Good morning, and welcome to the General Dynamics Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead..

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics second quarter 2023 earnings conference call. Any forward-looking statements made today represent our estimates regarding the Company’s outlook. These estimates are subject to some risks and uncertainties.

Additional information regarding these factors is contained in the Company’s 10-K, 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures.

For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the press release and slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com.

On the call today are Phebe Novakovic, our Chairman and Chief Executive Officer; and Jason Aiken, Executive Vice President, Technologies and Chief Financial Officer. With the introductions complete, I turn the call over to Phebe..

Thank you, Howard. Good morning, everyone, and thanks for being with us. Before I discuss the quarter, I want to take a moment to acknowledge the loss of our long-time Board member and Lead Director, Jim Crown. Jim has a record of distinguished service on the GD Board for over 35 years.

Throughout that time, Jim provided guidance to more than five different management teams. We mourn his passing, and our prayers are with his family. Earlier this morning, we reported earnings of $2.70 per diluted share on revenue of $10.2 billion, operating earnings of $962 million and net income of $744 million.

We enjoyed revenue increases at each of our four business segments. Importantly, we had a 12% revenue increase across the Defense segments, with a more modest 4.6% increase at Aerospace. While revenue is up by $963 million or 10.5%, operating earnings are down $16 million and net earnings are down $22 million against last year’s second quarter.

So, we had significant revenue increase but lower operating margin against the year-ago quarter. From a different perspective, we beat consensus by $0.14 per share on significantly higher revenue and modestly lower operating margin than anticipated by the sell side. The earnings beat was exclusively operations-driven.

We enjoyed very nice sequential improvement. Revenue was up $271 million, and operating earnings are up $24 million on identical operating margins. On a year-to-date basis, revenue of $20 billion is up $1.45 billion or 7.8% over last year’s first half.

Operating earnings of $1.9 billion are up less than 1% and net earnings are down $22 million, largely as a result of below-the-line items, including a higher provision for income taxes. As Jason will amplify, cash from operating activities and cash after capital expenditures in the quarter continued at a very good pace.

For the first half, free cash flow was 123% of net income. Obviously, we are off to a very good start from a cash perspective. As is clear from the press release, we also had a powerful order quarter across the business, extending our already large backlog. Jason will provide full color around that item as well.

In summary, this is from a revenue perspective, a very strong quarter and a good first half. Supply chain issues and past COVID labor issues have impacted operating margins, but there is relief in sight. We expect improvement as we progress.

At this point, let me ask Jason to provide some detail on our strong order activity, growing backlog and very strong cash performance as well as commentary about the Technologies group in the quarter..

Thank you, Phebe, and good morning. We had a very good quarter from an orders perspective with an overall book-to-bill ratio of 1.2:1 for the Company. Order activity was strong across the board, as each segment had a book-to-bill of 1:1 or greater in the quarter. This is quite impressive in light of the strong revenue growth.

Combat Systems and Aerospace did particularly well with book-to-bills of 1.4 times and 1.3 times, respectively. This led to record-level backlog of $91.4 billion at the end of the quarter, up 1.7% from last quarter and up 4.3% from a year ago.

Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at more than $129 billion. Turning to our cash performance for the quarter. We generated $731 million of operating cash flow, which, following our strong first quarter performance, brings us to $2.2 billion for the first six months of the year.

After capital expenditures, our free cash flow was $519 million for the quarter and over $1.8 billion year-to-date, yielding a cash conversion rate of 123% for the first half.

This conversion rate reflects continued strong cash performance in Aerospace and Technologies and a particularly strong start to the year for the Combat Systems group from payments received on our large international vehicle programs.

The year-to-date results are consistent with our expectation for the year of a cash conversion rate in excess of 100%. Now turning to capital deployment. Capital expenditures were $212 million, or 2.1% of sales in the quarter, which brings us to 1.9% of sales for the first six months.

