Earnings Call Transcript
GENERAL DYNAMICS CORP (GD)
Earnings Call Transcript - GD Q2 2025
Operator, Operator
Good morning, and welcome to the General Dynamics Second 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 M. Shelton, Vice President of Investor Relations
Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Second 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; Kim Kuryea, Chief Financial Officer; Danny Deep, Executive Vice President, Global Operations; Jason Aiken, Executive Vice President, Combat and Mission Systems; and Amy Gilliland, Executive Vice President, and President, GDIT. I will now turn the call over to Phebe.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier today, we reported earnings of $3.74 per diluted share on revenue of $13 billion, operating earnings of $1.3 billion, and net income slightly over $1 billion. We enjoyed revenue increases at 3 of our 4 business segments compared to the year-ago quarter. Across the company, revenue increased over $1 billion, an 8.9% increase. Importantly, operating earnings of $1.3 billion are up almost 13%, once again, demonstrating strong operating leverage. Similarly, net earnings are up 12% and earnings per share up 14.7% over the year-ago quarter. You will note we beat Street EPS consensus by $0.19. On a year-to-date basis, revenue of $25.3 billion is up 11.3%, operating earnings of nearly $2.6 billion are up 17.4%, and earnings per share are up $1.26 or 20.5%. In my view, this was a wonderful quarter that exceeded our expectations and led to a very good first half of the year. Let me ask our CFO, Kim Kuryea, to provide detail on our strong order activity, growing backlog, superb cash generation, as well as other relevant financial information.
Kimberly A. Kuryea, Chief Financial Officer
Thank you, Phebe, and good morning. I'll start with orders. We had a huge quarter with over $28 billion of orders, yielding an overall book-to-bill ratio of 2.2:1 for the company. The largest driver was the Marine Systems segment, which received several contracts for further construction of submarines. The large awards in marine almost overshadow the fact that aerospace had a tremendous quarter with a book-to-bill ratio of 1.3x. This is the strongest first half for orders since 2022 and reflected strong demand across the entire Gulfstream product line. Combat Systems and technologies also had solid quarters with book-to-bill ratios of 1x and 0.9x, respectively. We ended the quarter with a record level of backlog of $103.7 million, up 14% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at over $160 billion, also an all-time high. Turning to our cash performance for the quarter. We generated $1.6 billion of operating cash flow with all 4 segments contributing to our efforts to drive cash earlier in the year. After capital expenditures, our free cash flow was $1.4 billion for the quarter, yielding a cash conversion rate of 138%. Through the first half of 2025, we have free cash flow of $1.1 billion, which is well ahead of what we had planned. However, there is still work to be done as we have working capital to unwind from the balance sheet. We expect a strong second half with the majority of cash generated in the fourth quarter, which should push us towards a cash conversion rate around 90% for the year, an improvement from what we were originally forecasting. Our full-year cash estimate excludes the impact of the recent tax legislation. As you know, reversing the prior law's requirement to capitalize R&D expenses will provide us a cash benefit. We are still working to develop an estimate of the exact timing and amounts associated with how that will all unfold. Now turning to capital deployment. Capital expenditures were $198 million or 1.5% of sales in the quarter. Similar to last year, you should expect capital expenditures to be somewhat higher in the second half of the year, spending a little over 2% of sales for the year. We paid $402 million in dividends in the quarter, but we made no share repurchases largely due to our cash profile. Also in the quarter, we refinanced $750 million of notes that matured in May. We have no further debt maturities until next year. We ended the quarter with a cash balance of approximately $1.5 billion and a net debt position of $7.2 billion, down $1.2 billion from last quarter. Our net interest expense in the quarter was $88 million, compared to $84 million last year. That brings the interest expense for the first half of the year to $177 million, up from $166 million for the same period in 2024 due to our utilization of commercial paper. At this point, our expectation for interest expense for the year is approximately $330 million. Finally, the effective tax rate in the quarter was 17.7%, bringing the tax rate for the first half to 17.4%. This rate is a little lower than our outlook for the full year, which remains around 17.5%. Phebe, that concludes my remarks. I'll turn it back over to you.