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

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, Phebe Novakovic, is under the weather today, so I’ll be conducting today’s call along with Bill. Earlier this morning, we reported earnings of $3.04 per diluted share on revenue of $10.6 billion, operating earnings of $1.06 billion and net income of $836 million. Revenue was up $596 million or 6% against the third quarter last year. Operating earnings were down $41 million or 3.7%. Net earnings were down $66 million and earnings per share were down 6.7%. The quarter-over-quarter results show significant growth in revenue but a 100 basis point contraction in operating margin. On the other hand, sequential results are quite good across the board. Here, we beat last quarter’s revenue by 4.1%, operating earnings by 9.9%, net earnings by 12.4%, and EPS by 12.6%. From a different perspective, we beat consensus by $0.13 per share on higher revenue and better operating earnings than anticipated. Operating margin is about the same as expected. The beat came almost entirely from operations. On a year-to-date basis, revenue was up 7.2%, operating earnings were down less than 1%, and diluted earnings per share were down 2.6%. We had another very strong quarter from a cash perspective. Net cash flow provided by operating activities was $1.32 billion and free cash flow was $1.1 billion, which is 131% of net earnings. This follows very good cash performance in the first half. Order performance was good in the quarter in all segments and particularly strong at Gulfstream and the marine segment. You’ll hear more detail on cash and backlog, as well as some of the other financial particulars from Bill in just a minute. In short, we enjoyed a strong quarter, particularly so in light of the supply chain and program mix headwinds that time will cure, so let me move right ahead with some color around the performance of the business segments. First, aerospace. Aerospace had revenue of $2.03 billion and operating earnings of $268 million with a 13.2% operating margin. Revenue was down $315 million from the year-ago quarter, driven by fewer deliveries at Gulfstream due to supply chain constraints. Operating earnings were down $44 million on lower revenue and a 10 basis point contraction in margin. The sequential comparison is much better - revenue was up $79 million or 4%, and operating earnings were up $32 million or 13.6% on 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 are on track to deliver between 40 and 45 currently in-service aircraft in the fourth quarter. All-in including G700s, we anticipate in excess of 60 deliveries in the quarter, assuming we’re granted FAA certification before the end of the year. That said, as you can tell, there’s a considerable amount of uncertainty as we get closer to certification. Moving to the demand environment, this was yet another positive quarter reflecting continuing strong demand. Aerospace book-to-bill was 1.4 to 1, and Gulfstream alone had a book-to-bill of 1.5 to 1. We continue to have vibrant sales activity going into the fourth quarter and expect strong orders. It would, however, be a stretch to get to 1 to 1 in the fourth quarter, given our expectation of over 60 deliveries. A wildcard in the quarter will be the conflict in Israel and its impact on demand, if any. The period of significant increased aircraft demand began in mid-February of 2021, over two and a half years ago. In 2021, Gulfstream’s book-to-bill was 1.7 to 1, in ’22 it was 1.5 to 1, and year-to-date 2023 it’s 1.3 to 1. This includes the first quarter of 2023, when there was a three-week hiatus in orders as a result of the failure of several regional banks. In that quarter, we still managed a 0.9 to 1 book-to-bill. All of this leads quite naturally to an astonishing build of the aerospace backlog. It grew from $11.6 billion at the end of 2020 to $20.1 billion at the end of the third quarter of 2023, an increase of over 70% in two and three-quarter years. This all speaks to me of the underlying strength of the market for our products. The G700 flight test and certification program continues to move closer to its ultimate conclusion. We continue to plan for certification in the fourth quarter of this year, largely dependent upon the availability of FAA resources and a credit the FAA may allow for company flying. We currently are spending most of our engineering time on final reports and data submission. Operationally, Gulfstream continues to make good progress under difficult circumstances, but as a result of the supply chain issues that we’ve previously discussed, we plan to deliver 10 to 12 fewer aircraft this year than the 145 we had originally forecast at the beginning of the year. On the other hand, we continue to expect more service revenue than initially predicted. Next, combat systems. Combat systems had revenue of $2.22 billion, up a stunning 24.4% over the year-ago quarter with growth at each of the business units, but particularly at OTS and European land systems. Earnings were $300 million, which was up 10.7%. Margins at 13.5% represent 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 margin. As you’d expect, these contracts will result in additional production at accretive margins over time. On the subject of munitions, we’re working very closely with our government customer and have accelerated production faster than planned. The large capacity expansion that we’re putting in place today will further increase production. We have a ways to go, but we’re making progress. The increase in combat revenue also came from new international vehicle programs, the ramp-up of the M10 Booker, higher artillery program volume, and higher volume on Piranha and Eagle vehicles in Europe. On a sequential basis, revenue was up $300 million or 15.6%, and earnings were up $49 million or 19.5% on a 50 basis point improvement in margin. Year-to-date, revenue was up $775 million or 15.1% and operating earnings were up $53 million or 7.1% over last year, so the numbers are quite impressive quarter-over-quarter, sequentially and year-to-date. Combat systems experienced very good order performance. Orders in the quarter resulted in a one-to-one book-to-bill, a very strong performance given the increased revenue and evidencing strong demand for munitions and international combat vehicles. Year-to-date, the book-to-bill is 1.3 to 1, which fully supports the growth outlook. Turning to marine systems, once again our shipbuilding units are demonstrating impressive revenue growth. Marine systems revenue of $3 billion was up $233 million or 8.4% against the year-ago quarter. Columbia-class construction and engineering drove the growth. Operating earnings were $211 million, down $27 million versus the year-ago quarter with 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 cost of late material. We continue with the help of the Navy to work this issue. At Bath, while we’re seeing signs of improved productivity, it has yet to manifest in the business’ financial performance. All that said, we’re looking for slow but steady incremental margin growth over time. Importantly, marine systems enjoyed a very good quarter from an orders perspective with a 2.3 to 1 book-to-bill. This is a very large enduring backlog. Lastly, technologies. It was another strong quarter with revenue of $3.3 billion, which is up 8% over the prior year and continues to build on the strong first half of the year. That growth was spread pretty evenly between GDIT and mission systems; in fact, each business grew both year-over-year and sequentially. At GDIT, we’re seeing particular strength in the defense and federal civilian portfolios as our technology accelerator investments and capabilities like zero trust, artificial intelligence, digital engineering and 5G are really resonating with customers and driving increased demand. At mission systems, the cyber and naval platform markets have been particularly strong. The production and delivery cadence on the hardware side appears to have stabilized, so we expect their results to be somewhat more predictable despite the lingering fragility in the supply chain that will continue to be the new normal. Based on the strength of the first three quarters, the group is on track to achieve our increased sales forecast of $12.7 billion for the year. Operating earnings in the quarter were $315 million, up 10.5%, yielding a margin of 9.5% - that’s up 20 basis points year-over-year and up 70 basis points sequentially, so a very solid performance on strong revenue growth in the quarter. This is a drumbeat we expect to see continue in the fourth quarter. Backlog at the end of the quarter was $12.7 billion. Through the first nine months, the group achieved a book-to-bill ratio of 1 to 1, keeping pace with the strong revenue growth across the business. Prospects remain strong with a qualified funnel of over $125 billion in opportunities they’re pursuing across the portfolio. Let me close with a review of the defense units in aggregate. As a whole on a quarter-over-quarter basis, defense had revenue of $8.54 billion, up $911 million or 11.9% over the year-ago quarter. On the same basis, earnings of $826 million were up $32 million or 4%. On a sequential basis, the pattern is similar - revenue was up $340 million or 4.1% and earnings were up $57 million or 7.4%. Year-to-date against the same period last year, revenue of $24.7 billion was up 10.2% and operating earnings were up $60 million or 2.6%. In short, our defense businesses are experiencing significant growth in revenue and to a lesser degree in earnings; however, we need to continue to work with our supply chain in order to achieve appropriate operating leverage. With that, let me turn it over to Bill.

