GD - NYSE

Good morning and welcome to the General Dynamics, First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. At this time, I would like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please...

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First 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 and Jason Aiken, Executive Vice President, Technologies. I will now turn the call over to Phebe.

Thank you, Nicole. Good morning everyone and thanks to being with us. As you can discern from our press release, we reported earnings of $3.66 per diluted share on revenue of $12.2 billion operating earnings of $1.268 million and net earnings of $994 million. These results compare quite favorably to the year ago quarter. Revenue was up 13.9%, operating earnings were up 22.4% and net earnings were up 24.4%. As a result, earnings per diluted share are up $0.78 or 27.1% more than the year ago quarter. The operating margin for the entire company was 10.4% a 70 basis point improvement over the year ago quarter. While Aerospace led the way with a 45.2% revenue increase, each of the defense segment also enjoyed revenue increases. A similar pattern is true with respect to operating earnings. Aerospace led the way with a stunning 59.4% increase and each of the defense segment contributed nice improvements to operating earnings as well. We have obviously opened the year with a very strong quarter. It is important to note that the comparative quarter in 2024 also showed very good growth in all respects over first quarter 2023. We also beat consensus by $0.16 in the quarter at this point. At this point, let me ask Kim Kuryea, our CFO to provide detail on our order activity, solid backlog and cash activity before I come back with segment observations.

Thank you, Phebe and good morning. I'll start with orders and backlog. We had a solid quarter with over $10 billion of orders. Order activity was particularly strong in the Technologies Group with a book-to-bill ratio of 1.1 to 1. Our overall book-to-bill ratio for the company was less than one times, due in part to the 14% increase in revenue from last year. This resulted in total backlog being slightly down from year-end to $89 billion at quarter end. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at a little over $141 billion. Turning to our cash performance for the quarter, we expected a slow start to the year. In terms of timing, this year will look a lot like last year with cash building throughout. The buildup of inventory as we approach certification and entry into service of the G800 impacted aerospace and although Technologies had a solid quarter, the defense businesses as a whole were impacted by a working capital buildup due to growth in timing. As a result, our free cash flow for the quarter was a negative $290 million. This was better than expected as our business units work to drive cash to the left. For the rest of the year, we expect modestly positive cash flow in the second quarter, followed by substantially improving free cash flow in each of the third and fourth quarters. Now to discuss capital deployment activities. Capital expenditures were $142 million, or 1.2% of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year as we anticipate spending around 2% of revenue on CapEx investments in our businesses this year. Also in the quarter, we returned in excess of $980 million to shareholders in the form of dividends and share repurchases. This included $383 million paid in dividends and repurchases of approximately 2.4 million shares of stock for $600 million at an average price of just over $252 per share. In addition, in late March we repaid $750 million of notes that matured on April 1. As a reminder, we have an additional $750 million of notes maturing in May. Although we ultimately intend to refinance those notes, the timing of when we do that maybe influenced by market conditions. When you add it all up, we ended the quarter with cash balance of around $1.2 billion and a net debt position of $8.4 billion. Our net interest expense in the quarter was $89 million compared to $82 million last year. The increase was due to utilization of commercial paper during the quarter. Finally, turning to income taxes, we had a 17.2% effective tax rate in the quarter, generally consistent with our full year guidance. Phebe that concludes my remarks. I'll turn it back over to you.

Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate. First, Aerospace. Aerospace did particularly well in the quarter. It had revenue of $3.03 billion and operating earnings of 432 million with a 14.3% operating margin. Revenue is $942 million more than last year's first quarter, a 45.2% increase. To give you a little color here, the increase was driven by a 50% increase in aircraft deliveries, including 13 new G700s and higher services revenue at both Gulfstream and Jet Aviation. The 36 deliveries in the quarter are about as planned. Recall, however, that there were no G700 deliveries in the first quarter of 2024. So this quarter really shows the robust revenue increase driven by the introduction of the G700. In addition, we saw improved margins on our G700 deliveries. In short, we expect revenue growth throughout the year, but at a slowing rate of growth because G700 deliveries began in the second quarter of last year. As I indicated last quarter, 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 am increasingly confident that we can meet this year's delivery plan. We are also pleased that the G800 was certified by both the FAA and EASA on April 16th. This is expected to be a smooth entry into service and we have some reason to believe that we can exceed our planned deliveries of G800. I would be remiss if I failed to mention that Jet Aviation made a significant contribution to the quarter's results. Its revenue was up 8% and earnings up 22% over the year ago quarter on 160 basis point improvement in operating margin. This business has become a real jewel. In summary, the aerospace team has had a good quarter. G800 FAA and EASA certification is behind us and we are improving our G700 delivery cadence and operating margin. Turning to market demand, we had a 0.8 book-to-bill in the quarter even as aircraft deliveries increased by 50%. Orders are consistent with our internal plan at about the same number of units as the first quarter in 2023 and 2024. We expect that the certification of the G800, it's better than plant performance characteristics and the early deliveries to customers will stimulate demand. We continue to see improved interest across all models in the U.S. albeit with cautious concern by customers about the macroeconomic environment and the impact of tariffs on their businesses. Middle East activity remains strong, so let's move on to the defense businesses. Combat had revenue of $2.18 billion, up 3.5% over the year ago quarter. Earnings of $291 million are up 3.2%. Margins at 13.4% are consistent with the year ago quarter. It's interesting to observe that this year's revenue growth is on top of our first quarter 2024 growth of almost 20%, so nice compound growth. The increased revenue performance occurred at Ordnance and Tactical Systems in European land systems, land systems held steady. We also experienced good order performance. Orders in the quarter drove backlog to 16.9 billion, up 3 billion from this time a year ago. Demand for combat system products continues to be robust with particular strength in Europe. Orders for wheeled and tracked vehicles are up, reflecting the heightened threat environment. In addition to several new combat vehicle starts, we are working closely with the U.S. Army to accelerate Abrams modernization. In the U.S. we are rapidly increasing munitions capacity and production with the opening of our projectile facility in Texas and our load and assembly and PAC facility in Arkansas. All-in-all, Combat had a solid quarter and is off to a good start for the year. Turning to Marine Systems, once again, our shipbuilding units are demonstrating impressive revenue growth. Let me repeat the recent history that I gave you at this time last year with respect to growth in this decade. The first quarter 2020 was up 9.1% against Q1, 2019. Q1, 2021 was up 10.6% over Q1, 2020. Q1, 2022 is up 6.8% over Q1, 2021. Q1, 2023 was up 12.9% over Q1, 2022. Q1 2024 was up 11.3% over Q1, 2023. And finally, this quarter is up 7.7% over Q1.24. This has been a really nice rate of growth for the shipyards and the repair yards. This growth has come at significant cost for facilities and significant increase in hiring. The good news is we've been able to hire and train the people we require to support our growth. This particular quarter's growth was driven by Columbia Class and Virginia Class construction, as well as an increase in DDG-51 construction. Operating earnings are $250 million in the quarter, up 7.8% from the year ago quarter. Operating margin is identical to last year's quarter. We have struggled to achieve operating leverage to go with our rapid revenue growth, but operating earnings have grown on a consistent basis as well. We continue to be impacted by delays and quality problems in the supply chain. Material and parts are late and sometimes exhibit quality escapes, and new shipbuilders continue to come down learning curves. We have more work to do, but we have made progress. In addition, one of the unions, the draftsmen's, a largely white collar union that converts engineering specs to drawing has voted to authorize the strike. We are working closely with the Navy and the new administration to continue to address the problems in the supply chain and look for opportunities to improve throughput and performance at the shipyard. The growth profile continues to look strong and demand is not abated. Our job is to continue to improve ourselves and to help the industrial base get stronger with the help of the government. The Technologies Group had a strong start to the year with revenue of $3.43 billion. This was an increase of 6.8% over the first quarter of 2024. Both businesses contributed to the growth in the quarter with GDIT up 9% and Mission Systems up almost 2%. Operating earnings of $328 million were up 11.2% over the year ago quarter on a 40 basis point improvement in operating margins from 9.2% to 9.6%. The operating margin improvement is encouraging given the top line shift toward IT services, which carry a lower margin than the defense electronics side of the portfolio. This reflects strong performance admission systems as the transition from legacy programs to new franchises continues. The group's order activity was also encouraging with a book-to-bill of 1.1 times for the quarter and trailing 12 months even against the strong revenue growth. As a result, the group's backlog is up almost 7% from a year ago and their total estimated contract value is up more than 10% over the same period. Their focus on advanced technology enabling autonomous platforms, smart munitions, subsea warfare and strategic deterrence as well as advanced AI, cloud, cyber 5G and quantum solutions is driving demand for the group. Their pipeline of qualified opportunities remains strong at 120 billion and their win and capture rates in the 80% range reflect the compelling value they're providing their customers. While this year is off to a strong start, a significant amount of uncertainty hangs over the market, particularly on the IT services side of the business as the administration establishes its own spending priorities. That said, our team has a great understanding of the government's emerging technology needs and is committed to innovating to solve the toughest technical challenges across the government at the best return for their customers. As you know, we never update guidance at this time of year. Apart from what I've already said about aerospace, I will continue with that practice. There is, however, no hiding from this quarter's performance and its implication for the year. Let me speak to tariffs for a moment. We cannot yet discern to what extent the defense businesses will be impacted over time. The more potentially impactful problem is in aerospace, where we are a significant net provider of export revenue to the U.S. We do not know the scope and breadth of the tariffs issue at the moment and will not for a while. Accordingly, anything I might say on that subject would be sheer speculation. So I do not intend to answer questions on the subject of tariffs because anything I say on that subject, given our lack firm of knowledge, will almost certainly be wrong. Rest assured that we are working the related issues diligently. This concludes my remarks about a good quarter and let me turn the call back to Nicole to take questions.

