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

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Third Quarter 2025 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phebe Novakovic, Chairman and Chief Executive Officer; Danny Deep, Executive Vice President, Global Operations; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.88 per diluted share on revenue of $12.9 billion, operating earnings of $1.3 billion and net income of $1.059 billion. Across the company, revenue increased $1.24 billion, a strong 10.6%, led by a 30.3% increase in our Aerospace segment and a 13.8% increase in Marine Systems over the year ago quarter. Importantly, operating earnings of $1.3 billion are up $150 million or 12.7% Similarly, net earnings increased $129 million or 13.9% and earnings per share are up $0.53 or 15.8% over the year ago quarter. On a year-to-date basis, revenue of $38.2 billion is up 11% over last year. Operating earnings of $3.9 billion are up 15.7%. Net earnings of $3.07 billion are up 16.4% and earnings per share are up 19%. As an aside, we beat consensus estimate by $0.18 on higher-than-anticipated revenue and modestly better operating margins. My reaction to the quarter is best reflected in thoughts about the sequential comparison. In the second quarter of this year, we had very good results, which were well received by investors. This quarter was even better. The 2 quarters enjoyed similar revenue, but operating margin improved by 30 basis points, and we generated significantly higher free cash flow, as you will hear in greater detail from Kim. Robust order momentum continued in the quarter, yielding record backlog. In short, we had a superb quarter from my perspective. With that, let's move into a discussion of the operating segments. First, Aerospace. Aerospace performed very well in the quarter to say the least. It had revenue of $3.2 billion and operating earnings of $430 million with a 13.3% operating margin. Revenue is a dramatic $752 million more than last year's third quarter, a…

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

Thank you, Danny, and good morning. The third quarter was another strong quarter from an orders perspective. The overall book-to-bill ratio for the company was 1.5:1. All 4 segments experienced a book-to-bill of at least 1.2x. Our Defense segment's book-to-bill was a robust 1.6x their revenue. Aerospace continued its momentum with a book-to-bill of 1.3x for the second quarter in a row, even as revenue increased in both quarters. Year-to-date, the book-to-bill for the company was a solid 1.5:1. This robust order activity led to a new record level of backlog at $109.9 billion at the end of the quarter, up 19% from a year ago and 6% from last quarter. Looking at the segments, Marine and Technology each ended the quarter with a record level of backlog. Our total estimated contract value, which includes options and IDIQ contracts, also ended the quarter at a new record level of $167.7 billion with each of the Defense segments reaching new highs. Moving to our cash performance. It's an even better story than orders. Last quarter, we discussed our efforts to drive cash to the left given our back-end loaded cash forecast for 2025. Well, we realized the fruits of those efforts in the quarter. Our business units really outperformed our cash flow generation estimates for the quarter, driven by solid cash collections. Let's get to the specifics. Overall, we generated $2.1 billion of operating cash flow. All segments contributed to the better-than-expected results with particularly strong cash generation in Combat Systems and Technologies. Including capital expenditures, our free cash flow was $1.9 billion for the quarter or 179% of net income. Coming off strong cash collections in the third quarter, we now expect about half as much free cash flow as we generated in the third quarter in the fourth quarter.…

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

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

[Operator Instructions] Your first question comes from the line of Myles Walton with Wolfe Research.

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

I'd say there were a whole host of factors that drove the orders. I think primarily, it's the strength of the economy. It's been -- our order book has been pretty resilient. And in fact, the pipeline remains resilient and pretty robust. So I'd say it's that. It's a combination of that plus the fact that we've got a number of new models. Delivery cadence is improving. So I think it's all the factors that you mentioned. And I will note that it is across the portfolio, led primarily by the 800.

Geographically, is there an area of particular strength?

North America.

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

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

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

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

No, there were not, not in this quarter.

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

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

On cash collection, not yet. On contracts, in some instances, the contracting people have been sent home. So that will push contracting into whatever week or month that the government resumes. I think from our point of view, we've looked at this as a rolling basis since it is unknowable. When the shutdown ends, then we are looking on a weekly basis and rolling forward to anticipate what each one of our contracts look like to the extent that we can. So we're -- it does introduce uncertainty in the quarter. And if it goes into next year, that increases the likelihood that it will have additional impact on particular lines of business that begin to run out of funding. So there's an awful lot of, I think, uncertainty. And in that uncertain environment, I think we're taking a prudent approach.

