Q2 2026 General Dynamics Corp Earnings Call

Speaker #1: Good morning, and welcome to the General Dynamics Q2 2026 earnings conference call. All participants will be in listen-only mode. Please note this event is being recorded.

Speaker #1: I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Go ahead.

Speaker #2: Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics Q2 2026 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: On the call today, our Phoebe Novakovic, Chairman and Chief Executive Officer, Danny Deep, President, and Kim Kuria, Chief Financial Officer. I will now turn the call over to Phoebe.

Speaker #3: Thank you, Nicole. Good morning, everyone, and thanks for being with us. You may recall that at the outset of his remarks at the end of the first quarter, Danny described it as a very powerful quarter.

Speaker #3: This quarter is even better and almost all respects. Earlier today, we reported earnings of $4.24 per diluted share on revenue of $14.1 billion. Operating earnings of $1,460,000,000, and net earnings of $1,160,000,000.

Speaker #3: These results compare quite favorably to the year-ago quarter as well as sequentially. For example, against the year-ago quarter, revenue is up 8.1%, operating earnings are up almost 12%, and net earnings are up 14.4%.

Speaker #3: As a result, earnings per diluted share are up 50 cents or 13.4%. The operating margin for the entire company is 10.4%, a 40-basis-point improvement over the year-ago quarter.

Speaker #3: Which coupled with the revenue growth led to very strong earnings growth. While aerospace and marine led the way on revenue increases, each of the other two segments had revenue increases as well.

Speaker #3: With respect to operating earnings, aerospace led the way with a 26.6% improvement, followed by marine systems with a strong 17.5% increase. Sequentially, against a very good first quarter, revenue is up 4.5%, operating earnings are up 2.8%, and diluted earnings per share are up 14 cents or 3.4%.

Speaker #3: On a year-to-date basis, revenue of $27,600,000,000 is up 9.1%. Operating earnings of nearly $2.9 billion are up 11.9%, and earnings per share are up 95 cents or 12.8%.

Speaker #3: We beat consensus by 28 cents in the quarter. More revenue, more operating earnings, and better operating margins than is expected by the sell side.

Speaker #3: In short, it was a superb quarter and first half. Let me ask our CFO, Kim Kuria, to provide some detail on our strong order activity, rapidly growing backlog, and superb cash generation, as well as other relevant financial data.

Speaker #1: Against a very good first quarter, revenue is up 4.5%, operating earnings are up 2.8%, and diluted earnings per share are up 14 cents, or 3.4%.

Speaker #4: Thank you, Phoebe, and good morning. I'll start with our outstanding cash performance for the quarter. We generated $1.9 billion of operating cash flow, which when combined with the strong $2.2 billion from the first quarter yields over $4 billion of operating cash flow in the first half of the year.

Speaker #1: On a year-to-date basis, revenue of 27,600,000,000 is up 9.1%. Operating earnings of nearly 2.9 billion are up 11.9%, and earnings per share are up 12.8%.

Speaker #4: Each of our segments contributed nicely, exceeding their planned cash flows and driving operating working capital down over $1 billion from the end of 2025.

Speaker #1: We beat consensus by 28 cents in the quarter on more revenue, more operating earnings, and better operating margins than it's expected by the sell side.

Speaker #4: Capital expenditures totaled $234 million, or $1.7% of sales in the quarter. Compared to the first half of 2025, capital expenditures were up nearly 30% to $437 million.

Speaker #1: In short, it was a superb quarter and first half. Let me ask our CFO, Kimberly Kuryea, to provide some detail on our strong order activity, rapidly growing backlog, and superb cash generation, as well as other relevant financial data.

Speaker #4: We continue to expect capital expenditures between $3.5 and 4% of sales for the full year. You should expect the profile of our investment to grow significantly in the back half of the year as we continue to invest, especially in our shipyards, to accelerate production and meet future demand.

Speaker #2: Thank you, Phebe, and good morning. I'll start with our outstanding cash performance for the quarter. We generated 1.9 billion dollars of operating cash flow, which, when combined with the strong 2.2 billion from the first quarter, yields over 4 billion of operating cash flow in the first half of the year.

Speaker #4: After capital expenditures, our free cash flow was $1.6 billion for the quarter, yielding a cash conversion rate of $142% and $3.6 billion for the first half, a cash conversion rate in excess of $150%.

Speaker #2: Each of our segments contributed nicely, exceeding their planned cash flows and driving operating working capital down over $1 billion from the end of 2025.

Speaker #4: Given our strong cash performance so far, we now expect a free cash flow conversion rate a little north of 100% of net income for the year.

Speaker #2: Capital expenditures totaled 234 million dollars, or 1.7% of sales in the quarter. Compared to the first half of 2025, capital expenditures were up nearly 30%, to 437 million dollars.

Speaker #4: Let's say around $105%. That said, we will have a later second half than the first, which is due to higher planned capital expenditures, which I've already discussed, and three other factors I'll address now.

Speaker #2: We continued to expect capital expenditures between 3.5 and 4% of sales for the full year. You should expect the profile of our investment to grow significantly in the back half of the year as we continue to invest, especially in our shipyards, to accelerate production and meet future demand.

Speaker #4: First, pension. We have decided to contribute approximately $500 million to our pension plans. Given favorable market returns over the last few years, the funded status of many of our plans are near full funding.

Speaker #2: After capital expenditures, our free cash flow was 1.6 billion dollars for the quarter, yielding a cash conversion rate of 142% and 3.6 billion dollars for the first half, a cash conversion rate in excess of 150%.

Speaker #4: And this contribution will allow us to de-risk those plans and eliminate significant volatility going forward. Second, our cash taxes are weighted toward the back half of the year with over $500 million of payments expected.

Speaker #2: Given our strong cash performance so far, we now expect a free cash flow conversion rate a little north of 100% of net income for the year, let's say around 105%.

Speaker #4: Third, we will be working down some advanced payments on new programs at European Land Systems during the second half. Now to round out the cash discussion.

Speaker #4: From a capital deployment perspective, in the quarter we paid dividends of approximately $430 million and repurchased about $100 million of our common stock to cover dilution.

Speaker #2: That said, we will have a later second half than the first, which is due to higher planned capital expenditures, which I've already discussed, and three other factors I'll address now.

Speaker #4: Finally, we repaid $500 million of notes that matured in June. We have another $500 million of notes coming due in August that we anticipate repaying with cash on hand.

Speaker #2: First, pension. We have decided to contribute approximately 500 million dollars to our pension plans. Given favorable market returns over the last few years, the funded status of many of our plans are near full funding.

Speaker #4: At this time, we don't anticipate refinancing these maturities during the year, but we will continue to evaluate market conditions and potential borrowing needs as the year progresses.

Speaker #2: And this contribution will allow us to de-risk those plans and eliminate significant volatility going forward. Second, our cash taxes are weighted toward the back half of the year with over 500 million dollars of payments expected.

Speaker #4: All in all, we ended the quarter with a cash balance of approximately $4.3 billion and a net debt position of $3.2 billion. Down $1.2 billion from last quarter.

Speaker #2: Third, we will be working down some advanced payments on new programs at European Land Systems during the second half. Now to round out the cash discussion.

Speaker #4: Next, on to orders and backlog. We had another strong quarter with just shy of $20 billion of orders, yielding an overall book-to-bill ratio of 1.4 to 1 for the company.

Speaker #2: From a capital deployment perspective, in the quarter we paid dividends of approximately 430 million dollars and repurchased about 100 million dollars of our common stock to cover dilution.

Speaker #4: Book-to-bill in all four of our operating segments was greater than 1 to 1. In aerospace, our dollar-based book-to-bill was $1.5 times this is the strongest first half for orders for aerospace since 2022 and reflected very solid demand across the entire Gulfstream product line.

Speaker #2: Finally, we repaid 500 million dollars of notes that matured in June. We have another 500 million dollars of notes coming due in August that we anticipate repaying with cash on hand.

Speaker #2: At this time, we don't anticipate refinancing these maturities during the year, but we will continue to evaluate market conditions and potential borrowing needs as the year progresses, all in all, we ended the quarter with a cash balance of approximately 4.3 billion dollars and a net debt position of 3.2 billion dollars, down 1.2 billion dollars from last quarter.

Speaker #4: In the defense segment, book-to-bill was $1.4 times led by the combat systems segment at $2.1 times, which received several large contracts, including the production of new armored combat support vehicles ACSVs for the Canadian Armed Forces.

Speaker #4: We ended the quarter with a record level of backlog of $136.5 billion up 32% from a year ago. Backlog was also a record high for each of our segments.

Speaker #2: Next, on to orders and backlog. We had another strong quarter with just shy of 20 billion dollars of orders, yielding an overall book-to-bill ratio of 1.4 to 1 for the company.

Speaker #4: Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at $186.9 billion. Turning to interest, our net interest expense in the second quarter was $49 million compared to $88 million in the respective 2025 period.