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 of 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 about the same place. Nicole, that will conclude 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. We will take our first question from Peter Arment with Baird. Your line is open.

Yes, thanks. Good morning, Jason and Bill. Jason, it seems there are many factors at play for Q4 at Gulfstream. Is there a specific cut-off date regarding your ability to manage those deliveries based on whether certification occurs in December or November? Additionally, could you provide some insight on your long-term forecast of 170 deliveries for '24? Do you still believe that forecast remains valid? If certification is delayed, the delivery numbers could potentially increase, so any thoughts on that would be appreciated. Thanks.

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

Appreciate the color, thanks Jason.

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

Thanks, good morning.

Good morning, David.

Hey Jason, at the beginning of the year, you had projected that marine and combat would remain relatively stable. Now, it seems we are likely looking at double-digit growth for both sectors this year. As we begin to consider the outlook for these businesses next year, do you think this growth might indicate a pull-forward that could potentially dampen the growth we might expect from them next year?

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

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.

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

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

So far as the G700 is concerned, we are still targeting 19 deliveries and are working towards that goal. This number depends on the timing of certification. Currently, we have 15 of those 19 aircraft ready and in good shape, and we are focusing on the remaining ones. Assuming certification timing goes smoothly, we should be on track for those deliveries this year. Regarding the G280s, the slight decrease in our overall deliveries for 2023 that I mentioned earlier primarily relates to G280s. We have the aircraft we planned to deliver this year at our Dallas facility for completion, so there isn't any additional risk to 2023 deliveries. We will need to monitor the situation in Israel and its potential impact on 2024, but it's too early to make any conclusions about that.

Okay, great. Thanks Jason.

You’re welcome.

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

Thanks very much, good morning.

Morning Rob.

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

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

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

At marine.

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

We will take our next question from Scott Deuschle 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.

You covered most of the key points regarding next year, and the G700 will play a significant role in that. We've discussed how it will enter service with favorable margins, which will benefit the group greatly. Another crucial factor, as you mentioned, is resolving the supply chain issues. Gulfstream has been actively working on this and has made effective plans that will enhance operational efficiency with this new family of aircraft. The facilities that have been constructed, the commonality among the airplanes, and the ability to service them efficiently are central to our goals and are fundamental to returning to mid to high teens margins over the long term. However, the timing of resolving these supply chain problems is critical since it's currently hindering our efficiency progress. We can expect a slight decrease in R&D spending—not a major concern—but it will decrease as we complete the G700 this year and move into the G800 next year, with the G800 and G400 still in development, so we have more work ahead on the R&D front. Overall, we anticipate margins will continue their upward trend toward the mid to high teens. We expect to see improvements in the fourth quarter and strong progress in 2024.

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

Yes, the major internal capital expenditure projects are completed this year. We have some remaining costs and activities in the shipyards as we finalize the capacity expansion, especially at Electric Boat, but that will conclude next year. The investments we're making on the Army side for artillery are being funded by the customer, so overall, we expect our capital expenditure level to trend back towards 2%. This year, we will be below 2.5%, which indicates we're moving in the right direction, and we aim to be at or near 2% next year.

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

Hey, good morning Jason and Bill. 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 timing at all?

Bottom line, Kristine, I think the short answer is no. Any additional support, such as supplemental or other funding to strengthen the industrial base, is helpful. There’s a lot of discussion around AUKUS, and we’re committed to supporting our customer in that area. However, the fact remains that this supply chain is still very fragile. We have considerable work ahead to restore the submarine industry to two submarines per year. We need to achieve that target on Virginia while also delivering Columbias, and we have more work to do to reach that goal. Therefore, any extra funding and support, whether from the supplemental request or other Navy assistance, would be extremely beneficial. Our current focus is to reach two submarines per year in addition to Columbia, and then we will address AUKUS afterward.

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

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

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

Thanks very much, and good morning everyone. I wanted to follow up on the last topic. The Q3 margin in marine was similar to Q1. In Q1, we had some charges related to Virginia, specifically Block 4 and Block 5. Were there significant negative early cost estimates on Virginia in the third quarter that influenced the margin we observed? Also, while you mentioned supply chain issues at Electric Boat, could you provide any further details on what assumptions have changed and how those new assumptions impact your ability to improve margins?

In the quarter, Seth, nothing material in terms of EACs in the quarter. What you’re seeing there, obviously we are still experiencing pressure from delayed material coming out of the supply chain that’s affecting Electric Boat’s 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 2020 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. It’s those types of factors that are being incorporated, 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.

Thank you for the clarification. You mentioned that the overall company's EPS outlook remains unchanged despite some adjustments, and that this is related to the new Gulfstream delivery forecast of over 60 in Q4. If the G700 is not certified this year, would that change the outlook? What is the latest possible date for that certification to occur in order to still deliver a significant number of G700s?

