Earnings Call Transcript - GD Q3 2025

Operator, Operator

Good morning, and welcome to the General Dynamics Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Nicole Shelton, Vice President of Investor Relations

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Third Quarter 2025 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. On the call today are Phebe Novakovic, Chairman and Chief Executive Officer; Danny Deep, Executive Vice President, Global Operations; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe.

Phebe Novakovic, Chairman and CEO

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.88 per diluted share on revenue of $12.9 billion, operating earnings of $1.3 billion and net income of $1.059 billion. Across the company, revenue increased $1.24 billion, a strong 10.6%, led by a 30.3% increase in our Aerospace segment and a 13.8% increase in Marine Systems over the year-ago quarter. Importantly, operating earnings of $1.3 billion are up $150 million or 12.7%. Similarly, net earnings increased $129 million or 13.9%, and earnings per share are up $0.53 or 15.8% over the year-ago quarter. On a year-to-date basis, revenue of $38.2 billion is up 11% over last year. Operating earnings of $3.9 billion are up 15.7%. Net earnings of $3.07 billion are up 16.4%, and earnings per share are up 19%. As an aside, we beat consensus estimate by $0.18 on higher-than-anticipated revenue and modestly better operating margins. My reaction to the quarter is best reflected in thoughts about the sequential comparison. In the second quarter of this year, we had very good results, which were well received by investors. This quarter was even better. The two quarters enjoyed similar revenue, but operating margin improved by 30 basis points, and we generated significantly higher free cash flow, as you will hear in greater detail from Kim. Robust order momentum continued in the quarter, yielding record backlog. In short, we had a superb quarter from my perspective. With that, let's move into a discussion of the operating segments. First, Aerospace. Aerospace performed very well in the quarter to say the least. It had revenue of $3.2 billion and operating earnings of $430 million with a 13.3% operating margin. Revenue is a dramatic $752 million more than last year's third quarter, a 30.3% increase. The revenue increase was led by new aircraft deliveries, higher special mission volume, and the services business at both Gulfstream and Jet. Similarly, operating earnings of $430 million show a staggering 41% increase over the year-ago quarter. The 13.3% operating margin is 100 basis points better than a year ago. We delivered 39 aircraft in the quarter, 11 more deliveries than a year ago, including 13 G700s. It is important to note that this is the first quarter where we had no deliveries of the high gross margin G650ER compared to 9 in the year-ago quarter. We also made 3 initial deliveries of the G800 in the quarter. This plane will provide the majority of delivery growth in Q4. For the year-to-date, Aerospace revenue is up $1.82 billion, an increase of 24.2%. Operating earnings are up $386 million, an increase of 43.9%, all very impressive, especially when the comparator year 2024 showed remarkable growth over 2023. Turning to market demand. We saw accelerated interest across all models in the third quarter, led by the North American market. This led to very strong order intake and loaded the pipeline for a good fourth quarter. This remains, by all accounts, a very resilient and robust market for new business aircraft. In summary, the Aerospace team had a very good quarter and look forward to a strong finish to the year. So let's move on to the defense businesses. As a collective, we once again saw strong growth in Marine Systems and good operating performance across the portfolio. Let me walk you through each segment in turn. First, Combat Systems. Combat Systems had revenue of $2.3 billion for the quarter, a modest 1.8% increase. Earnings of $335 million are up 3.1%. Operating margins at 14.9% are up 20 basis points over Q3 last year, demonstrating nice operating leverage. On a sequential basis, while revenue decreased 1.4%, earnings rose 3.4% on a 70 basis point improvement in operating margin. Year-to-date, revenue of $6.7 billion is up 1.7%, and earnings of $950 million are up 3.3%. Overall, demand is strong across Combat, particularly in our ordinance and international combat vehicles business. Artillery orders in the missile subcomponent work we do for the primes have increased in our ordinance business. Internationally, demand for all classes of combat vehicles across the European theater has been increasing, and orders are following, particularly in those countries in which we have indigenous production. We saw robust order intake with over $4.4 billion awarded in Q3, resulting in a book-to-bill of 2:1 for the quarter. Orders came from across the portfolio and internationally, primarily Europe. Our Combat System backlog at roughly $18.7 billion reflects a strong demand. All in all, a strong performance quarter for Combat that sets them up nicely for improved growth rates. Turning to Marine Systems. Yet again, our Shipbuilding Group is demonstrating strong revenue growth. Marine Systems revenue of $4.1 billion is up $497 million, 13.8% against the year-ago quarter. Columbia-class construction and Virginia-class construction led the way with increased throughput. Operating earnings of $291 million are up 12.8% over the year-ago quarter with a 10 basis point decrease in operating margin. However, we are seeing metrics showing improved performance across the business, which should lead to improved operating margins little by little. Sequentially, results are about the same as the prior quarter. Year-to-date, Marine revenue of $11.9 billion is up 14.7%, and earnings of $832 million are up 13.2%. So across the business, we have seen rapid growth of revenue and earnings, but margin performance around 7%. As I have said before, improvement here represents our most meaningful opportunity. And lastly, Technologies. It was another good quarter with revenue of $3.3 billion, which is down 1.6% over the year-ago quarter. Operating earnings in the quarter of $327 million are essentially the same on a 10 basis point improvement in operating margin. The year-to-date comparisons are better. Revenue at $10.2 billion is up 3.5%, and earnings of $987 million are up almost 5% on a 10 basis point improvement in operating margin. Order activity was particularly strong in the quarter with a book-to-bill of 1.8:1. That resulted in backlog at the end of the quarter of $16.9 billion, up $2.7 billion sequentially. Through the first 9 months, the group achieved a book-to-bill ratio of 1.3:1. This positions the group well for better revenue growth than they have had in the last 2 years. Prospects remain strong with a large, qualified funnel of more than $113 billion in opportunities that they are pursuing across the group. It is interesting to observe that our slower growing segments in more recent periods have enjoyed very robust book-to-bill this quarter and year-to-date. That concludes my remarks about the defense businesses. Before I hand the call over to Kim, I'd like to have Danny share his observations from an operating perspective and provide additional color.