Thank you, Phebe.

[Operator Instructions] We will take our first question from Peter Arment at Baird.

Yes, thanks. Good morning, Phebe, Kim, Jason, Nicole. Nice results. Phebe, maybe just given in the spirit of everything that's going on, GD -- Technology Segment had a really good bookings quarter, kind of bucking the trend of the industry. Maybe could you talk a little bit about, I guess, any visibility or any discussions that GD is supporting kind of the GSA and their efforts and just, how are things looking from a bookings in a cost savings environment with the current administration?

Yes, Peter, that's a good question. I asked Jason to join us on the call to provide us more color for those of you who wanted some. So I'll turn that over to Jason.

Thanks, Phebe, and good morning Peter. I think as you'd expect, along with a number of GDITs peers that I'm sure you've heard from, we've been in active conversation and actively working with the customer to identify opportunities for savings for increased value and so on from the services and the solutions that we provide. I think it's important to as a reminder that we are not strictly in the consulting business per se. We deliver mission driven solutions. We deliver solutions to the customer's most challenging technology issues. But the fact is we are in the conversation and as part of that conversation, we are going to partner with our customer and we are going to find the savings that they're looking for. At this point, the only thing I could comment in terms of what we're seeing in our results is you saw, you heard about the strong results in the quarter. First quarter was very strong, not only from a revenue and earnings standpoint, but also the order book was healthy. So on the one hand, we're seeing a little bit of sluggishness in the solicitation and the proposal and award process, no different than the rest of our peers. But we'll have to see how that plays out, how long that sustains and how much of that is just an impact of a new administration setting their priorities and no different than any transition we see with a new administration. So a lot still to be determined, nothing to change yet. The outlook for the year remains the same and I think we'll know a lot more by the midpoint of the year.

Thanks, Jason. Thanks, Phebe.

We'll move next to Jason Gursky at Citi.