Similar to last year, you should expect capital expenditures to be higher in the second half of the year, but in line with our expectation to be just under 2.5% of sales for the year. Also in the quarter, we paid $360 million in dividends and repurchased approximately 1.4 million shares of stock for $288 million.

That brings year-to-date repurchases to 1.8 million shares for $378 million. We also repaid $750 million of debt that matured in May and ended the quarter with a cash balance of over $1.1 billion. That brings us to a net debt position of $8.6 billion, down nearly $700 million from year-end.

As a reminder, we have an additional $500 million maturing in the third quarter that we plan to repay with cash on hand. Our net interest expense in the quarter was $89 million compared to $95 million last year. That brings the interest expense for the first half of the year to $180 million, down from $193 million for the same period in 2022.

At this point, our expectation for interest expense for the year remains unchanged at approximately $360 million. Finally, the effective tax rate for the quarter was 16%, bringing the tax rate for the first half to 16.5%. There’s no change to our outlook for the full year of approximately 17%.

But of course, that implies a rate in the mid-17% range for the second half of the year. To shape that for you, we’d expect the rate to be somewhat lower in the third quarter and higher in the fourth due to typical timing items. Now turning to operating performance in Technologies.

It was another solid quarter with revenue of $3.2 billion, which is up 7% over the prior year and continues to build on the strong start to the year we saw in the first quarter. In fact, each business grew year-over-year, both in the quarter and the first half.

The measures implemented at Mission Systems to overcome what seems to be the new normal in the supply chain are taking effect. So we feel good about their prospects for the balance of the year.

GDIT had another solid quarter, in fact, their highest second quarter revenues since before the pandemic as they continue to deliver on their steady year-over-year growth trajectory. Operating earnings in the quarter were $283 million, yielding a margin of 8.8%.

As you know, margins are driven by the mix of IT service activity and hardware volume, and in this case, were further impacted by the mix of new start programs that are driving the strong growth trajectory.

Backlog grew during the quarter, with the group achieving a book-to-bill ratio of 1.1:1 on solid order activity that outpaced the strong revenue growth across the business.

In fact, GDIT booked the highest first-half orders they’ve seen since mid-2019, and their pipeline remains robust with $20 billion in submitted bids awaiting customer decision and another $81 billion in qualified opportunities identified.

Now, let me turn it back to Phebe to review the other business segments and give an update on our guidance for 2023..

Thanks, Jason. Now, let me continue to review the quarter in the context of the other business segments and provide color as appropriate and guidance for the full year. First, Aerospace. Aerospace had revenue of $1.95 billion and operating earnings of $236 million with a 12.1% operating margin.

Revenue was $86 million more than last year’s second quarter on the strength of additional new aircraft deliveries, coupled with higher Gulfstream service center volume, partially offset by less volume in Jet Aviation’s completion center. The 24 deliveries are modestly fewer than planned and are a result of supply chain issues.

On the good news side of the equation, supply chain conditions are improving. We still have a significant backlog of late parts, but processes are in place to catch up, deliveries are trending positive and we have greater transparency. In short, the suppliers are more predictable and are complying with catch-up schedules.

This will help both revenue and margins as we do less out-of-station work. Operating earnings of $236 million are $2 million behind last year’s second quarter as a result of a 60 basis-point reduction in operating margin. Operating margin in the quarter was off largely as a result of the supply chain issues and higher R&D expense.

The shortage of parts continues to cause significant out-of-station work, impacting efficiency. As mentioned earlier, we see improvement here, and that should help as we go through the second half. Sequentially, Aerospace had a 3.2% increase in revenue and a 3.1% increase in operating earnings on identical operating margins.

Moving to the demand environment. Aerospace had a very good quarter with a book-to-bill of 1.3:1 in dollar terms and even higher for Gulfstream aircraft alone. Vibrant sales activity and strong pipeline replenishment were evident in the quarter.

