue to see strong interest in Gulfstream aircraft and services. From a product perspective, the G500 and G600 have now seen FAA remove the wind-related airworthiness directive right on the schedule we had previously forecast. Almost the entire fleet had received the installation of the upgraded software by the end of the quarter. We have delivered 188 of these aircraft to customers through the end of the quarter. The G500, G600 together led the quarter in orders followed closely by G650. This is a very successful program with real market momentum. With respect to G700 development, the control law software validation is scheduled to begin FAA-type inspection authorization during the first week of November. We estimate we will certify this upcoming summer but much depends on available FAA resources. Gulfstream had 35 deliveries in the quarter. If everything goes as planned, we'll deliver 40 to 41 aircraft in the fourth quarter. I haven't said much about Jet Aviation, but suffice it to say, it performed well in the quarter with improving margins in its MRO activities. In short, Aerospace exhibited very strong performance in the quarter and should have an even stronger fourth quarter. Next, Combat. Combat Systems had very similar results on a quarter-over-year basis, but with strong improvement sequentially. The Combat Systems revenue of $1.790 billion is up 2.5% from the year ago quarter. Earnings are down 1.8% on a 60 basis point reduction in operating margin. Nevertheless, the operating margin in the quarter is an impressive 15.2%. On a sequential basis, Combat Systems revenue is up $122 million or 7.3%, while operating earnings are up a very significant 10.6% on a 50 basis point improvement in operating margin. Demand across the segment provided a book-to-bill of 1.3:1 with a large order for Abrams main battle tanks for Poland, orders for $370 million for munitions and ordinance, and an order for 39 labs from the Canadian government. We also received our first order related to Ukraine at our munitions business. All of this increases the Combat Systems total backlog to $13.8 billion. In summary, this was an impressive new business quarter with strong operating performance once again by the Combat Systems group. Next, Marine. Revenue of $2.8 billion is up $132 million, 5% over the year ago quarter. This quarter's revenue growth was distributed fairly evenly between Electric Boat and NASCO. Revenue is also up $118 million or 4.5% sequentially. Year-to-date revenue is up $415 million or 5.4%. Revenue in this group has been up for the last 20 quarters on a quarter-over-quarter basis. This is very impressive continued consistent growth. Operating earnings are $238 million in the quarter, up $9 million or 3.9% on operating margins of 8.6%. On a sequential basis, operating earnings are up $27 million or an impressive 12.8% on a 60 basis point improvement in margin. At Electric Boat, the Columbia first ship remains on cost and on contract schedule. The ship is more than 25% complete. NASCO had a particularly good quarter with improved TAO revenue and better margins across the board. From an orders perspective, Electric Boat received a large maintenance and modernization order for the USS Hartford. NASCO received orders for an additional ESB and 2 TAO oilers. As a result, book-to-bill was 1.1:1, leading to a $400 million increase in backlog. Throughout the group, we have a solid backlog of new construction and repair work. Our programs are also well supported in the FY '23 budget. In summary, revenue growth is clearly visible. And as I've said before, the real opportunity given the steady revenue visibility is margin improvement over time. Moving to Technologies. This segment has revenue of $3.71 billion in the quarter, down $49 million from the year ago quarter or 1.6%. The revenue decrease was fairly evenly split in dollar terms between Mission Systems and IT. Mission Systems suffered from nagging supply chain disruptions and the failure of some government customers to obligate funds for authorized and appropriated products. In the case of IT services, it was largely timing and program mix. Operating earnings of $285 million are down $42 million or 12.8% on a 120 basis point reduction in operating margin, exclusively attributed to Mission Systems and largely related to the issues impacting revenue. Total backlog remains relatively consistent over all comparative periods with a book-to-bill of 1:1 in good order prospects on the horizon. The pipeline remains very active at both businesses. GDIT enjoyed another solid operating quarter with healthy earnings and particularly strong cash in part due to good results in the federal civilian division. While we continue to see procurement delays, GDIT's year-to-date wins exceeded full year 2021 awards in dollar terms. These wins highlight the nice momentum in the business as GDIT begins to realize the benefits from targeted investments in the technical differentiation of its offerings. And this, despite the more than $3.5 billion tied up in prolonged protest and nearly $17 billion pending adjudication at the end of the third quarter. On the people front, GDIT remains focused on attracting and retaining the very best technology talent. The culture of this business has created one of empowerment, accountability, and inclusivity, which is a clear differentiator in a fiercely competitive talent market. Mission Systems experienced a series of challenges in the third quarter; additional supply chain disruptions, inflation, labor availability, and select intel programs and customer contracting delays. Many mission system customers have a serious shortage of contracting officers that have hampered their ability to execute on programs of record. In addition, quite understandably, customer focus has been redirected in some areas to meet the more urgent demands of Ukraine. The business has offset some of the bottom line impact by productivity improvements and cost-cutting initiatives. They will make every effort to catch up in the fourth quarter. Nonetheless, we anticipate these factual-life realities to continue for a while. That concludes my remarks with respect to a solid quarter for the entire company. So as we look toward the end of the year, we expect performance to be largely in line with the update to guidance that we gave you on the last call. As I referenced, we expect technologies to fall short of our previous estimates, but we expect aerospace to run somewhat ahead of our previous forecast. All up, they should offset each other. In all other respects, our guidance remains the same. We stand by our previous EPS guidance.