Hey, good morning. First question, Phebe maybe just get some comments from you and your take on the administration's desire to stand up, I don't know, Office of Shipbuilding inside the White House and all the efforts that we're seeing from them on supporting the industrial base here in the United States. We just look to get your take on what you're hearing.

Yes. So we've been in touch with the office. We're very happy to have the focus on shipbuilding across the enterprise. So consider that all goodness. And we've had productive conversations with multiple elements of the administration and we're working with them to see in some cases how we can accelerate throughput productivity and shore up how we can shore up the industrial base, particularly on the, on the defense side, and opportunities for more commercial shipbuilding where they may arise. So I think attention on a, on a subject of national import is always beneficial.

Okay, great. And then quick follow up question would just be on the executive orders that hit last week about the potential for seems like a rewrite of federal acquisition regulation. I just would love to get your take on, this administration's approach to procurement reform. Seems like every administration comes in and wants to reform how acquisition is done. Just curious if you think this one's going to be any different kind of potential opportunities and risks as we go through this process for the industrial base writ large. Thanks.

So I think that acquisition reform is always laudatory, and I think the extent to which it succeeds is understanding what works in the acquisition process and what doesn't. So I think that part of the dialogue we're all having is here's the good things, because there are an awful lot of good things within the process, but here are all the impediments, the cost drivers, the elements that tend to slow down or build bureaucracy. So I think that's a -- I think those are good conversations. And we've always been supportive of acquisition reform.

We'll move next to David Strauss at Barclays. Thanks.

Thanks, good morning.

Hi, David.

Phebe, has there been a change in kind of the order activity or customer interest, any noticeable change that you've seen at Gulfstream, post all the tariff announcements in early April, Any, any, any slowing or anything?

The pipeline remains good. I'd say everyone's a little bit cautious figuring out to the extent to which the tariffs will impact any one of their businesses, but the pipeline remains strong across the portfolio of products. So, so far, so good.

Okay. And a follow up on the marine side, can you give an update on getting the money, the significant funding that was in the CR under contract and maybe progression on, the larger Block 6, Virginia Class contract?

So we're working with the administration on getting the supplemental funding in the CR under contract. And so we've had very productive conversations and will continue those, so I don't think it's appropriate to talk anymore about that. But to the extent to which that we get those funds into the shipyards, into wages and additional throughput capacity, that's all beneficial in the big conversations that have to happen around Block 6 and the second build of Columbia. So the Navy intends for those to happen this year, but I think we need a lot of building blocks before we get there, including getting the supplemental under contract and starting to execute there.

Next, we'll move to Robert Stallard at Vertical Research.

Thanks so much. Good morning.

Good morning.

Phebe, you said some positive things about the aerospace supply chain that you've experienced in the last couple of months, but I was wondering if in recent weeks this whole tariff thing has shifted the landscape here, particularly with regard to engines.

So let's just be clear about the supply chain. They've made very good progress, but the problems are not all behind us. And so we continue to work out of station work and continue to find some issues. I think it's a little soon to tell within the supply chain the extent to which we've got real concerns or their suppliers have real concerns. I would say that a lot of what we consume, internal consumption material, has a significant amount of U.S. content. So how all of this plays out is remains to be seen here.

Okay, thanks very much.

We'll go next to Kristine Liwag at Morgan Stanley.

Hi, good morning, everyone.

Good morning.

Jason. I want to focus on technologies a little bit. You mentioned that you're working on savings that you can provide the customer. It seems like the GSA was disappointed with the initial proposals from the industry about cost savings. So can you talk about what's the potential size of savings you could provide with the new approach and if we could size the potential effect on your revenue stream as this materializes, that'd be great. Thanks.

Yes. I'm afraid I'm going to give you an answer you're not going to be happy with. Kristine. The point is, as I said, we are in a good, healthy, active discussion with that customer. We are identifying savings. Some of that, as you might imagine, is from a conversation that's been discussed quite a bit around shifting the fixed price and outcome based type contracts, which we very much welcome. We have a good healthy portion of that in our backlog and portfolio already. But the fact is it's an ongoing dialogue with the customer. And so I think it'd be inappropriate to get out ahead of that in a public conversation and get ahead of them on that.