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate. I have asked some of our group executives to participate and provide color from their perspective as well. First, Aerospace. Aerospace performed well in the quarter. It had a revenue of $3.06 billion, a 4.1% increase. Operating earnings of $403 million were 26.3% better than the year ago quarter. Operating margin is 230 basis points better than the year-ago quarter. To give you a little perspective here, Gulfstream had 38 deliveries in the quarter, including 15 G700s, which is 4 more than the year-ago quarter and 2 more sequentially. This was offset in part by fewer G650s as we made the final deliveries of this high-margin product. As I indicated previously, the supply chain continues to improve and is performing better to both schedule and quality. We are finding fewer faults and those we are finding are becoming easier to fix. In short, I'm increasingly confident that we can meet this year's delivery plan. And in fact, we are delivering G700s on a much more predictable cadence. I am pleased that all of our G700 retrofit airplanes have been delivered. Also, all of the G700s that were completed before engines were installed have also been delivered. You may recall that both of these things have negatively impacted costs and delayed deliveries. We are in the process of completing the G700 flight test aircraft and a number of them will be delivered in the second half. These are lower-margin aircraft and will be dilutive to margins, but will reduce inventory and increase operating cash by a like amount. The initial deliveries of the G800 will be made in the third quarter. We expect to deliver about 13 G800s for the year, which is about 3 less than the G650s we delivered in the second half of last year. The initial G800s will not carry the operating margins of the G650. This will obviously put some pressure on operating margin in the second half, but we still expect the margins in the third quarter to be very similar to the second quarter, coupled with a stronger fourth quarter. In summary, the Aerospace team had a solid quarter. The G800 deliveries are about to commence and G700 delivery cadence and operating margin are both improving. Anecdotally, as you may recall, the G800 was designed to replace the G650. Interestingly, the first 20 of the G800s will be the G650 owners. There is significant interest in this plane from Fortune 500 companies. Before I discuss demand, I am frequently asked questions about Aerospace operating margin. And when it will move into the high teens, that is above 15%. The simple answer is maybe 2026, but for sure, in 2027, with degradation again in 2028, with the delivery of a significant number of G400s. The simple answer is made with some trepidation, nothing is more complex to forecast than the operating margin for Aerospace. So first, let me focus on what you all think about operating margin on aircraft deliveries. This is almost always driven by mix. The G700 has the highest margins, the G800 should ultimately enjoy similar margins, but it's early in its delivery cycle. The G600 enjoys the next highest margin, followed by the G500 and G280. And let's not forget the very strong margin contribution earlier in the year from the sunset G650 program. But aircraft margins, while important because of their size, are only part of the story. Aerospace also has over $3.5 billion of sales and what we generally refer to as the aircraft services business. At Gulfstream, we have a large maintenance business impacted by the amount of warranty work in a given period. Over the counterpart sales and special mission aircraft, each with differing operating margins and varying from quarter to quarter and impacted by both volume and mix. At Jet Aviation, we have a large MRO business impacted by mix, particularly the number of large maintenance checks in a given quarter. They also have an aircraft completions business that is influenced by the mix of aircraft in-house, i.e., narrow-body, wide-body, or completions for Gulfstream. Jet also has a high-margin FBO business impacted by volume in any particular quarter. FBO volume happened to have been down in the second quarter. Finally, Jet has a significant aircraft management and services business that has over 300 aircraft under management. The mix of these things impacts margins quarter-over-quarter at Jet. Jet also has about $1.6 billion of annual revenue, and that is sufficient to impact margins in the group. I hope this, to some extent, helps you understand the mosaic that makes forecasting in this area so complex and the impact of both volume and mix on the results. However, do not let this discussion distract you from the main aerospace steady increasing sales and earnings. So turning to demand. Aerospace enjoyed very strong market demand in the quarter. As Kim noted, we had a 1.3x book-to-bill in the quarter even as aircraft deliveries increased the denominator. As I said last quarter, we fully expect the certification of the G800, its better-than-planned performance characteristics, and early deliveries to customers will stimulate demand. We continue to see very strong interest across all models in the U.S., across Europe, the Middle East, and other parts of the world. So let's move on to the defense businesses. First, Marine. The growth story at Marine continues. Revenue of $4.22 billion is up 22.2% from the year ago quarter and 17.6% sequentially. Similarly, operating earnings of $291 million are up 18.8% quarter-over-quarter and 16.4% sequentially. Operating margin of 6.9% leaves plenty of room for improvement, but let's not lose sight of the fact that operating earnings continue to grow along with sales. This particular quarter's growth