The U.S., particularly large corporations, led the way with the Mid East and Asia participating to a lesser degree. The 700 flight test and certification program continues to progress. The aircraft design, manufacturing and the overall program are very mature.

However, we now target certification in the fourth quarter and see no major obstacles in our path. To give you a little more insight, we will complete our FAA Type Inspection Authorization in September. This is a flying we are required to do pursuant to FAA requirement and plan.

When we are finished, the FAA will fly some confirmatory flight tests to verify portions of our results. That will be followed by a brief period of paper submission, followed by FAA review. As most of you know, we had planned to deliver considerable number of G700s in the third and fourth quarters. That has now flipped into the fourth quarter.

We now expect to deliver 27 aircraft in the third quarter, with a rapid increase in the fourth quarter deliveries. In short, we are making good progress under difficult circumstances. However, we expect to deliver 5 to 6 fewer aircraft than the 145 we forecast at the beginning of the year.

On the other hand, we expect more service revenue than initially anticipated. I’ll have more on this later in my remarks. Next, Combat Systems. Combat had revenue of $1.92 billion, up a stunning 15.5% over the year-ago quarter with growth in each of the business units. Earnings of $251 million are up 2.4%.

Margins at 13% represent a 170 basis-point reduction over the year-ago quarter. So, we saw powerful revenue performance, coupled with more modest operating margin, in large part attributable to mix. The increase in revenue came from international vehicle programs at both Land Systems and European Land Systems.

OTS has also enjoyed higher artillery program volume, including programs to expand production capacity for the U.S. government. These programs carry dilutive margins, but will result in more production at accretive margins over time.

On a sequential basis, revenue is up $168 million or 9.6%, and earnings are up $6 million or 2.4% on a 100 basis-point reduction in margin for the reasons described. Year-to-date, revenue is up $339 million or 10.1%, and operating earnings are up $24 million or 5.1%. We also experienced very strong order performance.

Orders in the quarter resulted in a 1.4:1 book-to-bill, evidencing strong demand for munitions and domestic combat vehicles. International programs also contributed to the strong book-to-bill. So, a very exciting first half for Combat. Turning to Marine Systems. Once again, our shipbuilding group is demonstrating impressive revenue growth.

Marine Systems revenue of $3.1 billion is up $408 million, a robust 15.4% against the year-ago quarter. Columbia-class construction and engineering volume drove the growth, and to a lesser degree, TAO growth. Operating earnings are $235 million, up $24 million over the year-ago quarter, with a 30 basis-point decrement in operating margin.

We anticipate that all of our yards are now well positioned for slow but steady incremental margin growth over time with fewer perturbations. On a sequential basis, revenue was up $67 million or 2.2%, and operating earnings are up $24 million or 11.4% on a 60 basis-point improvement in margin.

For the first half, revenue was up $749 million or 14.1% and earnings are up $24 million or 5.7%. So, a good quarter and first half. So, let me move on to give you our updated forecast for the year. The figures I’m about to give you are all compared to our January forecast, which I won’t repeat.

There is, however, a chart with respect to all of this, will be posted on our website, which should be helpful. In Aerospace, revenue will be down almost $200 million due to the 5 or 6 fewer aircraft deliveries, offset in part by stronger service activity. So look for revenue of $10.2 billion.

We also expect margins to be down from a projected 14.6% to 14.1%. This implies operating earnings of $1.4 billion. With respect to the Defense businesses, Combat Systems will have revenue of $400 million to $500 million higher than previously projected due to new program starts and an increased threat environment.

So look for the total revenue of around $7.75 billion. Margins will be down 50 basis points from 14.7% to 14.2% on mix. All-in, operating earnings will be up $25 million over the previous forecast. Marine Systems revenue should be up $900 million or $1 billion on acceleration of work throughout the yards.

This is a leading indicator of improving efficiency. So, we will have annual revenue around $11.8 billion with an operating margin around 7.6% for the reasons I have previously described to you. Operating earnings for the year should be up $20 million over the previous forecast.