Thank you, Phebe, and good morning. Starting with our cash performance. It was another strong quarter with operating cash flow of nearly $1.3 billion. This was achieved once again on the strength of the Gulfstream orders and particularly strong cash performance from our Technology segment. This brings us to $3.9 billion of operating cash flow through the first 9 months of the year, which also includes the ongoing collections on our large international combat vehicle contract according to the contract restructuring that occurred back in 2020. Including capital expenditures, our free cash flow was just over $1 billion for the quarter and $3.3 billion year-to-date, yielding a conversion rate of 137% through the first 9 months. The continued strong performance positioned us very well to achieve our target for the year of free cash flow conversion at or above 100% of net income. With respect to the status of the tax treatment of research and development expenses, I think everyone can sense that despite the broad-based bipartisan support for immediate expensing of these investments, the window of opportunity for action in 2022 is quickly closing. As we've said all throughout the year, if Congress acts to defer or reverse the capitalization requirement, we would expect free cash flow for the year at or above 110% of net income. Looking at capital deployment, capital expenditures were $255 million in the quarter or 2.6% of sales. That's up from last year, consistent with our expectation to be around 2.5% of sales for the year. For the first 9 months, we're at 2.2% of sales, but 2.5% remains our full year target, so obviously an implied uptick in capital investments in the fourth quarter. We also paid $345 million in dividends during the quarter, bringing the total deployed in dividends and share repurchases through the first 9 months to just over $2.1 billion. The net result at the end of the third quarter was a cash balance of $2.5 billion and a net debt position just under $9 billion, down over $1.5 billion from this time last year. Net interest expense in the quarter was $86 million, down from $99 million in the third quarter of 2021. That brings the interest expense for the first 9 months of the year to $279 million, down from $331 million for the same period in 2021. At this point, we continue to expect our interest expense for the year to be approximately $380 million, including the assumed repayment of $1 billion of notes that mature in the fourth quarter. The tax rate in the quarter was 14.3%, bringing the rate for the first 9 months to 15.1%. 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 of 16% for the full year, which, of course, implies a higher tax rate in the discrete fourth quarter. One more comment on the tax front. The Inflation Reduction Act, which was signed into law in August included a 15% corporate minimum tax and a 1% excise tax on stock buybacks. We don't expect either of these provisions to have a material impact on our financial results. Order activity and backlog were once again a strong story in the third quarter with a 1.1:1 book-to-bill for the company as a whole. As mentioned earlier, Aerospace continued to have a strong order activity with a 1.2 times book-to-bill in the quarter and 1.6 times over the trailing 12 months. On the defense side, the combined book-to-bill was 1.1 times, with each of the segments achieving a book-to-bill of at least 1 time. We finished the quarter with a total backlog of $88.8 billion, while total potential contract value, including options and IDIQ contracts was $125.8 billion. The increase in backlog was particularly notable given a headwind from foreign exchange rate fluctuations of approximately $275 million in the quarter and $650 million year-to-date, with the vast majority of the impact in Combat Systems. Incidentally, the FX fluctuations also negatively impacted Combat’s revenue by $55 million in the quarter and $123 million in the first 9 months of the year due to the surging dollar versus the euro and the British pound. But for the FX headwind, the Combat Systems Group's revenue would have been up by 5.6% in the quarter and down only 3.9% for the first 9 months. That concludes my remarks, and I'll turn it over to Howard to start the Q&A.