was driven by Columbia-class and Virginia-class construction as well as a slight increase in DDG-51 construction. On a sequential basis, the 10-point decline in operating margin was driven by an unfavorable EAC adjustment at NASSCO. Backlog increased in the quarter by $14.6 billion or 38% to almost $53 billion, largely the result of a contract for 2 Block V Virginia-class ships, including a one-of-a-kind special mission ship with considerable contract. The contract also included important investment funds to support shipyard productivity, wage increases, and additional training programs. These funds complement the funding that the Navy and Congress have provided over the last several years to help stabilize and improve the submarine industrial base. Taken together, these will help further improve EV throughput and productivity. As I said last quarter, at Electric Boat, we continue to experience delays and quality problems in the supply chain. Material and parts are late and sometimes exhibited quality escapes. This obviously disrupts workflow, but we are developing good workarounds. We have more work to do here, but we are making progress. We are working closely with the Navy and the new administration to continue to address the problems in the supply chain and to work diligently to improve throughput and performance at Electric Boat. Our job remains to continuously improve to help the industrial base get stronger and to improve the cadence of ship delivery to the Navy. Next, Combat Systems. I'm going to summarize the group's results for the quarter and first half of the year and then ask Jason, our new Executive Vice President, to give you some color on the quarter from his perspective. Revenue in the quarter of $2.28 billion is essentially flat versus the year-ago quarter. Operating earnings of $324 million are up 3.5%, on a 50 basis point increase in operating margin to 14.2%. Year-to-date, the comparison is not dissimilar with modest revenue growth of 1.6% to $4.46 billion, stronger earnings growth of 3.4% to $615 million, and a 20 basis point expansion of operating margin to 13.8%. And sequentially, even stronger revenue growth, 4.9% to $2.28 billion, an impressive increase of 11.3% in operating earnings to $324 million, on an 80 basis point improvement in operating margin. Order activity was solid with a book-to-bill of 1x for the quarter. So solid performance all around for Combat Systems. Jason?
Jason W. Aiken, Executive Vice President, Combat and Mission Systems
Thank you, Phebe, and good morning. As you can see from the numbers Phebe detailed for you, the group continues to demonstrate strong operating leverage irrespective of the top line trajectory, flat versus the prior year quarter, up modestly year-to-date, and up more significantly on a sequential basis. And that's a testament to the operating discipline of this group. Growth in the quarter in Europe was offset by lower volume in our U.S. combat vehicle business, driven largely by the cancellation of the Booker program. While the Booker cancellation represents a headwind, we've stayed very close to the Army and are supporting their efforts as they work through budget and program prioritization activities. To that point, we've invested ahead of need to make sure we're well positioned to support priorities such as the rapid development and fielding of the next-generation main battle tank. The growth in Europe is particularly encouraging and is representative of significant potential in that business as defense spending in Europe is poised to accelerate. To that point, the book-to-bill in our European business was 1.5x in the first half, and they've got solid opportunities as we look ahead. Our munitions business continues to focus on facility expansion and increasing production rates in all areas related to artillery, including projectiles, load assembly, pack, and propellant. We're making progress and working closely with the Army in support of their artillery production goals.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Thanks, Jason. And finally, Technologies. As with Combat, I'm going to summarize the group's results for the quarter and first half of the year and then ask Amy and Jason to give you some color on the quarter from the perspective of GDIT and Mission Systems, respectively. The group had another strong quarter with revenue and earnings up quarter-over-quarter sequentially and year-to-date. Revenue of $3.5 billion was up 5.5% from the year-ago quarter while earnings of $332 million were up 3.8%. Operating margin for the group was 9.6%, down 10 basis points from a year ago, on a shift in mix as GDIT grew faster than Mission Systems in the quarter. On a sequential basis, revenue and earnings were up by 1.3% and 1.2%, respectively, on a steady margin rate of 9.6%. And for the first half, revenue of $6.9 billion was up 6.1%, and operating earnings of $660 million were up 7.3% on a 20 basis point expansion in operating margins to 9.6%. The group continues to have solid order activity with a book-to-bill of just under 1x for the quarter and just over 1x for the first 6 months. As a result, the group's backlog is up 7.5% from this time a year ago, and their total estimated contract value is up more than 11% over the same period. With that, I'll turn it over to Amy first to talk about GDIT's quarter.