Speaker #2: Book-to-bill in all four of our operating segments was greater than one to one. In Aerospace, our dollar-based book-to-bill was 1.5 times. This is the strongest first half for orders for Aerospace since 2022 and reflected very solid demand across the entire Gulfstream product line.

Speaker #4: And $118 million for the first half of 2026 compared to $177 million in the first half of 2025. The decrease in our interest expense is due almost entirely to the interest we paid for commercial paper borrowings in 2025.

Speaker #2: In the defense segment, book-to-bill was 1.4 times, led by the combat systems segment at 2.1 times, which received several large contracts, including the production of new armored combat support vehicles ACSVs for the Canadian Armed Forces.

Speaker #4: We have not been in the commercial paper market in 2026. Further, our interest income increased in 2026 as we held higher cash balances. At this point, our expectation for net interest expense for the year is approximately $270 million.

Speaker #2: We ended the quarter with a record level of backlog of 136.5 billion dollars, up 32% from a year ago. Backlog was also of record high for each of our segments.

Speaker #2: Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at 186.9 billion dollars. Turning to interest, our net interest expense in the second quarter was 49 million dollars, compared to 88 million dollars in the respective 2025 period.

Speaker #4: Finally, the effective tax rate in the quarter was 17.6%, bringing the tax rate for the first half to 17.7%. This rate is a little higher than our outlook for the full year, which remains around 17.5%.

Speaker #4: Phoebe, that concludes my remarks. I'll turn it back over to you. Thanks, Kim. Now I will briefly review the financial performance for each of the groups and Danny will interject additional details.

Speaker #2: And $118 million for the first half of 2026, compared to $177 million in the first half of 2025. The decrease in our interest expense is due almost entirely to the interest we paid for commercial paper borrowings in 2025.

Speaker #4: First, aerospace. Aerospace had a very good quarter with revenue of $3.5 billion and operating earnings of $510 million, with a 14.5% operating margin. Revenue is $463 million more than last year's second quarter, a 15.1% increase.

Speaker #2: We have not been in the commercial paper market in 2026. Further, our interest income increased in 2026 as we held higher cash balances. At this point, our expectation for net interest expense for the year is approximately $270 million.

Speaker #4: To give you a little perspective here, the increase is attributable to three more deliveries and higher service revenue at both Gulfstream and Jet Aviation.

Speaker #2: Finally, the effective tax rate in the quarter was 17.6%, bringing the tax rate for the first half to 17.7%. This rate is a little higher than our outlook for the full year, which remains around 17.5%.

Speaker #4: The $41 deliveries in the quarter are somewhat more than planned. Operating earnings of $510 million are up $107 million, driven in part by the increased revenue, but most importantly, by $130 basis points improvement in operating margin.

Speaker #2: Phebe, that concludes my remarks. I'll turn it back over to you.

Speaker #1: Thanks, Kim. Now I will briefly review the financial performance for each of the groups and Danny will interject additional details. First, aerospace. Aerospace had a very good quarter with revenue of 3.5 billion and operating earnings of 510 million, with a 14.5% operating margin.

Speaker #4: There are no unusual items of significance. As a result, the improvement quarter over quarter comes from a lot of measurable improvements across the entire business.

Speaker #3: From an operational perspective, we're after a strong start to the year. Phoebe mentioned $41 deliveries in the quarter. This is three more than the year ago quarter, and sequentially as well.

Speaker #1: Revenue is 463 million more than last year's second quarter, a 15.1% increase. To give you a little perspective here, the increase is attributable to three more deliveries and higher service revenue at both Gulfstream and Jet Aviation.

Speaker #3: We see durable productivity improvements on all new aircraft types with modestly improved margins both year over year and sequentially. We performed quite well across all service categories, at both Gulfstream and Jet Aviation, with improved operating earnings at each, both quarter over quarter and sequentially.

Speaker #1: The 41 deliveries in the quarter are somewhat more than planned. Operating earnings of 510 million are up 107 million, driven in part by the increased revenue, but most importantly by 130 basis points improvement in operating margin.

Speaker #3: You might note that the second quarter overall operating margins are down sequentially despite the fact that operating margins by line of business all improved.

Speaker #3: This is attributable to a slightly disadvantageous mix plus a modest increase in both G&A and R&D. Phoebe?

Speaker #1: There are no unusual items of significance. As a result, the improvement quarter over quarter comes from a lot of measurable improvements across the entire business.

Speaker #4: Turning to market demand, aerospace had a $1.5 book-to-bill in the quarter of 16 more airplane orders than the year ago quarter, and 20 more than the first quarter of this year.

Speaker #3: From an operational perspective, we're after a strong start to the year. Phebe mentioned 41 deliveries in the quarter; this is three more than the year ago quarter, and sequentially as well.

Speaker #4: The book-to-bill was 312 months, 1.35. So we see very active interest across all models in the US and Asia, with some cautious concern from customers in the Mid East, but they're still active in the pipeline.

Speaker #3: We see durable productivity improvements on all new aircraft types, with modestly improved margins both year over year and sequentially. We performed quite well across all service categories, at both Gulfstream and Jet Aviation, with improved operating earnings at each, both quarter over quarter and sequentially.

Speaker #4: In summary, the aerospace team had a special quarter both operationally and in terms of order activity. So let's move on to the defense businesses.

Speaker #3: You might note that the second quarter overall operating margins are down sequentially despite the fact that operating margins by line of business all improved.

Speaker #4: First, combat. Combat systems had revenue of $2.3 billion, up marginally over the year ago quarter. Earnings of $318 million are down $6 million. Margins of 13.9% are down 30 basis points against the year ago quarter due largely to mix.

Speaker #3: This is attributable to a slightly disadvantageous mix plus a modest increase in both G&A and R&D. Phebe?

Speaker #2: Turning to market demand, aerospace had a 1.5 book-to-bill in the quarter of 16 more airplane orders than the year ago quarter and 20 more than the first quarter of this year.

Speaker #4: There was increased revenue performance at Ordnance and Tactical Systems and European Land Systems, offset by a decline at Land Systems. Sequentially, revenue is up modestly, but earnings are up 2.6% on a 30 basis point improvement in operating margins.

Speaker #2: The book-to-bill over the trailing 12 months is 1.3 times. So we see very active interest across all models in the U.S. and Asia, with some cautious concern from customers in the Mid East, but they're still active in the pipeline.

Speaker #4: The real good news story here is the order performance at 2.1 to 1 book-to-bill continues to build strong significant backlog. A large portion of the order activity in the quarter was at Land Systems.

Speaker #2: In summary, the Aerospace team had a special quarter, both operationally and in terms of order activity. So, let's move on to the Defense businesses.

Speaker #4: Demand for combat systems products is strong, primarily driven by US allies. Orders for wheeled and tracked vehicles are up, reflecting the increased threat environment.

Speaker #2: First, combat. Combat systems had revenue of 2.3 billion, up marginally over the year ago quarter. Earnings of 318 million are down 6 million. Margins of 13.9% are down 30 basis points against the year ago quarter, due largely to mixed.

Speaker #4: In addition, OTS continues to have, particularly strong growth in munitions.

Speaker #3: So I want to repeat what I said last quarter. Because performance this quarter further demonstrates the strength and breadth of the combat portfolio. Particularly with international vehicles, as well as our munitions group.

Speaker #2: There was increased revenue performance at Ordnance and Tactical Systems and European Land Systems, offset by a decline at Land Systems. Sequentially, revenue is up modestly, but earnings are up 2.6% on a 30 basis point improvement in operating margins.

Speaker #3: It's encouraging during this period of transition and recapitalization to next-generation platforms for our US Land Force customers that the overall group continues to provide a healthy growth outlook with very nice margins.

Speaker #2: The real good news story here is the order performance at 2.1 to 1 book-to-bill continues to build strong significant backlog. A large portion of the order activity in the quarter was at Land Systems.

Speaker #3: You've seen the 2.1 book-to-bill in the quarter, we're confident there is more to come. Phoebe?

Speaker #4: So turning to marine systems. Once again, our shipyards are each demonstrating strong revenue growth. This quarter's growth at 10.4% was driven by the Colombia and Virginia-class programs, followed by NASCO and BAF, expressed in dollar increases.

Speaker #2: Demand for combat systems products is strong, primarily driven by U.S. allies. Orders for wheeled and tracked vehicles are up, reflecting the increased threat environment.

Speaker #2: In addition, OTS continues to have, particularly strong growth in munitions.

Speaker #4: However, in growth expressed as a percentage of revenue, both NASCO and BAF outpaced electric boat for the first time in my memory. Earnings improved 17.5% on a 40 basis point improvement in operating margins.

Speaker #3: So, I want to repeat what I said last quarter, because performance this quarter further demonstrates the strength and breadth of the combat portfolio, particularly with international vehicles, as well as our munitions group.

Speaker #4: We can point to clear and measurable productivity gains. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at electric boat.

Speaker #3: It's encouraging during this period of transition and recapitalization to next-generation platforms for our U.S. Land Force customers that the overall group continues to provide a healthy growth outlook with very nice margins.

Speaker #4: We will continue to invest as we go forward to support the additional demand we see in the national security interests of the United States.