Technologies revenue will be $100 million to $200 million better than previous guidance, but operating margin will be 9.4%, 10 basis points lower than previously forecast. So for the group, we expect annual revenue of about $12.7 billion, with operating earnings around $1.2 billion, steady with prior guidance.

There is some opportunity here to capture 10 to 20 basis points of margin. On a company-wide basis, we see annual revenue higher than our initial guidance and an overall operating margin about 40 basis points lower. So look for total revenue to be around $42.45 billion, about $1.2 billion up from previous guidance.

Operating earnings should be down modestly from prior guidance, but below-the-line items and lower share count will leave our EPS guidance the same. One final note before I conclude my comments. Howard has informed the Company that he intends to retire later this year. So, this will be his last earnings call.

We are grateful for the excellent work that Howard has done since joining our team. I hope many of you will join me in congratulating Howard on a job well done. Nicole Shelton, whom some of you know already, will be taking over the mantle with the third quarter call. That concludes my remarks, and we will be happy to take your questions..

Thank you for your kind words and friendship. It’s been a pleasure and a great experience to have had the opportunity to represent General Dynamics to the investment community these nearly six years. I have grown working side by side with many of the talented people of this tremendous enterprise.

I look forward to working with Nicole over the next few months to ensure there are proper introductions and a seamless transition. There will be time ahead to say goodbye, but today, I want to say thank you. Now, let’s turn to the question-and-answer period of this call.

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?.

[Operator Instructions] Your first question comes from the line of Seth Seifman from JP Morgan..

Hey. Thanks very much. Good morning, and congratulations, Howard. Thanks for everything. Just on the new Aerospace guidance, I guess, maybe if you could walk through how you thought about the setup for that. And I appreciate that this is mainly a timing issue and that any airplanes that don’t get delivered in ‘23 can kind of move to ‘24.

But just kind of the way we get level set. With 27 deliveries in the third quarter, we’re talking about something quite high to get to 140-ish for the year. And also, I mean, with 27 deliveries, I assume we’ll be looking at a margin in Q3 that’s probably still in the 12s and so also getting to 14.1% for the year.

Maybe you can talk a little bit about the margin -- the initial margin accretion from the new aircraft and what that contribution will be to the total deliveries..

Yes. So, I think you’ve put your finger on a nub of an issue. So, what we have given you with respect to Aerospace is Gulfstream’s plan, and the guidance that we gave you reflects their plan. Our January guidance, just for context, contemplated a very high Q4 delivery rate. That rate increased with the certification delay on the 700.

700 will be fully built and ready for delivery. Remember, too, our new planes are all built in purpose-built facilities. We’ve expanded our wing line. In short, we’ve facilitized for increased production.

And finally, the fact that we have planes -- and you can see this from the increase in inventory that are awaiting parts, we now have a schedule, and all of that taken together allows us to -- will give us the ability to deliver.

With respect to margin, we’ve got a number of higher-margin airplanes, as you would expect, delivering in the fourth quarter. So, that provides significant uplift.

So, we kind of explained how we intend to get the revenue through the deliveries, and the margin is really a question of mix of higher deliveries of higher-margin -- greater deliveries of higher-margin airplanes..

Okay. And just a follow-up real quick on this topic. The 27 deliveries in Q3 would be down year-on-year. And so in terms of -- there’s the issue of the G700 certification, which we’re all kind of looking at and it’s hard to analyze.

But just for the non-G700 deliveries, is there any risk around what the plan was there and what Gulfstream expects to do?.

So, as I noted in my remarks, our supply chain is increasing its transparency, improving its processes. And we have reliable -- increasingly reliable schedules.

That said, they’re more likely -- likely to anticipate more catch-up in the fourth quarter, which will allow us to complete a number of those airplanes, but they’re still impacting the third quarter deliveries..

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

I can’t believe Howard’s retiring. He’s so young..

That’s what we say..