Marguerite Amy Gilliland, Executive Vice President, President GDIT
Thank you, and good morning, everyone. As Phebe noted, GDIT delivered a solid quarter and first half with growth in all of our customer-facing divisions. This performance highlights the discipline and agility of a business focused on mission execution and cost control in a particularly dynamic environment. The pace of contract award activity was slower than normal in the first half, albeit somewhat improved in the second quarter. Despite significantly lower first half customer adjudications, GDIT enjoyed 6 wins over $100 million, including 1 over $1 billion, and the business delivered a first half book-to-bill of essentially 1x on a growing business. First half book-to-bill would have been even stronger, but for the protest by a competitor of a significant new second quarter win in the defense business. We are pleased with the results we are seeing from the investments we've made in our portfolio of digital accelerators, capabilities that enable customers to quickly leverage AI, cyber, and mission software technologies, and our deepening relationships with strategic and emerging technology partners. We reliably deliver and integrate the best technology has to offer day in and day out, and that has helped us navigate the changes in administration priorities throughout the first half. With that, I'll turn it over to Jason to talk about Mission Systems.
Jason W. Aiken, Executive Vice President, Combat and Mission Systems
Thanks, Amy. Mission Systems also had a great quarter with revenue, earnings, and margins up on every comparator basis, quarter-over-quarter, sequentially, and year-over-year. As we have been discussing for some time, Mission Systems has been transitioning from legacy lower-margin programs to new franchises for several years now. So the top line has been relatively flat, even as the margin profile is improving steadily. We said this is the final year of that transition, and so we're starting to see an inflection to growth. So that's very encouraging. Like GDIT, Mission Systems has been investing ahead of need in areas like unmanned platforms, smart munitions, high-speed encryption, strategic deterrents, and contested space. And as a result, they're seeing increasing opportunities across the portfolio. To that point, their total backlog is up 15% from a year ago, and total potential contract value is up 23% over the same period. All in all, a very strong first half of the year. I'll now turn it back over to Phebe.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Before getting into guidance, I wanted you to hear from Danny Deep about his new responsibilities and what we are up to here with the new Executive VP for Operations.
Danny Deep, Executive Vice President, Global Operations
Thank you, Phebe, and good morning. As you are all aware, General Dynamics takes great pride in being an outstanding operating company focused on cash generation, earnings, and dependable delivery of highly differentiated and critical capabilities to our customers. As the portfolio has grown, and in some cases, quite rapidly, we see opportunity across each of our business units to further optimize our operating leverage. Along with the senior corporate leadership team and the operating unit presidents, we will focus on driving continuous improvement across the entire value chain, from competing to winning while maintaining discipline in our contracts to ensuring a robust supply chain and efficient manufacturing footprint to execute on our commitments. We'll place particular attention on programs where we have challenges to ensure we get them up the learning curve and performing to the high standards that have been the hallmark of General Dynamics. In summary, we see a wealth of value creation opportunities across the portfolio. With that, I'll turn it back to Phebe.