Yes, the EPS reaffirmed at $12.65 is based on the updated Gulfstream delivery number I mentioned earlier. The reduced number from the July outlook is largely associated with G280s, which does not have a significant impact on earnings. There have been some minor adjustments across the rest of the portfolio, including some upward pressure in the defense businesses from a revenue perspective, as expected, improved customer service revenue at the aerospace group, and some below-the-line factors like lower interest expense and share count, which ultimately keeps us in the same position, hence the guidance remains unchanged. Regarding the G700 outlook, the main concern, and the reason behind the uncertainty, is that we don't have a confirmed date. This is part of the FAA's process, and we need to allow them to complete that process. We are assisting them with flying now and handling the necessary paperwork and reporting to support this. We anticipate getting there in early to mid-December, but there isn't a specific date we are looking at currently.

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

Good morning, thank you.

Morning Doug.

I wanted to revisit the marine aspect because, regarding Electric Boat, your backlogs have significantly increased. As you noted, the Navy aims for two VCS deliveries per year. Can you describe what scenarios you foresee? From what I understand, we are currently at about 1.2 deliveries, which is far from what Congress and the Navy desire. Are there scenarios you consider regarding how quickly we could potentially reach two deliveries per year in an optimistic situation, and what would a negative scenario look like? What is the range of outcomes?

You bring up a valid point, Doug. Reflecting on the period before COVID, in the few quarters leading up to 2020, our team was very close to achieving two deliveries per year for the Virginia-class program. This is certainly within reach considering our industrial base and the team involved. However, COVID impacted us significantly, along with the generational shifts in shipbuilders due to retirements and new hires. Currently, there are several factors that will aid us in returning to that production level. One significant factor is the development and experience of the new workforce, which is crucial for enhancing efficiency. Additionally, the investments being made by the Navy in our industrial base are critical for stability. We’re also implementing initiatives like strategic sourcing to alleviate bottlenecks in the shipyards by shifting subsystem construction to other facilities across the country, which will help lessen the load on our primary production and assembly yards. These efforts will guide us back toward achieving two deliveries per year. I can’t provide a precise timeline for when we’ll reach that goal; it’s a long-term and challenging process. However, with a strong collaboration between us, our partners, and the Navy, I feel optimistic about our progress.

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?

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

We will take our next question from Cai von Rumohr with TD Cowen. Your line is open.

Thank you very much, and it was a good quarter. Jason, you mentioned you’re still aiming for 12.7 in technologies, but considering your defense numbers, you exceeded revenue expectations across the board. It seems like, based on previous models, we might have a softer fourth quarter, but that doesn’t appear realistic given the impressive revenues from the third quarter. Could you provide an update on your revenue expectations for each of the defense sectors for the year, and should we anticipate a more significant increase next year?

I think regarding the fourth quarter, as I mentioned earlier, there is some upward pressure on defense revenue, though it’s not significant with just a couple of months left in the year. This year, if we break it down by group, in technologies, you may recall that last year there was a notable increase in the fourth quarter due to supply chain delays in mission systems during the third quarter, which carried over into the fourth quarter resulting in a substantial uptick. That isn’t the case this year. As I previously indicated, they have been following a more consistent order pattern, leading to a steadier revenue outlook for technologies in the fourth quarter. For combat, historically, there has been a seasonal trend of revenue growth throughout the year, peaking in the fourth quarter, which we observed last year. In 2023, however, we are seeing a more consistent demand with strong volume, but not the typical seasonal increase in combat for the fourth quarter. In marine, we’ve already experienced significant volume, surpassing our expectations, contributing nearly a billion dollars over the first nine months, which aligns with our expectations for the year, indicating a more stable quarter-to-quarter performance. Overall, we’re seeing more consistent volumes across all three defense segments from the first to the fourth quarter, unlike in previous years where there was a rise from the first to the fourth. I anticipate growth in each of the businesses as we head into next year, though I cannot provide further specifics at this time. However, you should expect growth in the defense business across all three segments moving into 2024.

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

You know, the Israel situation obviously is a terrible one, frankly, and one that’s just 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.

Abbie, 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. 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?

I want to acknowledge the team in the combat systems group, particularly in land systems. We haven't experienced issues like supply chain bottlenecks or labor capacity challenges in that area. This doesn't mean they haven't faced obstacles, but they've managed them impressively. As we look ahead, I do not expect any challenges, even with the growing demand for their products domestically and internationally.

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

On the margin side, just to be clear, as I think about double-digit margin for the group, not specifically GDIT - 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 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 systems 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 while they’re very symbiotic businesses and they are dealing with a market that’s dealing with a convergence, 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 theses. 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 are 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 services and so on, together in joint capability. 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.

Ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.