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?

Our first telephone question today comes from Seth Seifman of JPMorgan. Seth, please go ahead, you may begin.

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

Yes. As you said, Seth, we are somewhat different from most of the peer group in this regard. And as a result, right now, we're not expecting anything material from an income perspective on the pension front. Obviously, that's something we'll roll up as part of our full operating plan process here in the fourth quarter and give you more specific detailed guidance in January. But I think the bottom line is both from an earnings as well as from a cash perspective, we don't expect that at this point to be a material item.

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

Some version in that range. I don't have an exact number at this point. You can expect it to decline as you would modestly. But again, that's not 100% pension income there. It's a big piece of that is pension income on the commercial side of the business. So it should down take a little bit, but not in a material way.

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

Yes. We are completely driven by our customers' demand and their priorities. We are collaborating with the U.S. Navy to decide what our focus should be moving forward. As we address some capacity issues, we are also considering how to meet not only U.S. demand but potentially other needs as well.

Our next question today comes from David Strauss of Barclays. David, go ahead.

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

Yes, David, we did have, I think you're aware, some customer accommodation related to the software issue, both in the second quarter and the third quarter wasn't material to the results, but that has been absorbed in the numbers that you see and is inherent in the improved margins that the group posted in the quarter.

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

Right.

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

Okay. Great. And a follow-up on free cash flow conversion. Given where you are year-to-date, I mean over 100% for the full year looks pretty conservative unless there's something unusual, I guess, from a working capital perspective that you're expecting in or baking in in Q4. Can you just elaborate on that?

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

Thanks very much.

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

Good morning. Just maybe the supply chain question. It seems like you guys are navigating it really well. Most airplane companies today are having aren't going to deliver more than they thought they were going to deliver the opposite problem. So I guess my question for you is how is the supply chain going for Gulfstream? And then b, when you look at the defense business you have, you heard kind of across the sector, similar issues on chips and so on and so forth. How is it going there?

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

Got it. Got it. And then maybe as a follow-on, on the labor side, what are you seeing across the businesses, right? We clearly hear from the Navy that they want to have more shipbuilders out there. But I mean what are you seeing across all the businesses you have in the portfolio in terms of skilled labor?

Yes, there are specialty engineering and unique fields across our businesses that have experienced some labor challenges, but those are starting to improve in manufacturing. The labor market has been quite volatile, but we're beginning to see some stability. Shipbuilding, being a complex and labor-intensive industry, has certainly felt the impact of the nationwide labor market fluctuations. While we managed to stay operational, many parts of the supply chain did not, and we also lost several experienced shipbuilders and manufacturing personnel during this time. This situation is worse than what we typically see, and it's not something unique to us as many people chose to retire during the pandemic. We need to navigate through this, but it's important to note that we do not see labor as a limitation on our revenue growth right now, especially in the longer term.

Got it. Thank you.

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

Good morning. Steve, your comments suggest that we're finally seeing some of this strong defense demand turning into orders. But what sort of timeline are you expecting for these orders to actually convert into deliveries?

You talking about combat?

Well, across the defense divisions, but firstly, combat. Yes.