Phebe N. Novakovic, Chairman and Chief Executive Officer
So let me provide you our operating forecast for 2025 with some specifics around our outlook for each business group and then the company-wide rollup. For 2025, we now expect Aerospace revenue of around $12.9 billion, up around $250 million over prior estimate. Gulfstream deliveries will be $150 million to $155 million, up a little over our previous estimate. We anticipate a 13.5% operating margin for the year, 20 basis points lower than our earlier estimate. The third quarter operating margin will be about the same as this quarter with a somewhat better fourth quarter. In short, revenue is up on more deliveries, margin is down a little due to mix in airplane deliveries and at the service businesses. In Combat, we expect revenue of about $9.2 billion, coupled with a 14.5% operating margin. This should lead to somewhat improved earnings over our last estimate. As noted earlier, the Marine Group has been on a remarkable but difficult growth journey. It will continue during the rest of 2025, albeit at slightly lower growth rate. Our outlook for this year now anticipates revenue around $15.6 billion with an operating margin of 7%, which should provide better earnings than previously estimated. In Technologies, we are making no change to the 2025 revenue and earnings estimate provided at the beginning of the year. So for 2025 company-wide, we expect to see revenue of approximately $51.2 billion and an operating margin of 10.3%. The revenue estimate is increased by $900 million, and the overall operating margin held constant. You have already heard Kim's commentary about our estimate for increased cash for the year. All of this rolls up to an increased EPS forecast of $15.05 to $15.15. So to wrap up, as we go into the second half coming off a very strong first half, we feel very good about the potential for the year. Nicole, back to you.
Nicole M. Shelton, Vice President of Investor Relations
Thank you, Phebe. As a reminder, we ask participants to ask 1 question and 1 follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?
Operator, Operator
Your first question comes from the line of Gautam Khanna with TD Cowen.
Gautam J. Khanna, Analyst
Nice results. Phebe, I was wondering if you could elaborate on the G800 delivery cadence. You mentioned 13 in the second half. Do you have a sense for when the first one might deliver and what the SKU will be Q3 to Q4? And relatedly, you've given color on the lots and the G700 margins, if you will. Any sort of guidance you can give us on how to think about G800 profitability by lots over time?
Phebe N. Novakovic, Chairman and Chief Executive Officer
The first G800 should be delivered very soon. I’m not exactly sure of the distribution by quarter, but it will align closely with what I mentioned earlier. As previously discussed, the G700 lot 1 had lower margins due to developmental costs. Lot 2 is an improvement, and lot 3 is expected to perform even better, with lot 4 anticipated to follow suit. The G800 will start at a higher incremental margin for lot 1 compared to the 700, which had higher developmental costs. We expect margin expansion as we progress down our learning curves and transition from one lot to the next.
Operator, Operator
Your next question comes from the line of Seth Seifman with JPMorgan.
Seth Michael Seifman, Analyst
I wanted to ask, first of all, I thought it was helpful to have the breakdown of Aerospace and thinking about the different ingredients in margin. It seems like in services, after a strong couple of years, things seem to have slowed down a little bit here in the first half. And so maybe if you could talk a little bit about kind of why that's happening. And while I realize that there's a lot of unpredictability around the different dynamics there in terms of the contributors and the mix, what's sort of a good algorithm for services going forward? Does it grow at kind of a pace with flight hours or, I guess, deliveries, or kind of how to think about it and how it fits into the margin mix going forward as well?
Phebe N. Novakovic, Chairman and Chief Executive Officer
Sure. The rationale behind our services was that establishing additional service centers close to Gulfstream airplanes would generate extra revenue, and that has indeed been the case. As I mentioned in my remarks, margins vary mainly due to service mix, but also by volume. Therefore, in any given quarter, the margin depends significantly on the mix of MRO and other service lines at Jet Aviation, which contribute to the overall margin. There's not a specific formula to determine margin in the service sector, but we anticipate continued growth alongside the fleet, and we're pleased with our performance in this area.
Seth Michael Seifman, Analyst
Okay. Great. And then just as a follow-up, it seems like based on the new guidance, with Technologies unchanged, there's a step down in terms of both margin and sales in the second half. And so maybe if you could talk a little bit about what's driving that and then kind of where it goes from here.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Yes. So we were given the fluidity in that market so far this year, we thought it prudent to keep our earnings and our revenue estimates about where they are. But I'll ask both first Amy and then Jason to give you a little bit of color.