Danny Deep, Executive Vice President, Global Operations

Thank you, Phebe. Let me start with Aerospace. We have seen strong performance across the board, including orders, manufacturing and deliveries as well as customer service. From an order standpoint, Phebe mentioned a robust quarter across the portfolio. To give you some additional perspective, in the first 9 months of 2025, unit orders are up 56% versus this time a year ago. From a productivity standpoint, we are seeing good learning across all our lines with manufacturing hours on the G700 and G800 coming down quarter-over-quarter throughout this year. We have seen measurable improvement in the supply chain with on-time deliveries to pre-COVID levels. And in terms of airplane deliveries, the progress has been pronounced with our delivery cadence steadily increasing. Through the first 9 months of this year, we've delivered 113 airplanes as compared to 89 airplanes for the same period in 2024. So overall, plenty to be pleased about from an operational standpoint. Turning to our defense businesses. I'll highlight a few key items of interest. In our Marine group, at Bath Iron Works, we are seeing positive momentum in terms of ship-over-ship learning reflected in both the number of hours to produce as well as the schedule to produce them. At Electric Boat, our productivity and schedule metrics are slowly but steadily improving as we see the investments in tooling and fixtures, automation, robotics and most importantly, our shipbuilders all taking hold. These improvements have stabilized margins and put us in a position to consistently grow them over time once the supply chain improves. With respect to the supply chain, we have seen improvements in some areas, but others are still struggling to meet the significant increase in demand. In the Combat Group, we have seen considerable uptick in demand in our European operations from bridges to combat platforms, and our long-term presence and manufacturing footprint in several European countries positions us well to serve this increased demand. In our Technologies group, we are seeing the benefits of the strategic investments that our Mission Systems business has made in differentiated defense electronics to serve priorities and strategic deterrence, subsea warfare and next-generation command and control. As we transition from legacy programs, which are nearly completed to programs with highly differentiated content, we expect to see continued growth with robust margins for this year and into the future. Across all our businesses, our continued focus on operational performance is bearing fruit as evidenced by our third quarter results, and we expect continued margin strength and strong cash generation in the future. Let me now turn the call over to Kim to discuss relevant financial data.

