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

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics second 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 Phebe Novakovic, our Chairman and Chief Executive Officer; and Jason Aiken, Executive Vice President, Technologies and Chief Financial Officer. With the introductions complete, I turn the call over to Phebe.

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

Thank you, Phebe, and good morning. We had a very good quarter from an orders perspective with an overall book-to-bill ratio of 1.2:1 for the Company. Order activity was strong across the board, as each segment had a book-to-bill of 1:1 or greater in the quarter. This is quite impressive in light of the strong revenue growth. Combat Systems and Aerospace did particularly well with book-to-bills of 1.4 times and 1.3 times, respectively. This led to record-level backlog of $91.4 billion at the end of the quarter, up 1.7% from last quarter and up 4.3% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at more than $129 billion. Turning to our cash performance for the quarter. We generated $731 million of operating cash flow, which, following our strong first quarter performance, brings us to $2.2 billion for the first six months of the year. After capital expenditures, our free cash flow was $519 million for the quarter and over $1.8 billion year-to-date, yielding a cash conversion rate of 123% for the first half. This conversion rate reflects continued strong cash performance in Aerospace and Technologies and a particularly strong start to the year for the Combat Systems group from payments received on our large international vehicle programs. The year-to-date results are consistent with our expectation for the year of a cash conversion rate in excess of 100%. Now turning to capital deployment. Capital expenditures were $212 million, or 2.1% of sales in the quarter, which brings us to 1.9% of sales for the first six months. Similar to last year, you should expect capital expenditures to be higher in the second half of the year, but in line with our expectation to be just under 2.5% of sales for the year. Also in the quarter, we paid $360 million in dividends and repurchased approximately 1.4 million shares of stock for $288 million. That brings year-to-date repurchases to 1.8 million shares for $378 million. We also repaid $750 million of debt that matured in May and ended the quarter with a cash balance of over $1.1 billion. That brings us to a net debt position of $8.6 billion, down nearly $700 million from year-end. As a reminder, we have an additional $500 million maturing in the third quarter that we plan to repay with cash on hand. Our net interest expense in the quarter was $89 million compared to $95 million last year. That brings the interest expense for the first half of the year to $180 million, down from $193 million for the same period in 2022. At this point, our expectation for interest expense for the year remains unchanged at approximately $360 million. Finally, the effective tax rate for the quarter was 16%, bringing the tax rate for the first half to 16.5%. There’s no change to our outlook for the full year of approximately 17%. But of course, that implies a rate in the mid-17% range for the second half of the year. To shape that for you, we’d expect the rate to be somewhat lower in the third quarter and higher in the fourth due to typical timing items. Now turning to operating performance in Technologies. It was another solid quarter with revenue of $3.2 billion, which is up 7% over the prior year and continues to build on the strong start to the year we saw in the first quarter. In fact, each business grew year-over-year, both in the quarter and the first half. The measures implemented at Mission Systems to overcome what seems to be the new normal in the supply chain are taking effect. So we feel good about their prospects for the balance of the year. GDIT had another solid quarter, in fact, their highest second quarter revenues since before the pandemic as they continue to deliver on their steady year-over-year growth trajectory. Operating earnings in the quarter were $283 million, yielding a margin of 8.8%. As you know, margins are driven by the mix of IT service activity and hardware volume, and in this case, were further impacted by the mix of new start programs that are driving the strong growth trajectory. Backlog grew during the quarter, with the group achieving a book-to-bill ratio of 1.1:1 on solid order activity that outpaced the strong revenue growth across the business. In fact, GDIT booked the highest first-half orders they’ve seen since mid-2019, and their pipeline remains robust with $20 billion in submitted bids awaiting customer decision and another $81 billion in qualified opportunities identified. Now, let me turn it back to Phebe to review the other business segments and give an update on our guidance for 2023.