Marguerite Amy Gilliland, Executive Vice President, President GDIT
So from a GDIT perspective, we did navigate the first half very well. That was not without some impact from contract scope changes, from cancellations of some of our contracts. And so as we look at the second half, the thing that will most impact our positioning is really the cadence of award activity. And as commented in my remarks, the adjudications were down significantly in the first half of 2025 compared to the first half of 2024. And so we're running out of days of the year to be able to win that work and deliver on it. And so really from a revenue expectation, it is the pace of adjudications that we're watching for the second half of the year, but feel very good about where we are from an earnings perspective.
Jason W. Aiken, Executive Vice President, Combat and Mission Systems
Yes. So from Mission Systems perspective, a good bit of the strength that we saw in the first half came from activity in their high-speed encryption product business, which is really a transactional business. And so while we still see incredible demand on that side of the business, the timing of that is somewhat less predictable given the transactional nature. So I would tell you there's opportunity for them in the second half, depending on how that demand goes. But as Phebe said, just given the uncertainty overall in the market for the group as a whole, that's the reason we're holding to the full year guidance.
Operator, Operator
Your next question comes from the line of Doug Harned with Bernstein.
Douglas Stuart Harned, Analyst
On Marine, the big increase you saw in revenues in Q2, that's unusual to see that large of a jump there. Can you talk about what happened specifically related to Virginia-class, Columbia-class that really took it up so much?
Phebe N. Novakovic, Chairman and Chief Executive Officer
So Virginia was about 60% of the volume, Columbia, about 40%, and it really just was the construction volume. And I'd say we'll give you a little bit of perspective here. We've been growing on average at about 9% year-over-year for the last couple of years. And some quarters, we've hit high teens, but I'd say the 22% growth in this quarter is really just a question of largely both timing, but also continued increasing performance at the shipyard.
Douglas Stuart Harned, Analyst
Early in the quarter, you received the award for the last two Block V boats, which was certainly positive news for labor support. Can you discuss the increased funding and what we might expect in the '26 budget, and how you can convert that into higher throughput, which it seems you're already starting to achieve, and ultimately higher margins as well?
Phebe N. Novakovic, Chairman and Chief Executive Officer
Let me address your question in reverse order. As we've mentioned previously, margin improvements at the Marine Group, particularly within the submarine sector, will enhance operations at Electric Boat once we achieve more stability in that industrial base and our supply chain. This has significantly contributed to productivity at the shipyard. Part of our strategy focuses on managing what we can influence directly on the deck plates to optimize our in-house work while navigating around delays and quality issues from major suppliers. This encapsulates our main strategy, and we are indeed witnessing productivity gains in several key areas at Electric Boat and across our other businesses. Regarding the supply chain, we've experienced some stabilization and positive changes in important sectors. The Navy and Congress have been allocating funding to support the industrial base, which is starting to show improvements, though we still have progress to make. Concerning the fiscal year 2026 funding levels, we are currently discussing the specific funding amounts for each program with our Navy customer. Navigating the complexities of the 2026 budget and the reconciliation bill is a task, but all our programs have solid backing. We're pleased to have secured that contract for the anomaly, as one of those boats is particularly complex. This contract has been crucial because it provided funding for the shipyards over the last few years. Such financial support for training, wage increases, and productivity enhancements at each of those yards will be very beneficial as we move forward.
Operator, Operator
Your next question comes from the line of Scott Deuschle with Deutsche Bank.
Scott Deuschle, Analyst
Phebe, does getting to high teens margins at Aerospace require meaningfully higher Gulfstream deliveries than the $150 million to $155 million you're planning for 2025? Or is that bridge to high teens, primarily driven by coming down the learning curve and optimizing the mix?
Phebe N. Novakovic, Chairman and Chief Executive Officer
I believe it's a combination of various factors. I took some time in my comments to explain the complexities of Aerospace margins. I'm not sure what further clarification I can provide, but it will involve a mix of elements and volume in simple terms.
Scott Deuschle, Analyst
Okay. That's fair. And sorry if I missed this, but was the order strength at Gulfstream this quarter pretty well spread across aircraft types? Or was it concentrated in any particular pockets of the Gulfstream portfolio, particularly in the context of the G800?