Kimberly Kuryea, Chief Financial Officer

Thank you, Danny, and good morning. The third quarter was another strong quarter from an orders perspective. The overall book-to-bill ratio for the company was 1.5:1. All 4 segments experienced a book-to-bill of at least 1.2x. Our Defense segment's book-to-bill was a robust 1.6x their revenue. Aerospace continued its momentum with a book-to-bill of 1.3x for the second quarter in a row, even as revenue increased in both quarters. Year-to-date, the book-to-bill for the company was a solid 1.5:1. This robust order activity led to a new record level of backlog at $109.9 billion at the end of the quarter, up 19% from a year ago and 6% from last quarter. Looking at the segments, Marine and Technology each ended the quarter with a record level of backlog. Our total estimated contract value, which includes options and IDIQ contracts, also ended the quarter at a new record level of $167.7 billion with each of the Defense segments reaching new highs. Moving to our cash performance. It's an even better story than orders. Last quarter, we discussed our efforts to drive cash to the left given our back-end loaded cash forecast for 2025. Well, we realized the fruits of those efforts in the quarter. Our business units really outperformed our cash flow generation estimates for the quarter, driven by solid cash collections. Let's get to the specifics. Overall, we generated $2.1 billion of operating cash flow. All segments contributed to the better-than-expected results with particularly strong cash generation in Combat Systems and Technologies. Including capital expenditures, our free cash flow was $1.9 billion for the quarter or 179% of net income. Coming off strong cash collections in the third quarter, we now expect about half as much free cash flow as we generated in the third quarter in the fourth quarter. Our estimate includes an increase in capital expenditures as we continue to invest in our businesses, especially at Electric Boat and somewhat larger tax payments in the final quarter of the year. As a result, we anticipate a free cash flow conversion percentage in the low 90s for the year. This guidance includes some goodness from the reversal of the R&D capitalization, but the rest of that benefit will be realized over the next few years. Having said that, the uncertain duration and future potential impacts of the government shutdown creates a lack of clear visibility into our cash forecast for the remainder of the year. We are taking prudent actions to conserve cash and liquidity. If a resolution can be reached in the near term, we would expect to be able to achieve the forecast that I just discussed. However, in the event of a protracted shutdown, it is unclear how and when our cash flow will be impacted despite our careful efforts to diligently manage cash. Looking at capital deployment. Capital expenditures were $212 million in the quarter or 1.6% of sales and $552 million year-to-date. We are targeting over 2% of sales for the full year CapEx, given the expected investments in the fourth quarter that I mentioned a moment ago. We paid $403 million in dividends and repaid $696 million of commercial paper during the quarter. Year-to-date, we have returned $1.8 billion to shareholders in dividends and share repurchases. We ended the quarter with a cash balance of $2.5 billion. That brings us to a net debt position of $5.5 billion, down $1.7 billion from last quarter. After quarter-end, we did reenter the commercial paper market to support our liquidity during the government shutdown in the event of slow or nonpayment issues. Interest expense in the quarter was $74 million compared with $82 million last year. That brings interest expense for the first 9 months of the year to $251 million, up slightly from $248 million last year. Finally, the tax rate in the quarter was 16.7%, bringing the rate for the first 9 months to 17.2%. This rate is approaching our outlook for the full year, which remains around 17.5%. Now let me turn it back over to Phebe.

Phebe Novakovic, Chairman and CEO

Thanks, Kim. So in light of the things we've just discussed, let me give you some thoughts for the remainder of the year. On a company-wide basis, we see annual revenue of around $52 billion and margins of around 10.3%. The puts and takes around the businesses are sufficiently modest that I will not get into them here. Overall, we are increasing our EPS forecast to between $15.30 to $15.35. Some of you may regard this as a cautious forecast given the performance year-to-date. Let me remind you that we're in the midst of a government shutdown with no end in sight. The longer it lasts, the more it will impact us, particularly the shorter-cycle businesses. So forecasts in this environment are difficult at best and less reliable than one would hope. This concludes our remarks, and we'll be happy to take your questions.

Nicole Shelton, Vice President of Investor Relations

Thank you, Phebe. Operator, could you please remind participants how to enter the queue?

Operator, Operator

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

Myles Walton, Analyst

Phebe, on the orders front within Aerospace, second quarter that they've been quite strong. And I'm curious, how much of this do you think is customers seeing that delivery pace is sort of coming together, realizing that they better get in line, lead times where they are? And maybe how much of it is maybe just more because the certification happens, the orders come in?