Anyway, I’ve got a couple of questions for you, Phebe. First of all, on the revised Aerospace guidance, you mentioned that you’ve increased your expectations for services for the full year. I was wondering if you could square this with what we’ve been seeing in Biz Jet flight hours year-to-date, which have been down year-on-year.

And then secondly, a great Combat Systems order quarter, but how do you expect these orders to flow through to revenue growth over the next couple of years? Thank you..

So, our flying hours are not down. But I think, too, the way to think about our service business is we expect service to increase as the fleet of airplanes -- new airplanes in the market increases. So, we expect steady growth in service. And we haven’t seen any impact so far on any change in flying hours. I said that mostly other people flying hours.

With respect to Combat, the world has become a less safe place, and that’s reflected in the increased demand, both internationally and in the United States. So we expect the -- this year to be considerably higher than last year. And we’ll give you clarity around 2024 in January.

But as you may recall, we had anticipated flat to down growth in this business segment. Clearly, that trajectory has changed. We won’t be able to -- we can’t quantify it right now, but we’ll give you more clarity on that..

Your next question comes from the line of David Strauss from Barclays..

So, back on the G700, would you expect to make up the missed deliveries this year? Would you expect them to make those up next year? So does the -- I think, what was -- 170 go higher in terms of what you’re expecting for deliveries next year?.

Well, we’ll get into next year, next year. But the deliveries are lower, are -- 5 to 6 deliveries that won’t deliver this year are not 700s. So, it’s other airplanes..

Okay. Got it. And then as a follow-up -- quick follow-up. Combat Systems, you’ve mentioned this during the prepared remarks, the lower margins in the quarter, and then it looks like you’re forecasting a bit of a snapback in the second half of the year, but still a fair amount lower than what you were initially forecasting.

Could you just give a little bit more detail on the mix and how that’s impacting? Thanks..

Yes. So mix in this instance is comprised of two elements. One is the capacity expansion, which I noted carries lower margin. And then it’s really the transition from more mature programs to newer programs, and those margins will improve as we come down our learning curves..

Your next question comes from the line of Cai von Rumohr from TD Cowen..

Terrific. Thanks so much. So -- and Howard, let me say, you’ve been terrific to work with and a great friend, and I wish you all the best..

Thank you, Cai..

So, Phebe, how many 700s are you assuming to deliver in the fourth quarter? And what kind of margin for error is there in terms of timing in terms of....

We will deliver 19 G700s, and we’re not going to tell you margins will be accretive. Nice try.

Well, have we ever given you margins by airplane?.

No, no, no. I just -- so -- and next -- I didn’t mean -- I meant how much time-wise, a cushion you have in the schedule if the certification slips..

You mean the schedule for the 700 certification?.

Yes. I mean, is your best guess that you certify in the middle of November, in middle of December, which could impact the amount number of planes you get out….

So, what we’ve told you is our best estimate right now of the certification process. Clearly, if it comes very late in the year, we’ll deliver airplanes, but we won’t necessarily be able to deliver all of them. That will bleed over into the best first quarter GD has ever had in its history. But we’re not anticipating that at the moment.

So, I don’t have real good clarity because we don’t know yet with precision on when in the fourth quarter. But our best estimate, what we’re planning for right now is that we will be able to have sufficient time to deliver these airplanes. Remember, they’re built -- the pilot training will start, and that will help significantly with deliveries..

Got it.

And with all of these deliveries in the fourth quarter, maybe, Jason, can you give us some color in terms of the cash flow profile? I mean, do we have just a momentous fourth quarter cash? And is there any upside to the 105%?.

The way I think you need to think about that, Cai, is when it comes to Gulfstream, we have a sequence of progress payments that occurs from the time of the initial order through delivery and entry into service.

So, the vast majority of the cash receipts associated with an aircraft order and aircraft delivery are in-house before the actual airplane is delivered. So, while there’s obviously an implied set of progress payments, final delivery payments would occur at that point.