Phebe N. Novakovic, Chairman and Chief Executive Officer
It was across all of our airplanes. First with the 700, 600, right behind it, and we had nice geographic distribution as well. So it was a good solid demand. And we continue to see that in the third quarter with particular just in the 800 I might add.
Operator, Operator
Your next question comes from the line of Robert Stallard with Vertical Research.
Robert Alan Stallard, Analyst
Phebe, I was wondering if you could comment on the management reorganization that you announced this quarter and how this could affect the way that the business is run going forward?
Phebe N. Novakovic, Chairman and Chief Executive Officer
Well, it was one of the reasons I asked Danny to give you some clarity on how we see his role in particular playing out. We'll continue to manage the business as we have been managing it and really driving for value creation across each and every one of our portfolios. But as we grow, we have believed as a leadership team, and we've talked on this call and I've talked with many of you individually and in groups about our desire to increase our operating leverage. And you'll note in almost every single one of our calls, we'll stress and point out and then stress where we are on our operating leverage. So one of Danny's missions is to really focus on the operating performance of each and every one of our businesses. But we will manage the business in the same way.
Robert Alan Stallard, Analyst
Okay. The quick follow-up. Are you also looking to combine Combat Mission going forward? Or is it going to remain stand-alone businesses?
Phebe N. Novakovic, Chairman and Chief Executive Officer
No, we'll keep them as they are.
Operator, Operator
Your next question comes from the line of David Strauss with Barclays.
David Egon Strauss, Analyst
Phebe, in response to Rob's question, the portfolio used to operate with margins between 12% and 13%, but it has recently dropped to the low 10s. Considering the various factors at play, do you have any insights on the margin potential for the portfolio as we move ahead?
Phebe N. Novakovic, Chairman and Chief Executive Officer
We pride ourselves on our operating performance, and I think there's room for improvement. Specifically, the Marine group stands out, and those margins need to get better over time. I'll ask Danny if he has any insights, even though he's relatively new in his position, he has been a senior operating executive with the company for a while.
Danny Deep, Executive Vice President, Global Operations
Okay. Well, thank you. Yes, I mean I think Phebe hit it. We're going to look across each of the operating units and program by program and where we've had some challenges in getting up the learning curve, I think that's where our focus is going to be and not to point any one particular operating unit out, but if you look at where the largest operating pieces of the business are and where we've historically had our margins, that's where we see our best opportunities. But this company has been focused on operations and has been very disciplined from an operating perspective for a long time, and we're just going to put a finer point on that.
Operator, Operator
Your next question comes from the line of Myles Walton with Wolfe Research.
Myles Alexander Walton, Analyst
Phebe, the strength of bookings at Aerospace in the first half, are you feeling more confident in seeing a book-to-bill at or above 1x for 2025 at this point?
Phebe N. Novakovic, Chairman and Chief Executive Officer
I think we're keeping it about 1x. That's sort of been our cadence and our thought patterns and our observations, frankly. But the demand has been quite good. And as I noted, in my previous answers to one of the questions, we see that demand carrying through into the third quarter.
Myles Alexander Walton, Analyst
Okay. And then I think in your prepared remarks, you mentioned margin pressure in 2028 from the G400. I had my notes a certification in 2026.
Phebe N. Novakovic, Chairman and Chief Executive Officer
I don't think so. We've slowed down the 400 a bit because we have a lot on our plate. This isn't related to the FAA; it's just that we have a lot to manage as we continue to grow and work on our operating leverage at Gulfstream. The 400 is performing well, but I don't believe we've ever provided an entry into service estimate. I was trying to share some insights about year-over-year progress without discussing next year's guidance, which we will not do.
Operator, Operator
Your next question comes from the line of Sheila Kahyaoglu with Jefferies.
Sheila Karin Kahyaoglu, Analyst
I really appreciate the color on Aero. I might follow up a little bit on Myles' question. Just I think the point on aerospace is it's a stable growing business, both on revenues and operating profit. So maybe if you could talk about just the capacity of volume Gulfstream could produce. Is it growing off this 150 base annually? And to Myles' question, why the dip in '28? If G400 comes in there, I thought it would be maybe a year after the 800. So if you could just provide that dip timing.