Phebe Novakovic, Chairman and CEO

There were several factors that contributed to the orders. Primarily, the strength of the economy has played a significant role. Our order book has remained resilient, and the pipeline continues to look strong and healthy. It’s a combination of that and the introduction of several new models. Our delivery cadence is improving as well. I believe all these elements contributed to the situation, and it’s been evident across the portfolio, with the 800 leading the way.

Myles Walton, Analyst

Geographically, is there an area of particular strength?

Phebe Novakovic, Chairman and CEO

North America.

Operator, Operator

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

Robert Stallard, Analyst

Phebe, there's been some reports that the customer, the U.S. customer is talking to defense companies about potentially investing more of their own money, the CapEx and R&D in exchange for the work they do and also potentially putting restrictions on their ability to return cash to shareholders. And I wonder if you had any views or experience of this so far.

Phebe Novakovic, Chairman and CEO

I think we've all read the same reports. I would note that we have invested heavily over the last 7 years in our business because we anticipated the growth in all of our shipyards in our Combat Systems business and in technology. So we have a very, very clear record of heavy investing in our portfolio because we did see this growth coming. Some of it was predictable, and some of it, I think, is just the natural cycle of defense spending driven by the threat, which is increasingly obvious. So I think we all read the same reports. We haven't seen anything like that yet, but we're pretty comfortable that we have invested and we will continue to invest where we see it prudent to support the growth.

Robert Stallard, Analyst

Okay. And then just a quick follow-up for Kim on the very strong free cash flow in the quarter. Were there any unusual defense advances in there, particularly from Europe, which helped the number?

Kimberly Kuryea, Chief Financial Officer

No, there were not, not in this quarter.

Operator, Operator

Your next question comes from the line of Ken Herbert with RBC.

Kenneth Herbert, Analyst

Phebe, I wanted to follow up on your comments and Kim's comments. On the shutdown, you said protracted. How should we think about timing from what would be a protracted shutdown from your view? And are you seeing anything yet specifically you can point to that's either impacting cash collection or contract timing or anything else as a result of the shutdown?

Phebe Novakovic, Chairman and CEO

On cash collection, we haven't seen any developments yet. Regarding contracts, in some cases, the contracting personnel have been sent home, which will delay contracting until the government resumes operations. We are monitoring this on a rolling basis since it's uncertain when the shutdown will end. Once it does, we will assess our contracts weekly to forecast their status as best as we can. This situation introduces uncertainty for the quarter, and if it extends into next year, it raises the possibility of additional impacts on specific lines of business that may run out of funding. Overall, there is considerable uncertainty, and in this unpredictable environment, we are adopting a cautious approach.

Kenneth Herbert, Analyst

Okay. And when you talk about protracted, I'm guessing based on your comments, we should think about something resolved this quarter, probably not a material impact, but if it spills into '26, that would be obviously a different story.

Phebe Novakovic, Chairman and CEO

I think we'd have to assess where we are contract by contract. But clearly, the longer this goes on, the greater the risk and particularly in the supply chain.

Operator, Operator

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

Ronald Epstein, Analyst

Phebe, maybe the first one for you on Gulfstream. So unlike a lot of other companies in the market, you guys have a suite of new products out there, and you're really gaining the benefit from that. How are you thinking about product development now? Because my understanding is Gulfstream has always had sort of a steady investment in product development and kind of year-over-year and just doesn't ramp up, ramp down, it's very steady. Is that still the case? And how are you thinking about it going forward? I know we got all this behind us and sort of like the last question you probably want, but how are you thinking about it?

Phebe Novakovic, Chairman and CEO

As you know, we have a long-term strategy to completely replace our fleet with new products designed to meet the diverse needs of our customers, and we have accomplished that. The recent announcement of the 300 exemplifies this. Moving forward, we will be upgrading our products as needed. At this moment, that's all we plan to share. These are entirely new airplanes, offering significant potential, and they have received very strong positive feedback from customers.

Ronald Epstein, Analyst

Got it. Got it. And then one for Danny, if you will, on the shipbuilding. Shipbuilding has been sort of a bugaboo for the industry. When you think about making the shipbuilding business more efficient, how are you thinking about it? I mean labor, I think it's been one of the big problems for the entire industry. But I mean, from your point of view, I mean, what are the levers you're pulling today to try to really get the efficiency out of the shipyards up?