When those aircraft enter into service, it’s not an outsized level of cash, one way or the other. So, the bigger issue is you’ve got an ongoing sequence and series of progress payments associated with all of the orders in the order book.

And with the significant order volume that we’ve had over the past 2, 2.5 years, that is sort of a machine that’s just churning those progress payments over time as we continue to make progress on each of those airplane builds as well as the certification process..

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

Thanks. Good morning. And congratulations on retirement, Howard. Miss you. In terms of the -- the outlook for Aerospace orders, could you just comment, Phebe, what you’re seeing for the rest of the year? Obviously, the second quarter was probably helped a little bit because of the anomaly you mentioned in March around the banking crisis.

And then also if you can comment on churn in the backlog, I think your net book-to-bill was a couple of hundred million lighter than your gross book-to-bill. So maybe just talk about any cancellations..

Yes. So, the demand in the second quarter was at the same level as the demand in the first quarter. It felt very, very similar. As you quite rightly note, we had a three-week hiatus coincident with the banking -- many banking crisis. But the demand levels have remained about the same. And as we enter Q3, we have a very strong pipeline.

And so far, activity is quite good in Q3. We had six defaults in the quarter, but nothing that is notable to us. And the backlog is holding up very, very well..

Your next question comes from the line of Jason Gursky from Citigroup..

Congrats, Howard. I look forward to getting some postcards from our in distant places. Phebe, just sticking with Gulfstream for one last question, hopefully here.

On the pipeline and kind of what you see from a bottom-up perspective, can you give us a little flavor from a geographic perspective and customer type? How is high net worth doing versus corporate? And are we beginning to see some green shoots in geographies outside the United States?.

Yes. So, the United States was strong, has been strong, particularly with the Fortune 500. I would say that high net worth is about the same. And the Mid East is pretty good, as is Asia, but it’s really the Fortune 500 that are really driving the demand. These are long-established customers as well as new Fortune 500 customers..

Okay, great. And then, Jason, over to you on Technologies. It sounds like you’ve got a robust pipeline of opportunities in front of you. Can you talk a little bit about the mix of that? We had some margin degradation here in the quarter.

I’m just kind of curious, as you look out at that pipeline, do you see anything that would suggest we’re going to see a departure in any -- either higher or lower from a margin perspective as you bid on this work and bring it in?.

I think bottom line, the short answer to that is no. We don’t see any fundamental change, as we’ve talked about. You’re going to see some level of aggregate margin perturbation between the two businesses, the IT services side being somewhat lower obviously than the hardware side.

I think in this quarter, we saw it a little more pronounced because as we’re seeing this turn for the group to a stronger growth level, a lot of that is driven by not only new starts, but it’s actually replacement contracts, or I should say, recompetes that we’ve won.

So, you had in the prior year the trailing off of very mature-level legacy contracts that were closing out at higher margin rates as compared to the entry-level margin rates we’re seeing now. So, that’s sort of the driver of the year-over-year delta that you’re seeing.

But barring any major structural shift between the percentage contributions of the IT services versus defense hardware parts of the business, we continue to expect this to be a low double-digit margin business over time..

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

Yes. Hey. Good morning. And ditto Cai’s remarks, Howard, you will be missed. It’s been a pleasure working with you. So quickly, a couple of questions. On Technologies, what should we be looking for? I mean, sometimes the contracts there aren’t as obvious in the horizon.

So, Jason, what should we be looking out for in the second half of the year as potential things you guys could win?.

the defense, the intelligence community and the Fed SIV side. So, really good across-the-board support in GDIT.

And I think if I could point to any one thing in particular on that side of the portfolio, we’ve talked for the past few weeks, a couple of months about some selective technology investments they’ve been making to accelerate their growth, and we’re seeing that really start to take hold.