Speaker #3: You've seen the 2.1 book-to-bill in the quarter, where there is more to come. Phebe?

Speaker #4: Turning to operating performance.

Speaker #3: As Phoebe mentioned, momentum continues to build at each of our shipyards, and we're making good progress with our efforts to accelerate build rates. A great example of this is at BAF Ironworks, where our most recent DDG-51 destroyer delivery was accelerated by almost three months versus planned due to the excellent performance of the ship and its sea trial.

Speaker #2: So turning to marine systems. Once again, our shipyards are each demonstrating strong revenue growth. This quarter's growth at 10.4% was driven by the Colombia and Virginia class programs, followed by NASCO and BAF, expressed in dollar increases.

Speaker #2: However, in growth expressed as a percentage of revenue, both NASCO and BAF outpaced electric boat for the first time in my memory. Earnings improved 17.5% on a 40 basis point improvement in operating margins.

Speaker #3: At electric boat, on the Colombia program, we had a significant increase in the number of hours earned as compared to both the year ago quarter and sequentially.

Speaker #3: In the first half of this year, the hours earned are up 37% versus the same period last year. Material deliveries also continue to improve, with a 65% increase in sequence-critical material this quarter over the second quarter last year.

Speaker #2: We can point to clear and measurable productivity gains. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at electric boat.

Speaker #2: We will continue to invest as we go forward to support the additional demand we see in the national security interests of the United States.

Speaker #3: Let me state the obvious. This is the segment, given its backlog and improving productivity, where we can accelerate value for our shareholders as we accelerate delivery of submarines, surface combatants, and auxiliary ships.

Speaker #2: Turning to operating performance.

Speaker #3: As Phebe mentioned, momentum continues to build at each of our shipyards, and we're making good progress with our efforts to accelerate build rates. A great example of this is at BAF Ironworks, where our most recent DDG-51 destroyer delivery was accelerated by almost three months versus planned, due to the excellent performance of the ship and its sea trial.

Speaker #3: Continuous operational improvement has our undivided attention and focus. Back to you, Phoebe.

Speaker #4: So finally, technologies. This group is also experiencing growth in revenue and earnings, albeit not at the pace experienced by aerospace and marine systems. Revenue of $3.6 billion is an increase of 4.1% over the second quarter of 2025.

Speaker #3: At electric boat, on the Colombia program, we had a significant increase in the number of hours earned as compared to both the year ago quarter and sequentially.

Speaker #3: In the first half of this year, the hours earned are up 37% versus the same period last year. Material deliveries also continue to improve, with a 65% increase in sequence-critical material this quarter over the second quarter last year.

Speaker #4: Both businesses contributed respectable growth, but mission systems led the way. Operating earnings of $339 million are up 2.1% over the year ago quarter. Operating margin decreased 20 basis points from 9.6 to 9.4%.

Speaker #3: Let me state the obvious. This is the segment, given its backlog and improving productivity, where we can accelerate value for our shareholders as we accelerate delivery of submarines, surface combatants, and auxiliary ships.

Speaker #4: The group's order activity was also encouraging, with the book-to-bill of $1.1 times for the quarter and $1.3 times for the trailing 12 months.

Speaker #3: Growth in mission systems came from across the portfolio, but most notably in land and air systems, and in their international portfolio. The international portfolio was up more than 35% since 2024, and we expect that to continue to be a key driver of growth for the year and beyond.

Speaker #3: Continuous operational improvement has our undivided attention and focus. Back to you, Phebe.

Speaker #2: So finally, Technologies. This group is also experiencing growth in revenue and earnings, albeit not at the pace experienced by Aerospace and Marine Systems. Revenue of $3.6 billion is an increase of 4.1% over the second quarter of 2025.

Speaker #3: In IT services, we've discussed elongated procurement cycles and that continues. But a real bright spot has been GDIT's success capturing programs under agile contracting mechanisms, such as other transaction authorities or OTAs.

Speaker #2: Both businesses contributed respectable growth, but mission systems led the way. Operating earnings of 339 million are up 2.1% over the year ago quarter. Operating margin decreased 20 basis points from 9.6 to 9.4%.

Speaker #3: GDIT has submitted and won more OTAs in the first half of 2026 than for all of last year.

Speaker #4: So let's turn to guidance for the rest of the year. At the outset, I want to review what we've told you to date. In January, we told you to assume an EPS range of $16.10 to $16.20.

Speaker #2: The group's order activity was also encouraging, with the book-to-bill of 1.1 times for the quarter and 1.3 times for the trailing 12 months.

Speaker #3: Growth in Mission Systems came from across the portfolio, but most notably in Land and Air Systems, and in their international portfolio. The international portfolio was up more than 35% since 2024, and we expect that to continue to be a key driver of growth for the year and beyond.

Speaker #4: In April, our updated guidance for 2026 was an EPS range of $16.45 to $16.55. With that as a predicate, let me proceed to provide our operating forecast for the remainder of '26 with some specifics around our outlook for each business group, and then a company-wide roll-up.

Speaker #3: In IT services, we've discussed elongated procurement cycles and that continues. But a real bright spot has been GDIT's success in capturing programs under agile contracting mechanisms, such as other transaction authorities or OTAs.

Speaker #4: For 2026, we now expect aerospace revenue of around $13.8 billion, Gulfstream will still deliver about $160 airplanes. There is some potential upside, delivering large cabin aircraft and some risk on the 280 deliveries for obvious reasons.

Speaker #3: GDIT has submitted and won more OTAs in the first half of 2026 than in all of last year.

Speaker #4: We anticipate a $14.7% operating margin for the year. The third quarter operating margin will be about the same as this quarter, with a better fourth quarter.

Speaker #2: So let's turn to guidance for the rest of the year. At the outset, I want to review what we've told you today. In January, we told you to assume an EPS range of $16.10 to $16.20.

Speaker #4: In combat, we expect revenue of about $9.8 billion, coupled with a $13.8% operating margin. As noted earlier, the marine group has been on a remarkable growth journey.

Speaker #2: In April, our updated guidance for 2026 was an EPS range of $16.45 to $16.55. With that as a predicate, let me proceed to provide our operating forecast for the remainder of '26 with some specifics around our outlook for each business group, and then a company-wide rollout.

Speaker #4: Our outlook for the year now anticipates revenue around $18 billion, with an operating margin for the year of $7.4%. In technologies, we expect revenue of $14.1 billion and an operating margin of $9.4%.

Speaker #2: For 2026, we now expect aerospace revenue of around $13.8 billion. Gulfstream will still deliver about 160 airplanes. There is some potential upside—delivering large-cabin aircraft—and some risk on the 280 deliveries, for obvious reasons.

Speaker #4: So for 2026, company-wide, we expect to see revenue of approximately $55.7 billion and operating margin of $10.5%. You've already heard Kim's commentary about our estimates for cash flow for the year tax rate and interest expense.

Speaker #2: We anticipate a $14.7% operating margin for the year. The third quarter operating margin will be about the same as this quarter, with a better fourth quarter.

Speaker #4: All this rolls up to an increased EPS forecast of $16.80 to $16.90 for the year. 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 this second half and the full year.

Speaker #2: In combat, we expect revenue of about $9.8 billion, coupled with a $13.8% operating margin. As noted earlier, the marine group has been on a remarkable growth journey.

Speaker #4: Nicole, back to you.

Speaker #2: Thank you, Phoebe. 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?

Speaker #2: Our outlook for the year now anticipates revenue around $18 billion, with an operating margin for the year of 7.4%. In Technologies, we expect revenue of $14.1 billion and an operating margin of 9.4%.

Speaker #5: We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand.

Speaker #2: So for 2026, company-wide, we expect to see revenue of approximately $55.7 billion, an operating margin of $10.5%. You've already heard Kim's commentary about our estimates for cash flow for the year, tax rate, and interest expense.

Speaker #5: If you would like to withdraw your question, press star one again. We ask you to pick up your handset when asking a question to allow for optimum sound quality.

Speaker #5: If you are muted locally, please remember to unmute your device. Your first question comes from David Strauss from Wells Fargo. Your line is open.

Speaker #2: All this rolls up to an increased EPS forecast of $16.80 to $16.90 for the year. 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 this second half and the full year.

Speaker #5: Please go ahead.

Speaker #6: Thanks. Good morning.

Speaker #4: Hi, David.

Speaker #6: Hi, Phoebe. Maybe a few Phoebe with the backlog increase that we saw this quarter at aerospace. Could you talk maybe in terms of years of production, how far out that extends, and how much you could take production up from kind of current levels to start to eat into that backlog?

Speaker #2: Nicole, back to you.

Speaker #1: Thank you, Phebe. 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?

Speaker #4: We will now begin the question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. If you would like to withdraw your question, press star 1 again.

Speaker #4: So you followed us long enough to know that sometime ago we ceased giving you the details about model and years out. That became a very competitive issue.

Speaker #4: We ask you to pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.