Danny Deep, Executive Vice President, Global Operations

Yes. Let me begin with the supply chain. I mentioned that we have observed some improvements, though there are areas that continue to lag. However, these improvements are substantial. To illustrate, this will significantly affect our capability to enhance productivity and schedules while starting to increase margins. The evolution of the supply chain, much of which results from government investments aimed at enhancing productivity, employee retention, and capacity, has been notable. We've seen a 40% increase in critical material sequences over the last two years, which has been beneficial for productivity. When looking at our overall supply, there has been a 75% increase, and we are set to receive nearly 5 million parts. The most critical factor influencing our efficiency in the shipyards is the stabilization of the supply chain. As our shipbuilders improve their efficiency and start realizing better ship-over-ship learning, we are starting to witness this progress. Moreover, we are investing in the same areas that are being enhanced in the supply base, including robotics, automation, and employee development and training. This is where we expect to see the most significant returns on our investment.

Operator, Operator

Your next question comes from the line of Kristine Liwag with Morgan Stanley.

Kristine Liwag, Analyst

Congratulations on the record backlog in defense and growth in aerospace. But I guess, Phebe, focusing on technologies, look, we've seen continued strength in the backlog, but we're also seeing a notable step-up in the unfunded backlog. I was wondering if you could provide more color on what's driving this? Is this related to DOGE or the government shutdown? And when would we expect this to either convert to funded or eventually convert to higher revenue for the segment?

Phebe Novakovic, Chairman and CEO

I believe the increase is mainly due to timing, and I’m not aware of any specific causes. We are consistently collaborating with our customers, as we always have, to enhance efficiency. However, I can't attribute it to any one particular factor. It's important to note that we record backlog differently than many others and tend to be conservative in our approach. The demand we're experiencing across our portfolio is what drives that backlog. Specifically, DDIT has had an exceptionally strong book-to-bill ratio, exceeding 2:1 this quarter, and continues to secure robust bookings as their investments in cyber, Zero Trust environments, and AI start to yield results. Overall, we are in a strong position in that market.

Kristine Liwag, Analyst

And if I could follow on Ron's question about product development in Aerospace. We've seen in the past few years kind of some interest in Supersonic. I was wondering, would that be on the table for a next new program for Gulfstream?

Phebe Novakovic, Chairman and CEO

Well, first of all, there is no way I'm going to venture into what we're going to do next, but I will say something about Supersonic. We have yet to see a business case that even remotely works. So yes.

Operator, Operator

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

Peter Arment, Analyst

Nice results. Phebe, regarding Gulfstream, considering the strong bookings environment and backlog, is there any pressure on production levels? Do you need to increase rates, or do you think you have the right pace with the current rates?

Phebe Novakovic, Chairman and CEO

Our rates are influenced by the backlog and demand. Currently, we are confident that our rates will rise in a consistent manner. However, if demand and backlog continue to grow, we will need to adjust our rates accordingly. That has been our typical approach, and nothing has changed in terms of how we respond to rising demand. We expect to see year-over-year increases for the next few years as part of our strategy.

Peter Arment, Analyst

Got it. That's helpful. And just as a follow-up, could you give us the latest on where things stand on construction for the first Columbia class, just given all the reports out there and maybe how things are either showing some improvement and getting ready for additional volumes that are coming?

Phebe Novakovic, Chairman and CEO

We have the necessary equipment and facilities in place to keep production going. We will keep investing, especially in productivity enhancements and expanding our footprint as required. By the end of this year, the first Columbia will be around 60% complete. All the major modules at Groton will be ready for assembly and testing, and we will methodically address each testing phase with a rigorous first-of-class testing program that will collaborate closely with the Navy. We are diligently working to advance the ship's timeline alongside our customer and the supply chain. We have also observed some improvements from the supply chain. Therefore, the upcoming year will be crucial.

Operator, Operator

Your next question comes from the line of Seth Seifman with JPMorgan.

Seth Seifman, Analyst

I wanted to ask one about Combat. And so I was kind of thinking about the future there and the fact that there are some headwinds in vehicles, including Stryker and some tailwinds maybe from munitions and in Europe and kind of wondering if that business was going to grow. But based on the comments you made earlier and kind of the backlog growth we saw in the quarter, it sounds like there's potential for Combat growth to accelerate out of this year. Is that a fair way to think about it?