And of course, we’re talking about things like artificial intelligence, machine learning, hybrid cloud, Zero Trust and so on. And that’s really starting to bear fruit. We’ve seen already several hundred million dollars worth of award wins as well as organic growth on existing contracts that’s resulting directly from those investments.

They’ve got some $7 billion in change in post-submittal submissions that are awaiting award decisions. And they’ve got another 20-plus, I think, between $20 billion, $25 billion of opportunities in the pipeline that are directly tied to those targeted investments.

So, I think some really intelligent capital allocation over there at GDIT to try and drive that growth, and we’d expect to see the results of that continue in the second half of the year and beyond..

Okay, great. And then maybe one follow-on for Phebe.

When we think about Aero, when things start to normalize, right, supply chain kind of gets back to a normal cadence and all that, what should we be thinking about broadly as like a realistic margin target?.

We’re thinking in the higher teens when we get on a steady state with upside potential..

Your next question comes from the line of Louie DiPalma from William Blair..

Howard, thank you for your deep aerospace-defense expertise in your current position and your former position on the sell side, your high standards raised the level of those around you. For Jason, for the Army’s CHS-6 $8 billion recompete that should be announced, I think, very soon. GD Mission Solutions is teaming with GDIT.

Do you feel these synergistic joint bids between IT and Mission will become more common and a significant strategic advantage for you? And could it help return the overall Technologies segment to mid-single-digit growth over the long term?.

Yes. And bottom line answer, you kind of hit the nail on the head there. We absolutely expect the synergistic benefits of these two businesses working together to be to our benefit over the long run.

It’s -- the predicate for all that is that what we’ve seen both in the customer demand environment, what they’re requiring in terms of end-to-end solutions, including both software, services and the hardware elements of what we provide. We’re seeing the peer group migrate that way with some of their M&A activities that you’ve seen in the market.

And so, we believe that is the thesis that we’ll see play out. You noted CHS-6, we’re obviously participating in and anticipating that -- resolution to that competition.

We’ve seen that program migrate over time from one that was traditionally very much focused on high-end, customized, ruggedized hardened-type defense hardware to one that is a combination of that type of capability as well as a more traditional, sort of off-the-shelf catalog-type product.

And so, we believe that having the attributes of both GDIT and Mission Systems involved in that program would be the best suited to serve our customer there. So, that’s just one good example of it. But absolutely, we see that over time. And as far as long-term growth rates, we’ll have to see where this leads.

Right now, we continue to track low- to mid-single digit, but we’ll see if we can’t get some juice out of that over time..

And your next question comes from the line of Sheila Kahyaoglu from Jefferies..

Howard, exactly what Louie said, and then, thank you for being such a great colleague and a teacher to me and all those around you, so thank you. Phebe or Jason, whoever, on the Defense business, when you look at your 2023 guidance, Defense growth is up solidly up 5% for the year versus the 9% growth you did in the first half.

But this is not necessarily leading to operating leverage with margin contraction of 40 bps and flat operating profit. So, how do you think about the return to operating margin expansion either on a total company level or a segment basis? It seems like Technologies is more temporary, Combat mix maybe continues for some time..

So, Technologies and Combat are simply a question of mix. And I suspect Combat will quickly return to its normal operating leverage. The Marine Group has significant supply chain challenges that have impacted for the Virginia-class in particular. That’s going to take some time to resolve. We’ll talk about that in a little bit more detail.

So, as I noted, we expect slow quarter-over-quarter margin growth in the Marine Group, perhaps an occasional perturbation by quarter, but slow and steady improvement over time..

And your next question comes from the line of Ken Herbert from RBC Capital Markets..

Congratulations, Howard. Phebe, I just wanted to dig into Marine again a little deeper. The full year guide implies a pretty significant deceleration in growth into the back half of the year. Two questions, really. First, as we go back six months, you were talking about a much more conservative outlook for the top line in Marine.

And clearly, maybe any comments on really what’s changed because the first half has really been much stronger than expected.