Speaker #4: But look, we will the supply chain has stabilized. We're getting coming down our learning curve. On all of our products, we're still working through some of the challenges on completion, such as just a question of pace.

Speaker #4: Your first question comes from David Strauss from Wells Fargo. Your line is open. Please go ahead.

Speaker #5: Thanks. Good morning.

Speaker #2: Hi, David.

Speaker #5: Hi, Phebe. Maybe a few Phebe with the backlog increase that we saw this quarter at aerospace. Could you talk maybe in terms of years of production, how far out that extends, and how much you could take production up from kind of current levels to start to eat into that backlog?

Speaker #4: So we'll take all of this into due consideration and give you some real clarity next year what to expect.

Speaker #6: Okay. And quick follow-up on marine. It's consistently exceeded kind of expectations and the growth outlook that you've outlined. And it looks like for the rest of the year, you're forecasting kind of minimal growth in this second half of the year.

Speaker #2: So you followed us long enough to know that sometime ago we ceased giving you the details about model and years out. That became a very competitive issue.

Speaker #6: Maybe if you could just talk about kind of the longer-term trajectory here. I mean, I know it's law of large numbers at this point, but is there a reason to believe that marine growth meaningfully decelerates kind of from the levels that we've seen?

Speaker #2: But look, we will the supply chain has stabilized; we're getting coming down our learning curve. On all of our products, we're still working through some of the challenges on completion, such as just a question of pace.

Speaker #6: Thanks.

Speaker #3: Yeah. I think let me take that one. I think the second half and as compared to the first half is really just a function of material receipts, stuff that we received in the first half that we're actually now installing.

Speaker #2: So we'll take all of this into due consideration, and give you some real clarity next year what to expect.

Speaker #3: And as you know, it's important to reflect that we've increased sales for 2026 over 2025 by almost $1.3 billion, which exceeded even what we thought.

Speaker #5: Okay. And quick follow-up on marine. It's consistently exceeded kind of expectations and the growth outlook that you've outlined. And it looks like for the rest of the year, you're forecasting kind of minimal growth in this second half of the year.

Speaker #3: I think we'll see it continue to grow. Maybe not quite at that pace, but certainly we're getting up into as you say, the law of large numbers.

Speaker #3: But we don't have any expectation that it will slow down much because there's just volume out there that we have to execute on. But it's natural tail in the second half of the year.

Speaker #5: Maybe if you could just talk about kind of the longer-term trajectory here. I mean, I know it's law of large numbers at this point, but is there a reason to believe that marine growth meaningfully decelerates kind of from the levels that we've seen?

Speaker #3: Compared to the first.

Speaker #5: Thanks.

Speaker #3: Yeah. I think let me take that one. I think the second half and as compared to the first half is really just a function of material receipts, stuff that we received in the first half that we're actually now installing.

Speaker #5: Your next question comes from Ron Epstein from Bank of America, Merrill ill Lynch. Your line is open. Please go ahead.

Speaker #6: Yeah. Hey, good morning.

Speaker #4: Hi, Ron.

Speaker #6: So on marine, just following up on marine. On marine, where are we on build rate on Virginia-class now? Right? I mean, are we still at like $1.3 a year, $1.4?

Speaker #3: And as you know, it's important to reflect that we've increased sales for 2026 over 2025 by almost $1.3 billion, which exceeded even what we thought.

Speaker #3: I think we'll see it continue to grow—maybe not quite at that pace, but certainly we're getting up into, as you say, the law of large numbers.

Speaker #6: I mean, is there can you maybe put something around that?

Speaker #3: Yeah. We don't typically give the exact build rate. We leave that to the Navy. But as you know, we're trying to get to two Virginia-class and one Columbia in the early 2030s timeframe.

Speaker #3: But we don't have any expectation that it will slow down much, because there's just volume out there that we have to execute on. But it's a natural tail-off in the second half of the year.

Speaker #3: And we're on that path. And we're actually where we expect to be at this point in the process.

Speaker #3: Compared to the first.

Speaker #6: So okay. So you're making strides with the supply chain. It's my understanding that that was a one of the hurdles.

Speaker #4: Your next question comes from Ron Epstein from Bank of America, Merrill ill Lynch. Your line is open. Please go ahead.

Speaker #3: Yeah. I mean, we have seen significant improvements in their pace and the cadence of delivery. I mean, there are still some challenging areas. I think we mentioned in the last call where we had single sources of supply, but generally, the supply chain is improving, and it'll and we're counting on it to continue to improve.

Speaker #5: Yeah. Hey, good morning. So on marine, just following up on marine. On marine, where are we on build rate on Virginia-class now? Right? I mean, are we still at like $1.3 a year, $1.4?

Speaker #6: Great. And Phoebe, one for you. How are you thinking about the budget process now as we go into fiscal 27? You probably know the budget process better than anybody in Washington.

Speaker #5: I mean, is there can you maybe put something around that?

Speaker #3: Yeah. We don't typically give the exact build rate. We leave that to the Navy. But as you know, we're trying to get to two Virginia-class and one Columbia in the early 2030s timeframe.

Speaker #6: How are you thinking about it? How should we think about it? It seems like there's so much volatility in terms of there is going to be reconciliation.

Speaker #3: And we're on that path, and we're actually where we expect to be at this point in the process.

Speaker #6: There isn't. There's a baseline. There's not. There's midterm. So kind of broadly, how do you think about it?

Speaker #5: So okay. So you're making strides with the supply chain. It's my understanding that that was a one of the hurdles.

Speaker #4: Yeah. So I would say that there are a lot more factors today influencing the budget, other than there have been historically. But from our perspective, a lot of our programs are funded in the base budget.

Speaker #3: Yeah, I mean, we have seen significant improvements in their pace and the cadence of delivery. I mean, there are still some challenging areas, as I think we mentioned in the last call, where we have single sources of supply.

Speaker #4: But the reconciliation is important because if you stop and think about it, weapons production has been on. Very low-rate production or fairly minimally sustaining production for quite some time.

Speaker #3: But generally, the supply chain is improving, and we're counting on it to continue to improve.

Speaker #5: Great. And Phebe, one for you. How are you thinking about the budget process, not now as we go into fiscal 27? You probably know the budget process better than anybody in Washington.

Speaker #4: And in order to gear up production to meet the current threat environment, we need additional funds. The entire industry does. And so this is, I think, from a national security perspective, meritorious.

Speaker #5: How are you thinking about it? How should we think about it? It seems like there’s so much volatility in terms of, is there going to be reconciliation?

Speaker #4: So there are a lot of moving parts on all of this. And we'll continue to support our customer and the Congress as best we can.

Speaker #5: There isn't. There's a baseline. There's not. There's midterm. So kind of broadly, how do you think about it?

Speaker #2: Yeah. So I would say that there are a lot. Factors today, influencing the budget, that there have been historically. But from our perspective, a lot of our programs are funded in the base budget.

Speaker #6: Gotcha. Thank you.

Speaker #5: Your next question comes from Miles Walton at Wolf Research. Your line is open. Please go ahead.

Speaker #2: But the reconciliation is important because if you stop and think about it, weapons production has been on very low-rate production or fairly minimally sustaining production for quite some time.

Speaker #6: Thanks. Good morning. Phoebe, I was wondering if you can maybe talk about the M&A backdrop, which you haven't been as active in the last several years.

Speaker #6: But I'm curious if there's any interest in re-engaging given obvious balance sheet strength, the DOD's relatively negative view on charity purchase overall. What is your M&A pipeline look like?

Speaker #2: And in order to gear up production to meet the current threat environment, we need additional funds. And the entire industry does. And so this is, I think, from a national security perspective, meritorious.

Speaker #6: What kind of properties would even be attractive to you at this point?

Speaker #2: So there are a lot of moving parts on all of this. And we'll continue to support our customer and the Congress as best we can.

Speaker #4: Nice call. Hey, look, this is something we always look at and something we never talk about. I just think that's important. But it's always on our mind.

Speaker #5: Gotcha. Thank you.

Speaker #4: So you can rest assured about that. You want to ask another question?

Speaker #4: Your next question comes from Miles Walton at Wolf Research. Your line is open. Please go ahead.

Speaker #6: Would you say there's any shift in the way you look at it, even if you can't speak to it?

Speaker #5: Thanks. Good morning. Phebe, I was wondering if you can maybe talk about the M&A backdrop, which you haven't been as active in the last several years.

Speaker #4: No. No. We've consistently looked at it this. Right. When we have the when we have met some of our other obligations with respect to cash, or if there's a particularly attractive bolt-on out there.

Speaker #5: But I'm curious if there's any interest in re-engaging, given obvious balance sheet strength and the DoD's relatively negative view on share repurchase overall. What does your M&A pipeline look like?

Speaker #4: But we are doing what we always have done, is understand the marketplace and see what, if anything, makes sense. But golly geez, we just never talk about it.

Speaker #5: What kind of properties would even be attractive to you at this

Speaker #6: Okay. Maybe one that maybe Danny, you can talk to or Phoebe, on the missile framework agreements. Have you seen in combat with NOTS much of that coming your way on second source solid rocket motors, particularly with some of the interest of aggressive dual sourcing?