Phebe Novakovic, Chairman and CEO

We are viewing the situation with an understanding of both the headwinds and tailwinds. International demand for vehicles is rising at a significant pace, and we are also seeing increased demand for munitions both internationally and domestically, especially as we supply major contractors for missile components. However, we are facing some challenges with U.S. combat vehicles until we ramp up the delivery of the new tank. Overall, we anticipate solid growth driven by our international operations. To provide some perspective on that international segment, we have indigenous businesses that have been integral to their respective countries' supply chains and industrial bases for the past 25 years. These operations feature local engineering design and manufacturing and are managed by nationals from the host countries. Therefore, when we produce vehicles in Europe, they are designed, engineered, and manufactured in Europe. This approach has proven successful, as evidenced by our leading installed fleet in Europe, which gives us confidence in our competitive position in that market.

Seth Seifman, Analyst

Great. Great. And maybe as a follow-up, can you talk a little bit about where we stand in the replacement cycle for G650? To what degree has that been driving recent orders for G800? And I assume it's more 800 than 700. And to what kind of pipeline is there for that as we kind of look ahead?

Phebe Novakovic, Chairman and CEO

We have phased out the 650 and replaced it with the 800, which has attracted a lot of customer interest and led to strong order demand this quarter. Our pipeline looks solid, and the transition from the 650 to the 800 went very smoothly. The launch of the 800 has been successful, and deliveries are on the rise. This week, we delivered our sixth G800, and we also delivered our 72nd G700, indicating a more consistent delivery schedule as the supply chain has stabilized.

Operator, Operator

Your next question comes from the line of Sheila Kahyaoglu with Nepris.

Sheila Kahyaoglu, Analyst

Could you provide a follow-up on the topic, Phebe? With so many development programs underway, and considering the successful transition from the 650 to the 800, I'm curious about how we should view the stability of margins despite the discontinuation of the 650. Additionally, could you share your thoughts on the learning curve for the G800 and the 700? An update on those developments would be appreciated.

Phebe Novakovic, Chairman and CEO

We are progressing in our understanding and experience with both aircraft. The 650 was a well-established, high-margin aircraft, so it will take some time for the 800 to achieve similar gross margins. However, we are optimistic about all of our aircraft. The key factors are the ongoing stabilization of the supply chain, which has significantly improved. The launch of the 800 showcased the strength of the supply chain, as it has become more reliable and better equipped to meet demand compared to the 700. That supply chain has also stabilized. Therefore, we expect to see improvements in gross margins as we gain more experience with these aircraft.

Operator, Operator

Next question comes from the line of Doug Harned with Bernstein.

Douglas Harned, Analyst

On the topic of Combat, you mentioned the importance of having local operations in Europe. Looking ahead, considering the growth potential in Europe, do you anticipate increasing investments there? Could this extend beyond just ground vehicles into other areas?

Phebe Novakovic, Chairman and CEO

We have the facilities and the infrastructure to produce at the moment. I don't see getting out of our core. I don't see moving past tactical bridges or high-end combat vehicles. I think one of the things we have differentiated ourselves is having the discipline to stick with what we know, do what you know well and get better and better and better at it as you serve your customers, your people, your shareholders best by doing that. So we'll stick to our knitting.

Douglas Harned, Analyst

And then going back to Columbia Class. I mean the delays, there's been a lot of discussion about delays. Can you talk a little bit about what has driven those? Have those been related to design changes, supply chain, labor and you mentioned a little bit about addressing these issues, but can you talk a little bit more about mitigation and where we might end up if things get better there?

Phebe Novakovic, Chairman and CEO

The primary challenge affecting the production and delivery of the first Columbia has been the vulnerability of the supply chain as it attempts to increase from a very low rate of production that has persisted for the last 25 to 30 years to a much higher level. This has been our biggest hurdle. The government has acknowledged this issue and has provided substantial funding over the past few years to develop and expand the supply chain, and we're starting to see positive results from that support. Additionally, we have faced a significant demographic shift within the workforce as experienced workers have retired, leading to a generational transition with younger employees joining. We have invested in our training programs, and with the government's assistance, we are enhancing these initiatives so that new shipbuilders emerge from training with a higher level of proficiency than in the past. This is a positive development. By collaborating with the government, we have also managed to increase wages in a competitive market. We are confident in our manpower and facilities, and we continue to invest in our operations, particularly in productivity. Overall, many elements are starting to align that will help mitigate risks in this program and advance our timeline, which is our goal as we work closely with our customer.