Great, thank you. And then Phebe, if I could have a follow on Gulfstream. I mean you now have the G800 certified and you had previous had the G700 as well. At this point with the new products for Gulfstream coming out, it looks like there's a little uptick on the older G600s coming to market. I know you mentioned that there hasn't been significant change in demand, but I was wondering if you could provide color regarding customer behavior and how the deliveries of these newer jets are affecting the older pieces and how you expect that to play out regarding pricing.

It's interesting. Old is relative. He's a brand new aviator. I take your point, but a little bit of humor here. The interest in the 500 and 600 continued to be very strong. Each one has its market segment, fulfills different missions. Just so you know, an older airplane again though from a relative point of view is the 650. I think we deliver the last 650s this quarter. So that's kind of a seminal end to really an extraordinary airplane and I would say a real market changer for the last 12, 15 years. But demand remains good, the deliveries are on cadence, largely on cadence but again we still have some perturbations from the supply chain but we'll hopefully get some of those behind us as supply chain more fully recovers. I hope that answers your question.

Next, we'll move to Ken Herbert at RBC Capital Markets.

Hi Phebe and everybody, good morning.

Good morning.

Nice Gulfstream deliveries in the first quarter. Phebe, sounds like supply chain is getting better. Sounds like maybe there's some incremental upside to full year expectations. But can you provide any commentary on cadence of deliveries as we think about second quarter and second half of the year from Gulfstream?

I think pretty consistent. We'll have some mixed changes quarter-over-quarter like we typically do, but pretty consistent. And we're sticking with our with the estimate that we gave you on the last call. As you all know, we never I think once in the last 12, 13 years have we once or twice have we ever updated in the second quarter or in the first quarter. We always wait till the second quarter. So we'll give you more clarity to the extent that there are any changes in that second quarter update.

Okay, great. And just as a follow up, you called out Middle East good order activity there. Are you seeing anything else geographically? Maybe any areas of softness or anything else that sticks out in terms of customer activity on Gulfstream?

Pretty much consistent with what we've seen recently. The U.S. is strong and Middle East is strong. So, so far I haven't seen any systemic changes here.

We'll move next to Scott Mikus at Melius Research.

Morning.

Morning.

Phebe. Quick question on Marine. General Cotton of U.S. Strategic Command recently stated that the Columbia programmer record may need to be increased given today's elevated threat environment. Considering the Navy's fleet of 14 Ohio class submarines carry 280 SLBMs, but each Columbia is only designed to carry 16 SLBMs. Is there interest from the DoD that you've heard about increasing the Columbia program to maintain a one to one replacement of SLBM launch capability?

That's an interesting question. That has been a national security question on and off I'd say for the last 15 years or so. So I haven't heard anything new particularly on that subject but it's frequently a question that comes up or a subject that comes up in extended conversations, so I'm sure it is on people's minds.

Okay. And then turning to Gulfstream, deliveries were very good this quarter. Were there any customers that tried to accelerate the deliveries to get ahead of the tariffs?

Not that I'm aware of.

Okay, thanks very much.

We'll go next to Gavin Parsons at UBS.

Thanks, good morning.

Good morning.

Phebe, you mentioned the improvement in the G700 margin was 1Q better than your plan. And do you still expect a step down in the 2Q and 3Q margin?

Yes, we're holding consistent for a whole series of reasons, including mips, among others, in the second quarter. Pretty much the progression that we gave you last call in January. So again, if that changes, we'll update you at the end of Q2, but so far that's still our plan.

Okay, appreciate it. And you mentioned you expect G800 certification to drive a step up in orders there. Did you book any G800s in the first quarter?