But then also, as you think about the remainder of the year, what will drive the significant step down and how much conservatism does the Marine outlook reflect in terms of the growth?.

So, growth in the quarter was driven by improved -- increased volume on Columbia and on the oiler program as well as additional throughput throughout each one of those yards, which is often a precursor to better margin performance. And finally, just the -- revenue came in faster than we had anticipated, really across the board.

And that will drive our expectations. With respect to the margin performance, we have -- Columbia is doing very well. We’ve got nice performance on the oiler. We see some deck plate improvements of Bath, but that has yet to translate into financial performance.

Electric Boat needs to continue to get better to offset likely additional supply chain challenges as the Virginia supply chain begins to improve. And with respect to that supply chain, we see improvements and some very nice improvement in some area. But that supply chain was hit hard by COVID. And I think a little bit of explanation there is helpful.

COVID impacted that supply chain, Virginia supply chain, in particular, in a couple of ways. Obviously, the impact of COVID itself, the workforce disruption. Then we had the large demographic changeover. And finally, Virginia was impacted by the Columbia prioritization. All of that made it difficult for that supply chain to begin to get back on cadence.

They’re getting better, but we’ve got a while to go before they hit their two-a-year or more cadence..

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

Thank you. Good morning, Phebe and Jason. Congrats, Howard. Hey Phebe, within Combat, munitions kind of is viewed as a potential source of kind of upside volume, and thanks for all the color on the segment. But how should we be thinking about the munitions growth profile? I mean, it’s about -- finished last year, about 27% of your mix.

Do you expect that mix to continue to grow? And any comments on the supply chain there as my follow-up, just because I know there’s been talk about challenges there. Thanks..

The supply chain in the Combat group has been less of an issue. I suspect that the -- at least for the foreseeable future, the munitions portion of the business will remain about that, same as we see uplift in all of our all three businesses. We’ll see OTS at about that same level.

We’ve already increased munitions capacity and working with the federal government and the Army and OSD in particular, we have a very detailed plan to further increase capacity, which will allow us then to increase production very rapidly and move to the left, the munition availability to meet the United States’ needs and, frankly, external needs as well..

Operator, we’ll just take one more question, please..

And our final question for today comes from the line of George Shapiro from Shapiro Research..

Good morning, and congratulations, Howard. I didn’t figure I’d outlast you, but we’ve known each other a lot of years and....

George, it’s over 40, just counting..

That’s right.

Phebe, on the defaults that you mentioned, can you just mention what kind of customers they might have been? And I assume you keep the down-payments that might have been made on the aircraft that they order?.

So I think you know we have very strong terms and conditions that you forfeit some of your value in the airplane when you cancel. I don’t actually know the context of the default, that won’t -- nothing that was of note or interest, otherwise, I’d know it..

Okay. And Jason, the unbilled receivables was actually up like $100 million sequentially.

So, does that mean you didn’t get any payments from the expected customers in the quarter? And how much would you expect the rest of the year to come in?.

Actually, George, we did receive additional payments on schedule as per the plan that was set forth several years ago. And I’m actually happy to tell you that at this point -- and maybe this terminates this line of dialogue for the foreseeable future.

The arrears that you all may remember from many years ago on that Canadian international program has now effectively been paid down, and we are down to what I would call a normal run rate of operating working capital on that program. So I’m pleased to report that we’ve passed through that phase.

In terms of what we expect to receive for the balance of the year, there are some more progress payments to come in, but I don’t have that quantified off the top of my head..

Something you had kind of given what the specifics were on that in the Q..

We’ll follow up on that..

Yes..

Operator, that now ends the call. And for those that are interested in connecting later, we’ll have follow-up questions. Please don’t hesitate to call me. Thank you for joining our call today. As a reminder, please refer to the General Dynamics website for the second quarter earnings release and highlights presentation.

And as I said, if you have any additional questions, I can be reached at 703-876-3117. Thank you..

This concludes today’s conference call. Thank you for your participation. You may now disconnect..