Yes, let's discuss combat first, and then if you're interested, we can touch on technologies. Regarding combat, the marine sector is showing consistent orders. While there may be some fluctuations in quarterly revenue projections, they do not impact our long-term growth outlook. In the recent quarter, we observed various developments, particularly with Stryker, Abrams, and the Military Provides Force in Poland. Additionally, we received munitions orders related to Ukraine, indicating that our U.S. Army customers are requesting increased ammunition and munitions. We are actively working with them to enhance production capabilities. In Europe, there is a growing demand for bridges due to increased water levels, and we have a strong business in Germany supplying river crossings of various sizes and weight capacities. We are also starting to notice a rise in vehicle orders and requests for proposals, especially in the former Eastern Bloc countries. As for technologies, it presents a mixed picture. GDIT has experienced solid bookings and growth last year, and we expect continued growth this year. The focus is on Mission Systems, which I've outlined in detail regarding their challenges. There is significant demand for their high-value products, but supply chain issues are hindering our ability to fulfill some orders. The demand is present; it's just a matter of resolving these issues to execute the orders, and we are confident that we will overcome these challenges.

So just to follow up on combat, and these orders you've had from Europe, for example, is there roughly a 12-month to 2-year lead time between the contract getting signed and actually GD delivering?

Completely depends on the product. Less so on the bridge side and it depends and again, less so potentially on the vehicle side, it just depends on the vehicle and exactly what modifications or changes folks want. We're not looking at clean sheet vehicles. We're looking at changes to existing vehicles that we have updated consistently and throughout the years. So it will depend. I suspect a year, in some cases, 18 months. Certainly, I don't expect a whole lot more than that.

Yes, it was great. Thanks so much.

Our next question comes from Myles Walton of Wolfe Research. Myles, please go ahead.

Thanks. Good morning. I know that there's the $1 billion maturity coming in November, but curious maybe, Phebe, how you're thinking about capital deployment in a broader sense, obviously, cash flow coming in ahead of expectations.

Yes, that's a very good question. Our capital deployment priorities remain the same. Let me ask Jason to provide you with more details.

Yes. Regarding the $1 billion due in November, we plan to pay that down. In terms of debt, we have additional maturities coming up in 2023, and we will begin evaluating our position, especially considering the CSRA acquisition and the extra debt we incurred. We aim to bring it down to a level where we can assess whether we’ve reached the right point. As we move into next year, we will engage in more substantial discussions about decision-making. Regarding share repurchase, we are always tactical and opportunistic. The third quarter was quite volatile, so we were more reserved, waiting to see how things develop. This will not alter our long-term strategy for share repurchase. Importantly, the dividend will consistently be a priority; we expect to continue on the same trajectory we’ve maintained for the past 25 years. As Phebe mentioned, our deployment strategy remains unchanged. The focus will be on what is most relevant in each quarter. Our cash flow performance and liquidity give us the flexibility to address all our priorities without compromising one for another.

And just a quick follow up, Phebe said, it’s the M&A market attractiveness. Is that improved become worse the same?

We're just not going to comment on M&A. So I think we can leave it at that. You want one more shot, one more question?

No. I'll stay through. I don't want to get Howard angry.

Yes, that's a scary thing, isn't it?

Our next question comes from George Shapiro of Shapiro Research. George, go ahead.

Yes. Jason, I wonder if I could pin you down a little bit as to how big a number of the software fixes were in the margin for Gulfstream in the quarter. Are we talking a few million dollars or something more?

I don't have a specific number for the software fix, but I have an understanding of the overall R&D budget, which provides some context. As David mentioned earlier regarding impacts to aerospace this quarter, we saw a nice margin improvement, even slightly better than we anticipated, which is why we believe the group will perform better for the full year. Despite those strong results this quarter, we did experience an adverse impact due to the accommodations made for customers on the 500 and 600 airworthiness directive. That situation is now behind us. Currently, we are in a sustained elevated R&D mode. Part of that involves reallocating resources from the 700 to address the 500 and 600 AD fix, and this approach will continue into next year as we move toward certification of the 700 and eventually the 800. I'll provide additional information on that, but I regret I don't have a specific number for the airworthiness directive fix.