We've had. Yes, I'm almost certain we did. And we've had certainly additional interest since the since the certification. It's a popular airplane. Let's recall that airplane is the replacement for the 650. 650s, as I noted, leave, it's out of production at the end of this quarter. It's already out of production actually largely, and we're in the delivery mode. So the last delivery will be this quarter, so that'll be an additional, I think stimulant to demand.

And we'll move to our next question from Seth Seifman with JPMorgan.

Thanks very much and good morning everyone.

Morning, Seth.

I wanted to ask in Marine, just starting off with the 7% margin kind of slightly higher than what was initially expected for the year and potentially, bringing those last two Block five boats, well, hopefully bringing those boats under contract this year, we'll see about the rest. Does that create maybe a little bit less risk when we think about the margin outlook for Marine versus the past two years?

I think to the extent that we can continue to stimulate through productivity in the supply chain as well as at the shipyard, that is always a risk reduction, so I think every time that we can facilitate that, that is a good thing. I will recall -- I'll just note on the 7% margin. We had a charge in the fourth quarter last year that didn't revisit and that was some mix driven. But we're staying by, you didn't ask this question, but I'll answer it anyway. But we'll stick with, as we stand today with our -- we're going to hover in the upper sixes in margin. But yes, as I said, any action on the part of the government to stimulate productivity always takes risk out of the profile.

Okay. Okay, thanks. And then just as a follow up on the capital deployment and balance sheet with the share repurchases in the first quarter, I guess will affect the share count for the year. I think, Kim, you mentioned maybe waiting potentially to refinance some of the debt that's due in the second quarter. Should we think about some incremental interest expense at all this year that maybe offsets some of the goodness from -- from share repo or how do I guess, how do those two things kind of net out? And then, Phebe, I think you've said over time that you're typically opportunistic on share repo and this was, a bigger quarter than we're used to seeing and so, what was kind of the thought process around that?

Sure. I'll start with -- just to clarify, I didn't necessarily say we were waiting. We're just watching what's happening in the market in terms of the rates related to the refinancing of the debt. So just wanted to clarify on that. And as you stated, we did have significant share repurchase in the first quarter, and we continue to look at share repurchase throughout the rest of the year, depending on the facts and circumstances as they present themselves. And so I would say that we will likely have slightly more interest expense predicted for the rest of the year.

And I would say, too, our general attitude about capital deployment is unchanged, and our share repurchases are opportunistic, but the stock was a good buy a lot of instances this quarter.

We'll take our next question from Andre Madrid at BTIG.

Good morning, everyone.

Good morning.

Given all the recent tension around trade, do you think there's a reluctance moving forward for allies to work with U.S. contractors? I mean -- you saw several Northern European nations kind of coming together and saying that they were intending to collectively buy a competing inventory combat vehicle. Like do we expect stuff of this magnitude kind of moving forward? And yes, like I said, do we expect trade to kind of linger and weigh on allies dealing with contractors like GD?

I think that we have to see how all that plays out. But we -- I think you know that we are a little bit different, and this is largely talking about combat systems because that's our preeminent business in Europe. But this is a European business run by Europeans with manufacturing facilities in Europe sourced in Europe almost exclusively. So these are long-standing 30-year in some instances companies in their home countries. So, I think we're a little bit different. I would say that the demand in the first quarter for European made sourced GD products was certainly there and European Land Systems has a superb portfolio of products to offer and we have seen increased demand and increased spending. So, that bodes well from our perspective for these businesses.

Got it. Got it. That's helpful. And then if I could just squeeze in one more. I think some of your peers pointed out a slower pace of contract awards in the first quarter. Did you see anything of this nature? Could you provide more color there?

Yes. I'll not in the majority of the portfolio, but Jason, go ahead.