Speaker #2: Nice try. Hey, look, this is something we always look at and something we never talk about. I just think that's important, but it's always on our mind.

Speaker #2: So you can rest assured about that. You want to ask another question?

Speaker #5: Would you say there's any shift in the way you look at it, even if you can't speak to it?

Speaker #3: Yeah. So we are a subcontractor, both at OTS and Mission Systems, to a number of the missile primes and we have some content on all of the missiles for the most part, with things like actuators and motor cases at OTS and guidance systems and other components at Mission Systems.

Speaker #2: No. No. We've consistently looked at it this way. When we have the when we have met some of our other obligations with respect to cash, or if there's a particularly attractive bolt-on out there.

Speaker #2: But we are doing what we always have done, which is understand anything that makes sense. But golly gee, we just never talk about it.

Speaker #3: So the framework agreements that the primes have signed up to, we have mirrored agreements with them to ramp up. And so we're again, a part of the supply chain, but certainly not a prime there.

Speaker #5: Okay. Maybe one that maybe Danny, you can talk to or Phebe on the missile framework agreements. Have you seen in combat within OTS much of that coming your way on second of the interest of aggressive dual sourcing?

Speaker #6: Thank you.

Speaker #5: Your next question comes from Robert Stallard of Vertical Research. Your line is open. Please go ahead.

Speaker #6: Thanks so much. Good morning.

Speaker #4: Morning.

Speaker #3: Yeah. So we are a subcontractor, both at OTS and Mission Systems, to a number of the missile primes and we have some content on all of the missiles for the most part, with things like actuators and motor cases at OTS and guidance systems and other components at Mission Systems.

Speaker #6: This might affect you, Phoebe, or for Danny. But it sounds like the supply chain across the group is getting better. I was wondering if you could confirm that and if there are any areas of concern that still exist as you look forward to the rest of the year.

Speaker #3: Yeah. I would say broadly speaking, when we look across the areas that maybe we highlighted in the past that were causing some difficulties, there has been a noticeable improvement in the cadence.

Speaker #3: ... that the primes have signed up to. We have mirrored agreements with them to ramp up. And so we're, again, a part of the supply chain, but certainly not a prime there.

Speaker #3: Areas of concern haven't really changed where we have single sources of supply for large complex components. And that can be somewhat of a pacing item.

Speaker #5: Thank you.

Speaker #3: But when we look across the entire enterprise in each of the operating units, there has been a noticeable improvement in the supply chain. And that's a really good thing.

Speaker #4: Your next question comes from Roberts Stallard of Vertical Research. Your line is open. Please go ahead.

Speaker #5: Thanks so much. Good morning.

Speaker #6: Okay. Thanks for that. And a quick follow-up. There was some news overnight about the Virginia-class submarine Block VI being approved by the Secretary of the Navy.

Speaker #2: Good morning.

Speaker #5: This might fit you, Phebe, or for Danny. But it sounds like the supply chain across the group is getting better. I was wondering if you could confirm that.

Speaker #6: I was wondering if you could give us some sort of preliminary thoughts on how the next block of submarines could differ from Block V in terms of contractual terms or accounting or something like that.

Speaker #5: And if there are any areas of concern that still exist as you look forward to the rest of the year.

Speaker #3: Yeah. I would say broadly speaking, when we look across the areas that maybe we highlighted in the past that were causing some difficulties, there has been a noticeable improvement in the cadence.

Speaker #4: So we saw that as well. We're told that these contracts will be coming soon. And when we get those, let's give you the clarity.

Speaker #3: Areas of concern haven't really changed—where we have single sources of supply for large, complex components. That can be somewhat of a pacing item.

Speaker #4: That you're seeking here. I think that's best done after the awards are granted.

Speaker #6: Okay. Thanks, Phoebe.

Speaker #3: But when we look across the entire enterprise in each of the operating units, there has been a noticeable improvement in the supply chain. And that's a really good thing.

Speaker #5: Your next question comes from Doug Harned from Bernstein. Your line is open. Please go ahead.

Speaker #6: Good morning. Thank you.

Speaker #4: Hi, Doug.

Speaker #5: Okay, thanks for that. And a quick follow-up: there was some news overnight about the Virginia-class submarine Block 6 being approved by the Secretary of the Navy.

Speaker #6: On combat, you've gotten some really, really good increases in backlog. And as we had looked at this before, we saw a lot of the growth coming from European land systems.

Speaker #5: I was wondering if you could give us some preliminary thoughts on how the next block of submarines could differ from Block 5, in terms of contractual terms, accounting, or something like that.

Speaker #6: But now these awards are much outside of Europe. When you go forward, how do you see growth now across geographies? Do you have more optimism in a sense about growth coming from the US?

Speaker #2: So we saw that as well. We're told that these contracts will be coming soon. And when we get those, let's give you the clarity.

Speaker #4: So I think. Efficacy is double-digit growth continuing at European land systems, given the threat environment and the demand for combat support vehicles as well as other systems.

Speaker #2: That's what you're seeking here. I think that's best done after the awards are granted.

Speaker #5: Okay. Thanks, Phebe.

Speaker #4: Your next question comes from Doug Harned from Bernstein. Your line is open. Please go ahead.

Speaker #4: OTS, because of artillery missile components, 155s and then within land systems, this is a transition period, as we talked about before, but the double-digit growth at the OTS and ELS to drive high single-digit growth for the group going forward.

Speaker #5: Good morning. Thank you.

Speaker #2: Hi Doug.

Speaker #5: On combat, you've gotten some really, really good increases in backlog. And as we had looked at this before, we saw a lot of the growth coming from European land systems.

Speaker #5: But now these awards are pretty much outside of Europe. When you go forward, how do you see growth now across geographies? Do you have more optimism than a sense about growth coming from the U.S.?

Speaker #6: And then switching over to Gulfstream, you're in a great demand situation. Certainly, working on the supply chain, but as you go forward, you soon have the full portfolio G400, G800 out there.

Speaker #2: So, I think efficacy is double-digit growth continuing at European Land Systems, given the threat environment and the demand for combat support vehicles, as well as other systems.

Speaker #6: How do you think of having that portfolio of aircraft with commonality? Which customers does that portfolio breadth particularly appeal to? And does it give you some margin opportunities ahead in pricing?

Speaker #2: OTS, because of artillery missile components—155s. And then within Land Systems, this is a transition period, as we talked about before. But the double-digit growth at the OTS and ELS will have to drive high single-digit growth for the group going forward.

Speaker #4: So we built this family of aircraft to satisfy the mission that we knew that our customers flew. And they're varied. Some customers want a suite of airplanes from the large ones to medium to the medium-sized ones, depending on where they fly, how they fly, and who they fly.

Speaker #5: And then switching over to Gulfstream, you're in a great demand situation. Certainly, working on the supply chain, but as you go forward, you'll soon have the full portfolio G400, G800 out there.

Speaker #4: There are others who are primarily driven by large cabin, given their missions. And so we see this is the intent of this whole family of aircraft.

Speaker #5: How do you think of having that portfolio of aircraft with commonality? Which customers does that portfolio breadth particularly appeal to? And does it give you some margin opportunities ahead in pricing?

Speaker #4: So there are certainly some. Benefits as we continue to come down our learning curve. There and of course, as you know, we never discuss pricing.

Speaker #2: So we built this family of aircraft to satisfy the mission that we knew that our customers flew. And they're varied. Some customers want a suite of airplanes.

Speaker #4: But from my point of view, given the broad spectrum of offerings that we have and will have once the 300 and 400 are out in the market, new product our view.

Speaker #2: From the large ones to the medium, to the medium-sized ones, depending on where they fly, how they fly, and who they fly. There are others who are primarily driven by large cabin, given their missions.

Speaker #4: And it continues to remain our view. This is a wholesome portfolio.

Speaker #6: That's very good. Thank you.

Speaker #5: Your next question comes from Sheila Kayalulu with Jefferies. Your line is open. Please go ahead.

Speaker #2: And so we see this is the intent of this whole family of aircraft. So there are certainly some benefits, as we have continued to come down our learning curve.

Speaker #2: Thanks. Good morning. Phoebe, Danny. I wanted to ask two questions on margins. One on aerospace so on aerospace, as we think about margins up 100 bips from first half of last first half of '25, how do we think about the margin baseline from here, whether it's model mix, Phoebe, I think you mentioned Q3 will look similar to Q2, given timing of higher GNA and R&D.

Speaker #2: There are, and of course, as you know, we never discussed— we never discussed pricing. But from my point of view, given the broad spectrum of offerings that we have and will have once the 300 and 400 are out in the market, new product has driven demand.

Speaker #2: How do you think about opportunities for upside for aerospace margins from here?

Speaker #3: Yeah. I think from a margin standpoint, as Phoebe mentioned in her remarks, I think the third quarter will look a lot like the second quarter.

Speaker #2: That's always been our view. And it continues to remain our view. This is a wholesome portfolio.