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

Thank you for your kind words and friendship. It’s been a pleasure and a great experience to have had the opportunity to represent General Dynamics to the investment community these nearly six years. I have grown working side by side with many of the talented people of this tremendous enterprise. I look forward to working with Nicole over the next few months to ensure there are proper introductions and a seamless transition. There will be time ahead to say goodbye, but today, I want to say thank you. Now, let’s turn to the question-and-answer period of this call. 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?

Your first question comes from the line of Seth Seifman from JP Morgan.

Thank you very much. Good morning, and congratulations, Howard. I appreciate everything you’ve done. Regarding the new Aerospace guidance, could you explain how you arrived at that? I understand this is primarily a timing issue, and any airplanes not delivered in 2023 can shift to 2024. However, I would like to clarify the situation. With 27 deliveries in the third quarter, reaching around 140 for the year seems quite ambitious. Also, with 27 deliveries, I assume the margin in Q3 will still be in the low 12s, making it a challenge to achieve 14.1% for the year. Could you discuss the initial margin increase from the new aircraft and how much that will contribute to the total deliveries?

Yes. I think you’ve identified a key issue. The information we provided regarding Aerospace reflects Gulfstream’s plans, and our guidance acknowledges that. Our January guidance anticipated a very high delivery rate for Q4, which increased due to the certification delay on the 700. The 700 will be fully built and ready for delivery. Also, our new aircraft are manufactured in specialized facilities, and we have expanded our wing production line. Overall, we have optimized our operations for increased production. Additionally, our inventory data shows planes awaiting parts, and now we have a schedule in place that enables us to deliver. Regarding margins, we expect to deliver several higher-margin airplanes in the fourth quarter, which will significantly boost our results. We have outlined how we plan to achieve revenue through these deliveries, and margin will primarily depend on the mix of deliveries, particularly the higher number of higher-margin airplanes.

Okay. And just a follow-up real quick on this topic. The 27 deliveries in Q3 would be down year-on-year. In terms of the G700 certification, which we are all examining and it's difficult to assess, is there any risk regarding the plan for non-G700 deliveries and what Gulfstream expects to achieve?

As I mentioned earlier, our supply chain is becoming more transparent and is improving its processes. We have increasingly reliable schedules. However, we are likely to see more catch-up in the fourth quarter, which will help us complete several airplanes, although third quarter deliveries are still being affected.

Your next question comes from the line of Robert Stallard from Vertical Research.

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

That’s what we say.

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

Our flying hours remain consistent. However, we believe that our service business will grow as the number of new airplanes in the market increases. We anticipate steady growth in service, and we have not observed any impact from changes in flying hours, primarily those of other operators. Regarding Combat, the global landscape has become less secure, leading to increased demand both internationally and domestically. We expect this year to significantly outperform last year, and we will provide more information about 2024 in January. Initially, we had projected flat to declining growth in this segment, but that outlook has shifted. While we cannot provide specific figures at this time, we will offer further clarity on it soon.

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

So, regarding the G700, do you think you will catch up on the missed deliveries this year? Will those be made up next year? Are you expecting the number of deliveries to increase beyond 170 next year?

We will discuss next year later. However, the deliveries are lower, with 5 to 6 deliveries this year not being 700s. They are different airplanes.

Got it. As a follow-up, you mentioned during your prepared remarks that Combat Systems experienced lower margins this quarter. It seems you're anticipating a recovery in the second half of the year, but it's still projected to be significantly lower than your initial forecasts. Could you provide more details on the mix and its impact? Thanks.

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

Your next question comes from the line of Cai von Rumohr from TD Cowen.

Terrific. Thanks so much. Howard, I want to express my gratitude for being such a great collaborator and friend, and I wish you all the best.

Thank you, Cai.

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

We will deliver 19 G700s, and we’re not going to tell you margins will be accretive. Nice try. Well, have we ever given you margins by airplane?

I just wanted to know how much extra time you have in the schedule if the certification is delayed.