Yes. I think as it relates to the Technologies Group, as you saw in the results, it was actually a very encouraging quarter from an orders perspective. On a pretty meaningful uptick in revenue, we had a book-to-bill greater than 1:1. So -- so far, we're not seeing an impact through the end of the first quarter. And as Phebe said, the pipeline for the business remains very strong. The issue that I think most people are talking about, and we're seeing, frankly, the same thing is what I would refer to as perhaps a sluggishness, if you will, in the cadence of solicitations and award activity. But as a reminder, that's not necessarily something new for this business. In the GDIT side, in particular, we've talked for some time about dealing with these types of issues of protracted and drawn out adjudications and award activities, protests and other things that sort of extend that order cadence beyond what would be a regular order. So while this is something we're tracking and it's something everybody is talking about, I don't necessarily think it's something aberrationally different than what we've been used to dealing with in the past. And so we'll just have to see how it plays out as we go forward.

We'll take our next question from Sheila Kahyaoglu at Jefferies.

Good morning, Phebe or Kim, maybe two follow-ups, if I can, both on margins, one on Aerospace and one on Marine. On aerospace, can you just update us on how we think about the last 650 being delivered in this quarter as the G800 grams [ph] and how we think about the different box with G700 aggressing throughout the year?

So we're continuing to improve G700 margins. We are not, however, at what I would call a normal cadence yet. And so once we hit that, then we will begin to progress margins even further. The 650 will deliver at high margins and the 800 will come in at higher margins than the 700 because it's not carrying as much burden as the 700 for a slot of 700. So these are all, I think, beneficial to us. And you had a question on the Marine margins?

Yes, please. I just thought your prepared remarks mentioned the government and working with them a lot more. So I was wondering over the last quarter or two, what's really changed, whether it was the higher in cadence, the investment required from GD or is the government customer working closer with you to support the marine build-out.

I'd say there's a step-up in engagement on the civilian side of the government with us on building that cadence, getting the throughput up, getting productivity increases. Ensuring that we can continue to hire the workers that we have been hiring that the wage structure is appropriate and that the investments take us to the next level. And I suspect the next series of investments you'll see some investment in resiliency, a lot and, again, additional productivity and throughput with increased automation, even more increased automation. They have quite a bit that we've spent over the last decade and recently putting it in the shipyards and then additional fixtures for additional throughput so that we can really get our pace to where it needs to be, to deliver what the nation needs. And then, again, continued efforts on the part of the government to support the supply chain and get the supply chain stabilize, it's better in places, but we've got a ways to go.

We'll move next to Ron Epstein at Bank of America.

This is Mariana Perez Mora, for Ron today.

Good morning.

I wanted to do a follow-up on Combat Systems. Could you mind discussing what is the pipeline of opportunities in Europe, especially because we continue to see headlines on like increased commitment to build up their defenses?

So we've seen increased discussions and really throughout Europe. Eastern Europe as well as Central Europe now, and those conversations have accelerated. They started in earnest with the invasion of Ukraine, and they have picked up even more as each one of those governments has allocated an increasing amount of its resources to defense spending, so I would say it's across the board.

Thank you. And my follow-up is going to be on tariff. What are your expectations for -- especially in this macro environment or evolving uncertainty? What are your expectations for book-to-bill on for full [ph] strength for the full year?

We are close to 1:1 for the year. I think we're actually 9, but why pick nit, that's very close to 1. So we continue to see that as achievable in the moment. Should that let you know in Q2.

Next, we'll move to Myles Walton at Wolfe Research.

Thanks. Phebe, I realize you can't put precision on the tariffs from the step in the land mine here.

You're right about that.

I know. I know. So your confidence that you alluded to in the full year outlook. Is that encompassing your assessment of what you're going to see?

We don't think the defense guys get hit much. There will be some Gulfstream impacts and nothing we see so far is extraordinary but we had a long way to go. And I think a lot of the supply chains have to assimilate these changes and see the impacts to the extent that they have them on them, but that's all I can give you. If I were any more specific, the one thing I could assure you is it would be wrong, and you all would be highly irritated that it gave you a wrong number. So I'm giving you really how we see it from our thought at the moment.