Speaker #3: With the fourth quarter being the strongest from a margin standpoint. And that is, as Phoebe's mentioned, the fact that we're coming down the learning curve on all of the airplanes, but also due to favorable mix.

Speaker #5: That's very good. Thank you.

Speaker #4: Your next question comes from Sheila Kayalu with Jefferies. Your line is open. Please go ahead.

Speaker #3: And I think the margins, you can expect them to continue to be in that neighborhood with some slight variability all associated with mix.

Speaker #6: Thanks. Good morning. Phebe, Danny. I want to ask two questions on margins. One on aerospace so on aerospace, as we think about margins up 100 bips from first half of last first half of '25, how do we think about the margin baseline from here, whether it's model mix, Phebe, I think you mentioned Q3 will look similar to Q2, given timing of higher GNA and R&D.

Speaker #2: Okay. And then on marine. You raised the margins up 10 bips. Seems small, but a big deal from where you guys have come from.

Speaker #2: I guess, can you provide an update on where the workforce supply chain is from here on marine? Any risks? And is this a good baseline to work off of?

Speaker #3: Yeah. From a workforce standpoint, we've been really pleased with our ability to attract and retain the necessary number of workers in our shipyards and.

Speaker #6: How do you think about opportunities for upside for aerospace margins from here?

Speaker #3: Yeah. I think, from a margin standpoint, as Phebe mentioned in her remarks, I think the third quarter will look a lot like the second quarter.

Speaker #4: And the Navy's going to help with that.

Speaker #3: And the Navy's been a great help with that from in a lot of different ways. And so from a ramping standpoint, we are hitting exactly what we need to hit from a resource standpoint on that front.

Speaker #3: With the fourth quarter being the strongest from a margin standpoint—and that is, as Phebe mentioned—the fact that we're coming down the learning curve on all of the airplanes, but also due to favorable mix.

Speaker #3: So very positive from that perspective. And then as you mentioned, from a margin standpoint, the improvement in margin is a function of throughput and improvements on the deck plates and with the supply chain improving and we can expect that that will continue slow, steady, drumbeat as we continue to focus on executing.

Speaker #3: And I think the margins—you can expect them to continue to be in that neighborhood, with some slight variability, all associated with mix.

Speaker #6: Okay. And then on Marine, you raised the margins up 10 bps. Seems small, but it's a big deal from where you guys have come from.

Speaker #6: I guess, can you provide an update on where the workforce supply chain is from here on marine? Any risks? And And is this a good baseline to work off of?

Speaker #2: Great. Thanks.

Speaker #5: Your next question comes from Seth Seasman with JPMorgan. Your line is open. Please go ahead.

Speaker #3: Yeah. From a workforce standpoint, we've been really pleased with our ability to attract and retain the necessary number of workers in our shipyards and.

Speaker #1: Yeah. Thanks very much. And good morning. Morning. I wanted to ask about I feel like of course, most of our conversations on marine tend to revolve around subs.

Speaker #2: And the Navy's going to help with that.

Speaker #3: And the Navy's been a great help with that in a lot of different ways. And so from a ramping standpoint, we are hitting exactly what we need to hit from a resource standpoint on that front.

Speaker #1: But you talked about the high percentage growth in surface ships. And it was pretty nice growth in the first quarter as well. When we think about the growth potential for that portion of the business over the next several years, given what's been in recent shipbuilding budgets and what may be ahead of us, is there any way to dimensionalize the growth opportunity outside of the submarine portion of business?

Speaker #3: So very positive from that perspective. And then as you mentioned, from a margin standpoint, the improvement in margin is a function of throughput and improvements on the deck plates and with the supply chain improving and we can expect that that will continue slow, steady, drumbeat as we continue to focus on executing.

Speaker #6: Great. Thanks.

Speaker #4: Yeah. So at best, growth will continue. As we come. Improve our throughput and productivity, which they are doing and have done materially over the last few years.

Speaker #4: Your next question comes from Seth Seasmann with JPMorgan. Your line is open. Please go ahead.

Speaker #7: Yeah. Thanks very much. And good morning. Good morning. I wanted to ask about I feel like of course, most of our conversations on marine tend to revolve around subs.

Speaker #4: And at NASCO, again, it'll be driven by increased demand and coming down our learning curves on the oilers and other support and supply ships.

Speaker #7: But you talked about the high percentage growth in surface ships, and it was pretty nice growth in the first quarter as well. When we think about the growth potential for that portion of the business over the next several years, given what's been in recent shipbuilding budgets and what may be ahead of us, is there any way to dimensionalize the growth opportunity outside of the submarine portion of the business?

Speaker #4: NASCO is very well positioned and has been. For some time, it's a high-performing shipyard. And it has the capabilities, design, manufacturing capability to design and produce complex auxiliary ships, subtenders, oilers.

Speaker #4: So we like very much the positioning that NASCO is in. And we see some growth there as well with additional product coming in because they have additional capacity, by the way.

Speaker #2: Yeah. So, at best, growth will continue as we improve our throughput and productivity, which they are doing and have done materially over the last few years.

Speaker #1: Excellent. Very good. Thanks. And then one follow-up on technologies and GDIT. We've seen the administration be very vocal about a desire to shift to fixed price.

Speaker #2: And at NASCO, again, it'll be driven by increased demand and coming down our learning curves on the oilers and others, sport and supply ships.

Speaker #1: Contracting. When you think about the impact there for GDIT, how quickly do you see that change happening?

Speaker #2: NASCO is very well positioned and has been for some time. It's a high-performing shipyard. And it has the capability, design, and manufacturing capability. To design and produce complex auxiliary ships sub-tenders, oilers.

Speaker #4: Well, we've always encouraged fixed-price contracting when it's appropriate and the customer is interested. So we see additional interest in fixed price, which we welcome.

Speaker #2: So we like very much the positioning that NASCO is in. And we see some growth there as well with additional product coming in. Because they have additional capacity, by the way.

Speaker #4: And we're also very interested in agile acquisition programs. And. Pipelines that allow us to bring product quickly to our customers. GDIT is very fast in what they execute.

Speaker #7: Excellent. Very good. Thanks. And then, one follow-up on technologies and GDIT. We've seen the administration be very vocal about a desire to shift to fixed price.

Speaker #4: And their investments that they've made over the last few years have well positioned them in the marketplace.

Speaker #1: Thanks very much.

Speaker #5: Your next question comes from Gautam Khanna with TD Cowan. Your line is open. Please go ahead.

Speaker #7: Contracting. When you think about the impact there for GDIT, how quickly do you see that change happening?

Speaker #6: Yes. Good morning. I was wondering, Phoebe, if you could opine on aerospace margin potential a couple of years out. I know about a year or two ago, you did.

Speaker #2: So we've always encouraged fixed price contracting when it's appropriate and the customer is interested. So we see additional interest in fixed price, which we welcome.

Speaker #6: Opine. I mean, we see a good trend. You got me.

Speaker #4: We have it. I'm going to interrupt you because we haven't given you I think in the whole tenure of this leadership team, any kind of out-year I think once or twice they've given you some out-year color.

Speaker #2: And we're also very interested in agile acquisition programs. And pipelines that allow us to bring product quickly to our customers. GDIT is very fast in what they execute.

Speaker #4: We're not going to go there on margin. But let's just say both jet aviation and Gulfstream are high-performing companies. And they'll continue to improve over time.

Speaker #2: And their investments that they've made over the last few years have well positioned them in the marketplace.

Speaker #7: Thanks very much.

Speaker #4: I'm asking another question.

Speaker #6: Yeah. Just relative to prior peak, given the model, introductions you're doing, etc., is that a reasonable baseline? The prior peak margins.

Speaker #4: Your next question comes from Gautam Khanna with Phebe Cowan. Your line is open. Please go ahead.

Speaker #5: Yes. Good morning. I was wondering, Phebe, if you could opine on aerospace margin potential a couple of years out. I know about a year or two ago, you did.

Speaker #4: Yeah. Look, the prior yeah. Again, I'm going to interrupt you because the prior peak was really all around one product. And this is now a.

Speaker #5: Opine. I mean, we see a good trend.

Speaker #4: Portfolio products from large cabin to midsize cabin. They carry different margin with them. By definition, they do. So it's a more complicated, more robust.

Speaker #2: We have it. I'm going to interrupt you because we haven't given you, I think, in the whole tenure of this leadership team, any kind of out-year. I think once or twice we've given you some out-year color.

Speaker #4: And I think, frankly, a richer product offering for the market to avail itself of. And we're seeing that. So we're not going to get into the business of how good can it get at the moment.

Speaker #2: We're not going to go there on margin. But let's just say, both jet aviation and Gulfstream are high-performing companies. And they'll continue to improve over time.

Speaker #4: But you will see continued performance within this construct of this new business model that we've got as a result of the investments we've made in these families of aircraft.

Speaker #5: I guess I'm asking.

Speaker #2: We're asking another question.

Speaker #5: Yeah. Just relative to prior peak, given the model, introductions you're doing, etc., is that a reasonable baseline? The prior peak margins.