You mean the schedule for the 700 certification? Yes. I mean, is your best guess that you certify in the middle of November, in the middle of December, which could impact the amount number of planes you get out… What we have provided is our current best estimate of the certification process. If it comes very late in the year, we will deliver airplanes, but not all of them may be delivered. This could extend into what is projected to be the best first quarter in GD's history, although we are not expecting that at the present time. I don't have exact clarity since we don’t yet know when in the fourth quarter it will occur. However, our best plan right now is that we will have enough time to deliver these airplanes. It's important to remember that the pilot training will commence, which will significantly aid in the delivery process.

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

The way I think you need to think about that, Cai, is when it comes to Gulfstream, we have a sequence of progress payments that occurs from the time of the initial order through delivery and entry into service. So, the vast majority of the cash receipts associated with an aircraft order and aircraft delivery are in-house before the actual airplane is delivered. So, while there’s obviously an implied set of progress payments, final delivery payments would occur at that point. When those aircraft enter into service, it’s not an outsized level of cash, one way or the other. So, the bigger issue is you’ve got an ongoing sequence and series of progress payments associated with all of the orders in the order book. And with the significant order volume that we’ve had over the past 2, 2.5 years, that is sort of a machine that’s just churning those progress payments over time as we continue to make progress on each of those airplane builds as well as the certification process.

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

Thank you. Good morning, and congratulations on your retirement, Howard. I will miss you. Phebe, could you share your insights on the outlook for Aerospace orders for the rest of the year? It seems the second quarter may have benefitted somewhat from the anomaly you mentioned in March regarding the banking crisis. Additionally, could you address the churn in the backlog? I noticed that your net book-to-bill was a few hundred million lower than your gross book-to-bill, so please discuss any cancellations.

Yes. The demand in the second quarter was consistent with the demand in the first quarter; it felt very similar. As you mentioned, we experienced a three-week pause during the banking crisis, but demand levels have stayed about the same. As we approach the third quarter, we have a very strong pipeline and so far, the activity is quite good in Q3. We had six defaults this quarter, but nothing significant to us. The backlog is holding up very well.

Your next question comes from the line of Jason Gursky from Citigroup.

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

Yes. So, the United States was strong, has been strong, particularly with the Fortune 500. I would say that high net worth is about the same. And the Mid East is pretty good, as is Asia, but it’s really the Fortune 500 that are really driving the demand. These are long-established customers as well as new Fortune 500 customers.

Okay, great. Jason, can you share your insights on Technologies? It seems you have a strong pipeline of opportunities ahead. Could you elaborate on the composition of that? We experienced some margin decline this quarter, so I'm curious about what your outlook is for that pipeline. Do you anticipate any changes in margins, either an increase or decrease, as you pursue this work and bring it in? I think bottom line, the short answer to that is no. We don’t see any fundamental change, as we’ve talked about. You’re going to see some level of aggregate margin perturbation between the two businesses, the IT services side being somewhat lower obviously than the hardware side. I think in this quarter, we saw it a little more pronounced because as we’re seeing this turn for the group to a stronger growth level, a lot of that is driven by not only new starts, but it’s actually replacement contracts, or I should say, recompetes that we’ve won. So, you had in the prior year the trailing off of very mature-level legacy contracts that were closing out at higher margin rates as compared to the entry-level margin rates we’re seeing now. So, that’s sort of the driver of the year-over-year delta that you’re seeing. But barring any major structural shift between the percentage contributions of the IT services versus defense hardware parts of the business, we continue to expect this to be a low double-digit margin business over time.

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

Yes. Hey. Good morning. And ditto Cai’s remarks, Howard, you will be missed. It’s been a pleasure working with you. So quickly, a couple of questions. On Technologies, what should we be looking for? I mean, sometimes the contracts there aren’t as obvious in the horizon. So, Jason, what should we be looking out for in the second half of the year as potential things you guys could win?