Phebe N. Novakovic, Chairman and Chief Executive Officer
As the G400 is introduced, it will have lower profit margins compared to the very large cabin aircraft. And could you remind me what the first part of your question was?
Sheila Karin Kahyaoglu, Analyst
Just on the capacity, production capacity.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Yes. So on the capacity question, we've got the plant and equipment jigs and fixtures as well as the workforce to support a capacity of 200 airplanes, but we'll continue to work to increase our production exported to the market.
Sheila Karin Kahyaoglu, Analyst
Maybe one more, if I could ask, was services down in the quarter?
Phebe N. Novakovic, Chairman and Chief Executive Officer
Yes.
Operator, Operator
Your next question comes from the line of Jason Gursky with Citi.
Jason Michael Gursky, Analyst
You mentioned NASSCO and noted a potential small negative EAC there. Could you discuss what’s happening at NASSCO, the priorities of the new administration, and how that might impact the yard? Additionally, please provide some insight on the EAC.
Phebe N. Novakovic, Chairman and Chief Executive Officer
Yes. So let me talk about sort of what we see as the market environment, and then I'll turn it over to Danny to talk a little bit about this particular impact, which, by the way, at NASSCO is extremely unusual. So let's just set the table here and remind ourselves that NASSCO produces primarily auxiliary ships for the U.S. Navy. And the demand for those has been increasing over the last few years, and we continue to see that need as the war ships all need support ships in order to function at sea. So we've seen nice increases in demand, and we expect that to continue. We're working on the oiler program, and we've got several other programs in place as well. But I'll turn it over to Danny to talk about this quarter's EAC.
Danny Deep, Executive Vice President, Global Operations
Okay. Yes. So at NASSCO, it really started with the flood and the impact the flood had on our prime line. It took us down from 2 lines to 1, and then we had a subsequent issue. And after that issue, it created a fair bit of rework in the system. And so that's what's reflected in the EAC as we speak. And we think we'll largely be through that by the end of the year and have both of those prime lines up and running, and this issue will be behind us.
Nicole M. Shelton, Vice President of Investor Relations
Okay, Lacey. I think we have time for just one more question.
Operator, Operator
Final question comes from the line of Scott Mikus with Melius Research.
Scott Stephen Mikus, Analyst
Phebe, the Secretary of the Navy commented that it might be preferable to have Huntington Ingalls and Electric Boat each build Virginia-class submarines separately rather than in a teaming arrangement. So if the Navy were to actually pursue that route, how much capital would you need to invest to make that happen? And is there enough skilled labor for Electric Boat to handle 1 Virginia by itself while also continuing to work on Columbia?
Phebe N. Novakovic, Chairman and Chief Executive Officer
Skilled labor has not been a concern for Electric Boat for quite a while. We do not anticipate any capacity issues in the region regarding our skilled workforce, which means we can accommodate further growth. If the Navy decides to proceed with that strategy, we would require some additional capital, but it would not be a substantial amount. However, I will leave any future discussions on this topic to the Navy.
Scott Stephen Mikus, Analyst
Okay. And then a quick question on Aerospace. The book-to-bill in the quarter was very good despite the stock markets' perturbations around Liberation Day. Have you seen any uptick in the pipeline since the One Big Beautiful Bill Act was signed into law and reinstated bonus depreciation?
Phebe N. Novakovic, Chairman and Chief Executive Officer
I wouldn't cite one macroeconomic factor. I think that there are a lot of them here. There wasn't one in particular from my perspective that drove the demand. Bonus depreciation helps quite a bit, always has.
Nicole M. Shelton, Vice President of Investor Relations
Okay. Thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the second quarter earnings release and highlights presentation. Finally, we want to let you know that we expect to hold our Q3 earnings call on Friday, October 24, at 9:00 a.m. That's a slight change from our normal practice of announcing earnings on Wednesday. So we want to advise you that early for planning purposes. We will resume our normal schedule for the fourth quarter call. If you have additional questions, I can be reached at (703) 876-3152.
Operator, Operator
This concludes today's conference call. You may now disconnect.