Operator, Operator

Your next question comes from the line of Richard Safran with Seaport Research Partners.

Richard Safran, Analyst

If it's okay, I have a two-part question about contracting. To start, I'm not looking for specifics on any contracts. Generally, could you comment on the changes in the contracting environment you're observing with the new administration? There has been some discussion about award fees and incentive fees, and I'm curious about what you're seeing in new contracts. Secondly, regarding international contracts, are you noticing an increase in direct commercial awards compared to FMS? I'm interested in understanding the mix given all the new awards you've been receiving.

Phebe Novakovic, Chairman and CEO

I haven't observed any major changes in contracting, apart from a greater focus on speed. Some customers have experienced quicker contracting processes, while others have faced longer timelines. Overall, I wouldn't say there have been significant changes across the board. We are collaborating with a knowledgeable buyer on several large contracts, so I can't provide a comprehensive analysis on this matter. If we take a broader view of the federal landscape, we have noticed a shift with the departure of seasoned contracting personnel, leading to an influx of newer professionals who will need time to adapt. As for international orders, there is a strong pipeline for Foreign Military Sales, but progress has been slow. We are aware of the demand, but the timing within the FMS process remains uncertain. In Europe, we engage in direct commercial sales, along with certain markets outside the U.S. and in the Middle East, and as munitions demand increases, we may see a mix of direct commercial and foreign military sales.

Operator, Operator

Your next question comes from the line of Gautam Khanna with TD Cowen.

Gautam Khanna, Analyst

I wanted to follow up on Rich's question regarding Marine. I understand you are in discussions for five Columbia-class submarines and the next block of Virginia-class submarines. I would like to know your expectations concerning timing and the structure of the contract. Do you anticipate that all of them will be ordered at once, or will it be done incrementally? If so, when? Additionally, do you think the contract terms could potentially be more favorable, with the government taking on more risk than in the previous administration?

Phebe Novakovic, Chairman and CEO

The operating assumption is that those contracts will be executed this year. We won't go into details about the contracts, but they will be very large and complex. Once we sign them, we will be more transparent about the incentives and obligations in those contracts, as we have been in the past. We have had and will continue to have a close working relationship with the government as we work together to solve common challenges, like increasing shipbuilding throughput while maintaining quality. We remain optimistic that as partners, we will drive significant changes and move these deliveries earlier.

Kimberly Kuryea, Chief Financial Officer

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

Operator, Operator

Your final question comes from the line of Scott Mikus with Melius Research.

Scott Mikus, Analyst

Historically, you've talked about Colombia driving $400 million to $500 million of annual sales growth at Marine. It's been significantly higher than that in the past couple of years. Obviously, very strong growth on tough comps again this year. So if we're going to progress to 2 plus 1 on Virginia and Colombia, should Marine sustainably be growing sales at least $1 billion per annum until we hit that cadence? And then once we do hit that cadence, is that when Marine margins get back to the 8% to 9% range?

Phebe Novakovic, Chairman and CEO

I believe we can expect growth similar to what we've experienced over the past few years. I don't foresee any changes in the near term, and that growth has been quite strong. Regarding margins, Danny has outlined the key factors at play. The main focus is on stabilizing our supply chain and increasing our throughput to counter any supply chain disruptions. This approach is crucial for improving margins and, importantly, for enhancing throughput. Danny, do you have anything to add?

Danny Deep, Executive Vice President, Global Operations

Yes. No, I think you've captured it. To the extent that the supply chain stabilizes, I think that's where we will see meaningful margin expansion.

Nicole Shelton, Vice President of Investor Relations

Okay. Well, thank you, everyone, for joining our call today. Please refer to the General Dynamics website for the third quarter earnings release and highlights presentation. As a reminder, we will resume our normal reporting schedule of Wednesday at 9:00 a.m. for our fourth quarter call. If you have additional questions, I can be reached at (703) 876-3152. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.