Okay. And then a quick one, Phebe, a usual question. There's a $59 million difference between the gross and the net bookings in Aerospace. Was that a cancellation? Was it FX related? Or if you can quantify that?

All of the above. I mean really absolutely immaterial.

Okay. And let me sneak in one last one.

You're risking Howard's ire. Go, George.

I always got Howard's ire. That's okay. When you commented about your deliveries in '23 and '24, it presupposed the book-to-bill of 1. Obviously, we've run a lot better than that. So are you thinking of changing those delivery forecasts or just stay conservative with the delivery forecast that you have out there?

Not at the moment. We assumed 1:1, and at the moment, I don't see any reason to change that. But as we go through our planning process, to the extent that we need to modify it, we certainly will and we'll be very explicit about that in the fourth quarter.

Our next question comes from Kristine Liwag of Morgan Stanley. Please go ahead.

Sorry about that. You guys hear me?

Yes.

Okay. Great. Thanks. Good morning, everyone. And Phebe, on international defense sales, we're seeing changes in relationship between the U.S. and Saudi Arabia. With your foreign military sales to Saudi Arabia through Canada, how do we think about this evolving relationship potentially affecting your business?

We see no indication of that at the moment. You want to ask one more.

Yes, following up on what George was asking about on aerospace. I mean book-to-bill was at 1 times at aerospace. We've seen this above 2 times in the past few quarters. But at the same time, the backlog is at record levels. Can you provide some color on the demand resilience you're seeing? Is this a demand from corporate customers, individuals? And then also, is there some sort of level of backlog where you're comfortable at so not to extend the duration of when people have to wait for their aircraft? Any color you could provide there would be really helpful.

Sure. Let’s address your question about the inverter. We closely monitor the delivery times of our aircraft to customers, and so far, everything has been manageable. To give you some context, starting in mid-February of last year, we entered an exceptionally high-demand market which I have never experienced before. The order levels this quarter have been remarkable by any standard. We’ve seen strong demand from U.S. customers, Fortune 500 companies, the Mideast, and Southeast Asia. Interestingly, and not unexpectedly, our demand pipeline heading into the fourth quarter looks very similar to what it was going into the third quarter. At this point, we have good visibility on our order outlook.

Our next question comes from Cai Von Rumohr of Cowen. Cai, please go ahead.

Yes. Thanks so much, and good results, Phebe. So how is the software accommodation split between the second and third quarter? And as we look going forward, with that out of the way, and presumably R&D flat to down and volume up, what should we look for about the margins in the fourth quarter and going forward?

We expect to see some margin improvement, which we mentioned in our guidance for the year. The software fixes should be mostly completed by the end of the second quarter, and the financial issue is about equally balanced. We're pleased with our current position. Although you didn't ask, I wanted to provide some transparency on this matter.

If I could add just 1 thing. Cai, there was a predicate in your question that R&D would be coming down, we don't yet expect R&D to be coming down. If you look through next year with the 700 and the 800 will remain at a sustained and potentially even elevated level next year. So I just want to make sure that point is also clear.

Yes. Good point.

Excellent. And as a follow-up, if we turn to GDIT, you mentioned $3.5 billion in protest, $17 billion in bids awaiting. How does that compare with the second quarter? And given that they lifted the occupancy restrictions at DoD in the middle of September, have we seen a pickup in any of that flowing through to bookings?

Yes, we have. But tell me again what the first part of your question was?

Well, you had $17 billion in business awaiting and $3.5 billion in progress.

Some of the protests have been resolved in our favor. When we refer to protests, we mean items that we have successfully contested. We have one that is close to reaching the federal level in terms of the number of protests. We are hopeful that we will navigate through this in the fourth quarter. Although there has been a slight decrease, as I mentioned, due to these resolutions, we still observe a significant number of proposals in the decision-making phase, which has been extended. Despite this, GDIT continues to experience growth.

Our next question comes from Ken Herbert of RBC. Ken, proceed.