Speaker #6: Right. And then just on the shipbuilding contracts, the submarine contracts you're awaiting, is there any what forces the urgency on the customer side to place the order?

Speaker #2: Hey, look. The prior year—yeah. Again, I'm going to interrupt you, because the prior peak was really all around one product, and this is now a portfolio product.

Speaker #6: I just wonder what capabilities are lost if they delay? Just because we've been waiting for quite some time. I'm sure you guys have been aware.

Speaker #2: From large cabin to midsize cabin. They carry different margin with them. By definition, they do. So it's a more complicated, more robust. And I think, frankly, a richer product offering for the market to avail itself of.

Speaker #6: The street has been expecting these for about a year now. And I just wondered what.

Speaker #4: Well, I.

Speaker #6: Consequence happens if we go another quarter.

Speaker #2: And we're seeing that. So we're not going to get into the business of how good can it get at the moment. But you will see continued performance within this construct of this new business model that we've got as a result of the investments we've made in these families of aircraft.

Speaker #4: Well, I think yeah. I think the customer and the submarine industrial base are aligned around the need for getting these contracts out, particularly to stabilize the industrial base and to ensure that we continue to have long lead material for these contracted in advance of these long-term development programs.

Speaker #5: Right. And then just on the shipbuilding contracts, the submarine contracts you're awaiting, is there any what forces the urgency on the customer side to place the order?

Speaker #4: But as I noted, we're told that the contracts will be coming soon. And so we're confident that when they come out, I think it'll be a as we expected.

Speaker #5: I just wonder, what capabilities are lost if they delay? Just because we've been waiting for quite some time. I'm sure you guys have been aware that the street has been expecting these for about a year now.

Speaker #4: And very welcomed by the supply chain in particular.

Speaker #5: And I just wondered, what consequence happens if we go another quarter?

Speaker #6: Thank you.

Speaker #2: Well, I think yeah. I think the I think the customer and the submarine industrial base are aligned around the need for getting these contracts out, particularly to stabilize the industrial base and to ensure that we continue to have long lead material for these contracted in advance of these long-term development programs.

Speaker #5: Your next question comes from Christine Lewig with Morgan Stanley. Your line is open. Please go ahead.

Speaker #7: Hey. Good morning, everyone. Phoebe, I want to dive in a little bit deeper into GDITs. In the past, you've heard quarters, you've talked about how AI was a big driver of growing demand, particularly in defense.

Speaker #7: So when we think about these AI models maturing and pilot programs going to larger product deployments, how do you think about the role of AI and how is GD positioned in that ecosystem ultimately?

Speaker #2: But as I noted, we're told that the contracts will be coming soon, and so we're confident that when they come out, I think it will be as we expected.

Speaker #7: Is this more of an acceleration of earnings growth for now? Or do you think operational efficiencies in AI could potentially shrink the addressable market?

Speaker #2: And very welcomed by the supply chain in particular.

Speaker #4: Are you asking across the company as a whole or GDIT?

Speaker #5: Thank you.

Speaker #7: Maybe GDIT in particular for this question.

Speaker #4: Your next question comes from Christine Lewig with Morgan Stanley. Your line is open. Please go ahead.

Speaker #4: Yeah. So let's step back a minute. Remember how GDIT has been strategically thinking about innovation in general for the last few years? And they've invested in what they call their digital accelerators, which we've talked about before.

Speaker #6: Hey. Good morning, everyone. Phebe, I want to dive in a little bit deeper into GDIT. In the past, you've heard of quarters. You've talked about how AI was a big driver of growing demand, particularly in defense.

Speaker #4: Including an early focus on AI and automation. And that focus has provided them the skills to build and secure and connect the latest technologies and apply them to a growing number of agencies and systems.

Speaker #6: So, when we think about these AI models maturing and pilot programs moving to larger product deployments, how do you think about the role of AI?

Speaker #6: And how is GD positioned in that ecosystem? Ultimately, is this more of an acceleration of earnings growth for now? Or do you think operational efficiencies in AI could potentially shrink the addressable market?

Speaker #4: And we're seeing is AI tightly integrated in with cybersecurity and opportunities that, frankly, are spanning most of GDIT's portfolio. It also helps to have deep and rich relationships with a number of the OEMs and partners.

Speaker #2: Are you asking across the company as a whole? Or GDIT?

Speaker #6: Maybe GDIT, in particular, for this question.

Speaker #2: Yeah. So let's step back a minute. Remember how GDIT has been strategically thinking about innovation in general for the last few years? And they've invested in what they call their digital accelerators, which we've talked about before.

Speaker #4: So GDIT has been very agile in its strategic I think planning as well as implementation of AI and automation. As well as other important technology improvements.

Speaker #2: Including an early focus on AI and automation. And that focus has provided them the skills to build and secure and connect the latest technologies and apply them to a growing number of agencies and systems.

Speaker #7: Very super helpful. And Phoebe, my follow-up question, I know it's longer term. So maybe you won't answer it, but I hope you would. When we look at the pricing model for aerospace, it's clear that in the past decade or so, we've seen the premium end of the business jet market really more look like the luxury market.

Speaker #2: And we're seeing is AI tightly integrated in with cybersecurity and opportunities that, frankly, are spanning most of GDIT's portfolio. It also helps to have deep and rich relationships with a number of the OEMs and partners.

Speaker #7: And the luxury market, you see margins north of 20% EBIT over time. I guess with your portfolio, which is arguably the strongest brand and also with a refresh of the portfolio, it's really unique in the market.

Speaker #2: So, GDIT has been very agile in its strategic, I think, planning, as well as implementation of AI and automation, as well as other important technology improvements.

Speaker #7: Is there upside to your pricing power over time where you can get towards those luxury-type margins? I mean, it is much harder to build an aircraft versus handbags and deep champagne.

Speaker #7: But those guys are making higher margins.

Speaker #4: Yeah. I gotcha. So I'm going to quarrel with you on one word, luxury. That is a I would argue that is a misapprehension or characterization of these but really are tools.

Speaker #6: Okay, super helpful. And Phebe, my follow-up question—I know it's longer term, so maybe you won't answer it, but I hope you will. When we look at the pricing model for aerospace, it's clear that in the past decade or so, we've seen the premium end of the business jet market really start to look more like the luxury market.

Speaker #4: And for almost all of our Fortune 500, Fortune 100 companies and both public and private, they are business tools. There are some high-net-worth individuals who participate in the market.

Speaker #6: And the luxury market, you see margins north of 20% EBIT over time. I guess with your portfolio, which is arguably the strongest brand and also with a refresh of the portfolio, it's really unique in the market.

Speaker #4: But even they, they will tell you even in those cases, they'll tell you, "This is really about efficiency. Safety, efficiency." And efficacy in doing their jobs.

Speaker #4: So I think that's important. These are not luxury yachts that sail around the Mediterranean. These are airplanes that get the job done for our customers, whatever their mission is.

Speaker #6: Is there upside to your pricing power over time where you can get towards those luxury-type margins? I mean, it is much harder to build an aircraft versus handbags and big champagne.

Speaker #6: But those guys are making higher margins.

Speaker #4: So look, we are well-positioned in the marketplace. Because we have all these new products that we've heavily invested in and that we are producing.

Speaker #2: Yeah, I gotcha. So, I'm going to quarrel with you on one word: luxury. I would argue that is a misapprehension or mischaracterization of these, which really are tools.

Speaker #4: And producing at scale and well with the attention we've always had on quality and safety. So I think by definition, that positions us well in the market without any getting into any specificity about out-year margin performance.

Speaker #2: And for almost all, for all of our Fortune 500, Fortune 100 companies—both public and private—they are business tools. There are some high-net-worth individuals who participate in the market.

Speaker #2: But even they, they will tell you even in those cases, they'll tell you, "This is really about efficiency. Safety, efficiency. And efficacy in doing their jobs." So I think that's important.

Speaker #4: But we believe in the capability of both dead aviation and Gulfstream to continue to improve and continue to produce with this family of airplanes.

Speaker #2: These are not luxury yachts that sail around the Mediterranean. These are airplanes that get the job done for our customers, whatever their mission is.

Speaker #4: Does that help you?

Speaker #7: It does. Thank you, Phoebe.

Speaker #4: Thanks.

Speaker #2: So look, we are well-positioned in the marketplace because we have all these new products that we've heavily invested in, and that we are producing—and producing at scale—and, as always, with the attention we've had on quality and safety.

Speaker #5: Your next question comes from Scott Dushla with Deutsche Bank. Your line is open. Please go ahead.

Speaker #8: Hi. Good morning. Danny, are G700 margins approaching mature levels at this point? Or is there still a meaningful gap between where margins are today on G700 and where mature margins might ultimately land?

Speaker #2: Yeah. I think we're still coming down the curve specifically around completion. So I think there's still more opportunity. And we're seeing that both on the G700 as well as the 800.

Speaker #2: So, I think by definition, that positions us well in the market without getting into any specificity about our margin performance. But we believe in the capability of both Jet Aviation and Gulfstream to continue to improve and to continue to produce with this family of airplanes.