It's always challenging in this business to identify a single event or contract that will significantly impact overall performance. As you know, we have a vast portfolio consisting of thousands of contracts. I would highlight that in Mission Systems, we are experiencing strong support in their Navy platform support businesses, both on the strategic side and in mission computing. Additionally, they are seeing excellent performance in their cyber portfolio, which I anticipate will continue to drive growth. In GDIT, we are witnessing strength across all three of their customer segments: defense, the intelligence community, and the Federal Services side. There's broad support for GDIT, and if I had to pinpoint anything specific in this area, we’ve been discussing some selective technology investments made to accelerate growth, and those are starting to show positive results. We’re focusing on areas like artificial intelligence, machine learning, hybrid cloud, and Zero Trust, which are beginning to yield tangible outcomes. We've already secured several hundred million dollars in award wins, along with organic growth on existing contracts that are directly linked to these investments. Currently, GDIT has more than $7 billion in post-submittal submissions pending award decisions, along with an additional $20 to $25 billion in opportunities in the pipeline associated with targeted investments. This represents a strategic allocation of capital aimed at driving growth, and we expect to see the positive impact of these initiatives continue in the second half of the year and beyond.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Howard, exactly what Louie said, and then, thank you for being such a great colleague and a teacher to me and all those around you, so thank you. Phebe or Jason, whoever, on the Defense business, when you look at your 2023 guidance, Defense growth is solidly up 5% for the year versus the 9% growth you did in the first half. But this is not necessarily leading to operating leverage with margin contraction of 40 bps and flat operating profit. So, how do you think about the return to operating margin expansion either on a total company level or a segment basis? It seems like Technologies is more temporary, Combat mix maybe continues for some time.

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

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

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

Growth in the quarter was driven by increased volume on Columbia and the oiler program, as well as additional throughput at each of those yards, which often precedes better margin performance. Additionally, revenue came in faster than we expected across the board, influencing our expectations. Regarding margin performance, Columbia is performing very well, and we see positive results on the oiler. There are some improvements at Bath, though they have not yet impacted financial performance. Electric Boat needs to improve further to counter potential supply chain challenges, as the Virginia supply chain starts to recover. We have observed improvements in some areas of the supply chain, but it was significantly affected by COVID. The Virginia supply chain dealt with various issues due to COVID, including workforce disruptions, demographic shifts, and the prioritization of Columbia. All these factors made it challenging for the supply chain to regain its previous rhythm. While there are signs of progress, we have a long way to go before they achieve a consistent cadence of two or more per year.

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

Thank you. Good morning, Phebe and Jason. Congratulations, Howard. Phebe, in the Combat segment, munitions seems to be a potential source of increased volume, and I appreciate the insights you've provided on this area. How should we view the growth potential for munitions? Last year, it represented about 27% of your overall mix. Do you anticipate that percentage will continue to increase? Additionally, could you share any comments regarding the supply chain challenges, as I've heard there have been some difficulties? Thank you.

The supply chain in the Combat group has been less of an issue. I suspect that, at least for the foreseeable future, the munitions portion of the business will remain at about that same level. We expect OTS to be at about that same level as well. We have already increased munitions capacity and, in collaboration with the federal government, the Army, and OSD specifically, we have a detailed plan to further boost capacity. This will enable us to increase production quickly and improve munition availability to meet the needs of the United States and, frankly, international demands as well.

Operator, we’ll just take one more question, please.

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

Good morning, and congratulations, Howard. I didn’t figure I’d outlast you, but we’ve known each other for a lot of years.

George, it’s over 40, just counting.

We have very strong terms and conditions where you lose some of your value in the airplane if you cancel. I’m not familiar with the specifics of the default; nothing noteworthy comes to mind, or else I would be aware of it.

We did receive additional payments on schedule as planned from several years ago. I'm happy to share that at this point, the arrears from the Canadian international program have now been effectively paid down, and we are on a normal run rate of operating working capital for that program. I’m pleased to report that we've moved past that phase. As for what we expect to receive for the remainder of the year, there are still some progress payments to come in, but I don’t have a specific amount at this moment.

Something you had kind of given what the specifics were on that in the Q.

We’ll follow up on that.

Yes.

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

This concludes today’s conference call. Thank you for your participation. You may now disconnect.