Yes, good morning. Thank you. I wanted to first ask on the schedule for the 7 and the 800. Is it fair to assume that resources that were diverted from the 700 are now 100% back on that program? And in the last few months, considering issues, okay, great, considering issues on the 5 and 6 have been resolved. Are you seeing anything else from the FAA that could potentially put entry to service schedules at risk?

We have worked very effectively with the FAA, and we anticipate this collaboration will continue. We have gained valuable insights from this process regarding the new software requirements set by the FAA. Additionally, the G700 is the most advanced aircraft entering the FAA certification process due to its software system and extensive successful testing before the FAA review. We are currently maintaining our summer 2023 estimate.

Okay. Very helpful. And if I could, just 1 quick follow-up. On the defense side, how would you look at the risk of your business if for whatever reason, we have a continuing resolution that extends into calendar '23?

At the moment, we don't see a particular risk. And if we get 3 to 4 quarters in the entire year of a CR, which I find in this threat environment, very difficult to imagine. And we'd have to come back at you. But nothing we hear would suggest that it's the desire of Congress to do that.

Our next question comes from Doug Harned of Bernstein. Doug, please go ahead.

Good morning. Thank you. When you look at the demand you're seeing at Gulfstream right now, can you give us kind of a picture of how this looks? And what I mean is we're seeing a lot of things such as first-time customers going straight to large cabin jets, perhaps shifts in international versus U.S. Can you give us a picture of what that outlook is today for you? And has that changed some over the past couple of years?

So I think you and I, a couple of years ago, had a discussion about structural versus cyclical change. And I still think it's premature to see any to declare that there's been a structural change. We've certainly seen some increase in first-time buyers, but that was in part because a lot of wealth was created during the pandemic. The higher the pandemic. So I don't have exact data about what's in the pipeline, but I can imagine that it will be much different than this quarter, which is heavy U.S. Fortune 500, again, Southeast Asia and the Middle East.

Switching topics to munitions, it appears there is significant potential for growth here. How do you view this area? I see it as a high-margin business for you within Combat, with the likelihood of orders exceeding the 3.70 you reported this quarter.

Our customer has shown interest in increasing demand, so we are collaborating with them to boost production. However, I believe your assumption that this will lead to a high-margin business isn't entirely accurate. OTS, where we carry out this work, is indeed a high-performance organization in terms of operating leverage, but this is supported by a very diverse portfolio. We perform adequately, but I wouldn't categorize the current situation as additive.

Thanks, Doug. Lisa, we'll take one more question, please. This will be our final.

Our final question today comes from Scott Deuschle of Credit Suisse. Go ahead.

Good morning. Thanks for taking my question. Jason, I think ROIC is something that you've historically been very focused on. And honestly, it's held up really well here despite the capital that you put in the business. So just curious, as you get past the bulk of the CapEx phase of marine working capital comes out of the business and you have margins reflected aerospace? Where do you think ROIC can go over the next few years?

It's a great question. Obviously, as we've been in this period of extended investment, you'd expect to see ROIC become a little bit muted as a result. And we saw a little bit of a downtick in that during that investment period. But as we emerge having had essentially the investment period behind us. To your point, we absolutely expect to see ROIC back on decline. We'll see that this year, and we expect to see it next year and beyond. So our targets over the long term ought to be back in the range as we were in prior to the investment period we entered into a few years ago, and that's what you should expect as well.

Okay, great. And then Jason, does the recently announced facility expansion of Savannah, does that have any impact to the prior guidance you gave on '23 CapEx? Or was that embedded in the 2% figure you previously talked about? Thank you.

Yes, that's all embedded and now look we've given previously. So no change to those projections.

Great. Thank you so much.

Thank you. That concludes the Q&A session. I'll hand back to the management team for any closing remarks.

Thank you all for joining us today. As a reminder, please refer to the General Dynamics website for both our earnings release and, of course, our highlights presentation. If you have any other questions, I can be reached at 703-876-3117. Thank you.

Thank you all for joining today's call. You may now disconnect your lines.