And then a follow-up, we talked through the call about the administration fingerprints on the Marine business, with the Shipbuilding Act and technologies with some of their initiatives on government services. Is there anything you're seeing as it relates to your combat business and their view on the role of the Army and maybe the X30 and M10 as being prioritized or deprioritized in the framework?

So one of the things that is a truism about Washington that is now a truism on steroids is that rumor is rampant. So I want to see what the budgets actually show. But the CR did fund Stryker and Abrams at a lesser rate. I think the Army's plan had been on full brigade of Abrams third brigade of Strykers and they cut that request by about a third, so we need to find a little bit more stable funding profile, particularly for the supply chain. That really perturbate the supply chain badly. There is a great interest on the part of the Army, and we are working daily with them to accelerate the next-generation Abrams. So we consider that a very positive step in Army recapitalization and modernization.

Next, we'll go to Noah Poponak at Goldman Sachs.

Hey good morning everyone.

Good morning.

I just wanted to go back to technologies, Jason or Phebe, it's interesting you mentioned engagement with the customer and that this dialogue back and forth dialogue is going on. I wondered how much are they just asking for reductions versus how much are you showing them capability that can help them gain efficiencies while adding revenue to your business. And then additionally, I'm curious how much discussion is there around contract structure and how that could impact margins whether positively or negatively?

Yes. Look, in short, I'd say it's all of the above. Not to mince words, they are looking for reductions across the board, and we are actively participating in that and making recommendations to help them solve the problem they're trying to solve. But to your point, there are opportunities down the road because the fact is when you look at the types of efficiencies they're trying to drive the type of headcount reductions they're looking for, it is absolutely the very types of things that we provide in terms of these technology solutions and digitization and so on that enable those types of reductions. So there's going to be a period where it's a shorter-term conversation and then it's going to turn to a longer-term conversation. And to your point about opportunity in that, I think -- look, we talked about fixed price outcome-based type contracts. And again, I mentioned we're comfortable with that. We have a good bit of that in our portfolio and that should bring an opportunity for us. The fact is it's no different than any other contract geometry fixed price versus cost plus. When you take on more risk, there should be an opportunity for a little better margin. But all of it comes at a better price and a better outcome for the customer. I guess if I would add one other thing to watch out from a risk standpoint, we need to be careful from a mission perspective, that if there's dueling priorities of significantly reducing workforce within the government and at the same time, on a meaningful level in sourcing this type of work to the customer that can come at great peril and we need to be mindful of that in these conversations and make sure we don't compromise any mission capability.

I appreciate all that detail, Jason. And just one quick one, Kim, what's your updated thinking for full year free cash flow to net income conversion?

I think we're sticking with the forecast that we gave you in January at this point in time. We're obviously always trying to improve upon that. But at this point in the year, we're going to stick to that forecast.

Operator, I think now we have time for just one last question.

And we'll take that question from Gautam Khanna at TD Cowen.

Yes, thank you guys. Jason, I wanted to just follow up on the prior question. Have you actually seen dose or whatever we want to call this book terminate contracts with GDIT? Has that happened? And if so, can you quantify what that aggregates to?

Yes. I'm sure if you look at the public information around DOGE, they list all the contract actually that they've taken action on. And we have been a part of that. There have been some stop work orders, some partial stop work orders and so on. In terms of impact of that, I'm not going to quantify that for the year. As I said, the outlook for the year for the business remains the same. If anything, I think I would remind you that historically, the way General Dynamics puts contract value into backlog is materially different and more conservative than most of GDIT's peers. We're very rigorous about that. And so from a color standpoint, I think I'll put it that way. But we're -- those things are going on, and it's going to be part of the conversation.

Got you. And that's factored in. Okay. And then just a follow-up on Gulfstream, Phebe, could you remind us what percentage of the pipeline of opportunities on the large cabin side are with non-U.S. customers like a rough percentage? Is it half? Is it a quarter?

Yes. No, it's less than half. I think it typically runs 60-40, something like that, 60 U.S.

Great. Well, thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have any additional questions, I can be reached at 703-876-3152.