Speaker #2: So I think there's still more room for them.

Speaker #8: Okay. And then Phoebe, can you share an update on the G300 and G400 development timelines and your latest expectations as to the timing of EIS for each of those aircraft?

Speaker #8: Thank you.

Speaker #4: Yeah. Well, as you know, I'm no longer in the business of estimating EIS given that the regulators set the pace. But with respect to the 300, and thank you for raising that because I think it's an important to recognize that we are going we're going to have a gap in production from the end of the 280, which auto the final 280, auto deliver in the second quarter of next year.

Speaker #2: Does that help you?

Speaker #6: It does. Thank you, Phebe.

Speaker #2: Thanks.

Speaker #4: Your next question comes from Scott Deuschle with Deutsche Bank. Your line is open. Please go ahead.

Speaker #7: Hi, good morning. Danny, are G700 margins approaching mature levels at this point, or is there still a meaningful gap between them and where mature margins might ultimately land?

Speaker #4: And the onset, that of the 300, which late 27, early 28, somewhere in that. And so we'll have a planned production break so that if you infer from that, quite correctly, that we'll talk more about large cabins next year.

Speaker #8: Yeah. I think we're still coming down the curve specifically around completion. So I think there's still more opportunity. And we're seeing that both on the G700 as well as the 800.

Speaker #8: So I think there’s still more room for them.

Speaker #7: Okay. And then Phebe, can you share an update on the G300 and G400 development timelines and your latest expectations as to the timing of EIS for each of those aircraft?

Speaker #4: On the 400, we've looked up our efforts on the 400 and we'll have more to say over the next couple of quarters about where we think the 400 will be.

Speaker #7: Thank you.

Speaker #2: Yes. Well, as you know, I'm no longer in the business of estimating EIS given that the regulators set the pace. But with respect to the 300, and thank you for raising that because I think it's an important to recognize that we are going we're going to have a gap in production from the end of the 280, which auto the final 280, auto deliver in the second quarter of next year.

Speaker #4: But these new airplanes are coming and we're pretty excited about it.

Speaker #8: Thank you. Does that production break create any kind of absorption pressure that we should be aware of?

Speaker #4: No. Not given the agreement we have with our partners. By the way, has in this environment continued to perform beautifully and has its relentless excellence emphasis on quality.

Speaker #2: And the onset, that of the 300, which is late '27, early '28, somewhere in that range. And so we'll have a planned production break so that, if you infer from that, quite correctly, we'll talk more about large cabins next year.

Speaker #4: But for obvious reasons, some production may lag a little bit at the end of this year. And then we have this bit of a gap on the 300.

Speaker #2: On the 400, we've looked up our efforts on the 400, and we'll have more to say over the next couple of quarters about where we think the 400 will be.

Speaker #8: Thank you, Phoebe.

Speaker #7: So Dara, I think we have time for one more question.

Speaker #5: Thank you very much. Our last question comes from John Godden with Citigroup. Your line is open. Please go ahead.

Speaker #2: But these new airplanes are coming and we're pretty excited about it.

Speaker #8: Hey. Thanks for taking my question. I wanted to just double-click on aerospace supply chain. If you don't mind, obviously, it's humming for you guys.

Speaker #7: Thank you. Does that production break create any kind of absorption pressure that we should be aware of?

Speaker #2: No, not given the agreement we have with our partner. By the way, HAS in this environment has continued to perform beautifully and has its relentless excellence and emphasis on quality.

Speaker #8: There are other players out there that have been struggling a bit. Do you feel like you guys are doing something special? Obviously, executing well, but special?

Speaker #8: Or perhaps the issues that we're seeing elsewhere are idiosyncratic to those companies?

Speaker #2: But for obvious reasons, some production may lag a little bit at the end of this year. And then we have this bit of a gap on the 300.

Speaker #2: Yeah. I can't speak to the situation at some of these other companies. I can tell you that for the major components, Gulfstream has a very clear relationship that has really given the supply chain visibility into our production plans for whatever period is appropriate.

Speaker #7: Thank you, Phebe.

Speaker #6: So, Dara, I think we have time for one more question.

Speaker #4: Thank you very much. Our last question comes from John Godden with Citigroup. Your line is open. Please go ahead.

Speaker #2: And so they are able to keep up now. And our expectation is they will be in the future as well. So I don't know what the others are seeing, but we're pretty tightly integrated with these key suppliers.

Speaker #7: Hey. Thanks for taking my question. I wanted to just double-click on aerospace supply chain if you don't mind. Obviously, it's humming for you guys.

Speaker #7: There are other players out there that have been struggling a bit but do you feel like you guys are doing something special? Obviously, executing well.

Speaker #2: And they're keeping up.

Speaker #4: And the their ability to the supply chain's ability to continue to produce and produce on schedule has been very helpful in ensuring that we can continue to drive our orders.

Speaker #7: But special or perhaps the issues that we're seeing elsewhere are idiosyncratic to those companies?

Speaker #4: And orders were, of course, a big component of our significant component of our cash for this quarter. So it's really a team effort between Gulfstream and its suppliers.

Speaker #8: Yeah, I can't speak to the situation at some of these other companies. I can tell you that for the major components, Gulfstream has a very clear relationship that has really given the supply chain visibility into our production plans for whatever period is appropriate.

Speaker #8: Excellent. And if I could just ask a follow-up. Earlier, Ron Phoebe asked about the outlook for defense. And you mentioned resiliency in the portfolio.

Speaker #8: And so they are able to keep up now. And our expectation is they will be in the future as well. So I don't know what the others are seeing.

Speaker #8: I just wanted to re-ask ask that, but with a focus on the technologies portfolio specifically. Maybe you can speak a bit about the sensitivity of that portfolio to extended CRs or alternatively to the upside a budget environment that's more in the direction of Trump's request.

Speaker #8: But we're pretty tightly integrated with these key suppliers, and they're keeping up.

Speaker #2: And the their ability to the supply chain's ability to continue to produce and produce on schedule has been very helpful in ensuring that we can continue to drive our orders.

Speaker #8: Thanks.

Speaker #4: So we have handled in the technologies group, which are both fairly relative to our portfolio at large, fast cycle businesses. We've managed the CRs pretty well.

Speaker #2: And orders were, of course, a big component of our significant component of our cash for this quarter. So it's really a team effort between Gulfstream and its suppliers.

Speaker #4: So I would expect us to be able to do so, as long as they're not too extended. I think both businesses are poised for some growth, particularly mission systems, as you recall has gone through a transformation from a lot of legacy systems into investments in new programs and new products.

Speaker #7: Excellent. And if I could just ask a follow-up. Earlier Ron Phebe asked about the outlook for defense. And you mentioned resiliency in the portfolio.

Speaker #7: I just wanted to re-ask that, but with a focus on the technologies portfolio specifically. Maybe you can speak a bit about the sensitivity of that portfolio to extended CRs, or alternatively, to the upside in a budget environment that's more in the direction of Trump's request.

Speaker #4: And that is beginning to take off. So we continue to see continued strong growth there. And the steady growth that we have seen steady incremental growth we have seen at GDIT and look, they've got a pretty robust pipeline.

Speaker #7: Thanks.

Speaker #2: So, we have handled, in the Technologies group—which are both fairly relative to our portfolio at large—fast-cycle businesses. We've managed the CRs pretty well.

Speaker #4: At about 120-plus billion, that's a qualified pipeline out there. So that positions them well to continue to perform across their hundreds of programs that's both for mission systems and GDIT.

Speaker #2: So I would expect us to be able to do so as long as they're not too extended. I think both businesses are poised for some growth, particularly Mission Systems, which, as you recall, has gone through a transformation from a lot of legacy systems into investments in new programs and new products.

Speaker #4: And it's all about your ability to meet your customers' needs quickly and with excellent products and quality on time.

Speaker #8: All right. Thank you for the thoughts.

Speaker #7: Great. Well, 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.

Speaker #2: And that is beginning to take off. So we continue to see continued strong growth there. And the steady growth that we have seen steady incremental growth we have seen at GDIT and look, they've got a pretty robust pipeline.

Speaker #7: Finally, we want to let you know that we expect to hold our Q3 earnings call on Friday, October 30th at 9:00 AM. We will resume our normal schedule for the fourth quarter call.

Speaker #7: If you have additional questions, I can be reached at 703-876-3152.

Speaker #2: At about 120-plus billion that's a qualified pipeline out there. So that positions them well to continue to perform across their hundreds of programs that's both for mission systems and GDIT.

Speaker #2: And it's all about your ability to meet your customers' needs quickly and with excellent products and quality, on time.

Speaker #7: All right. Thank you for the thoughts.

Speaker #6: Great. Well, 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.

Speaker #6: Finally, we want to let you know that we expect to hold our Q3 earnings call on Friday, October 30, at 9:00 a.m. We will resume our normal schedule for the fourth quarter call.

Speaker #6: If you have additional questions, I can be reached at 703-876-3152.