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

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

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

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

Well, look, as you well know, we have -- this has been a long-term strategy of ours to replace the entirety of our fleet with all new product designed to meet every one of our customers' missions, and we've done that. I think the most recent announcement of the 300 shows that. As we go forward, we will be upgrading our products in due course. And that's probably all that we're going to say at this point. These are all brand-new airplanes, and they've got a lot of running room, and they've met with very, very strong positive customer reaction.

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

Yes. So let me start with the supply chain. I think in my comments, I mentioned that we've seen some improvement in the supply chain, and there's other areas where it's still lagging. But those improvements are significant. Just to give you a sense -- and that will have the biggest impact on our ability to drive productivity and schedule and start to grow margins. But to give you a sense of how the supply chain has evolved and a lot of it from the investments the government has made in the supply chain in terms of productivity, employee retention and just increasing capacity. But we've seen a 40% increase in the last 2 years in the sequence critical material. And that's really helped -- that helps with productivity. And if you look at it across all of the supply we get, it's been a 75% increase. We'll receive almost 5 million parts. So I'd say the #1 thing that will impact our efficiency in our shipyards is the supply chain stabilizing. And as our shipbuilders come down the learning curve from an efficiency standpoint, and we're starting to see that we're starting to see good ship-over-ship learning. And we make investments in all the same things that is happening in the supply base with respect to robotics and automation and employee development and training. That's where we really see the biggest bang for our buck.

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

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

I don't think that there's any root cause other than just timing that drives that increase. We're not -- I'm not aware of anything in particular. We are continuing to work with our customers. We always work with them in a normal course, and that's continuing now on ways in which that we can all improve our efficiency. But I wouldn't point to any particular element in that. And recall, we book -- and Nicole can walk you through this offline, but we book backlog a little differently than a lot of them, and we're pretty conservative about it. But I would say that driving that backlog is the demand that we're seeing pretty much across the portfolio. DDIT, in particular, had a very, very strong book-to-bill a little in excess of 2:1 in the quarter, and they've continued to have very strong bookings as a lot of their investments have begun to pay off in cyber, Zero Trust environment, AI. So we're in pretty good stead in that market.

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

Well, first of all, there is 0 way I'm going to venture into what we're going to do next, but I will say something about Supersonic. We have yet to see a business case that even remotely works. So yes.

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

Nice results. Phebe, maybe just to stay on Gulfstream. Just given the resilience of this -- the bookings environment and the backlog and how well you guys are doing, does that provide pressure on kind of where production is? Or do you need to take rates up? Or do you feel like you've got the right cadence with the current rates today?

Well, our rates are driven by the backlog and demand. So far, we're comfortable in our rates will increase in a regular order. But if you -- if we continue to see increasing demand and increasing backlog, we'll have to increase our rates. That's pretty much, I think, our standard operating cadence. And nothing's changed in that regard in how we -- with respect to how we react to increases in demand. So we'll continue to increase, I think, year-over-year for the next couple of years. That's sort of our plan.

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

So we have the jigs fixtures facilities to continue to produce. We'll continue to invest and particularly in productivity improvements and additional footprint as needed. The first Columbia is about 60% complete by the end of this year. We'll have all the major modules at Groton ready for assembly and test and then systematically work through each one of those testing items, pretty rigorous, as you can imagine, first-of-class testing program that will work in coordination hand in glove with the Navy. But we're moving -- we're working very hard to move that ship to the left along with our customer and along with the supply chain. So we've -- and we've seen some improvements again from the supply chain, as Danny, I think, clearly articulated. So this next year will be pivotal.

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

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

That's how we're looking at it. I think you quite accurately pointed to the headwinds and the tailwinds. International vehicle demand is increasing and at a higher rate and munitions demand, both internationally and domestically is increasing as our -- we are a supplier to the primes on missile parts, and that also is increasing. But there is some headwind with respect to U.S. combat vehicles. That is until we accelerate the delivery of the new tank. So it's a mix, but we see some nice growth driven by our international business. And let me tell you, I want to give you a little bit of perspective on that international business. So we have indigenous businesses that have been the backbone of their country's supply chain for the last -- or industrial base for the last 25 years. And in these businesses, they are -- have indigenous engineering design and manufacturing, and they are run by host country national. So these are -- when we produce vehicles coming out of Europe to Europe, they are European engineered, European designed and European manufactured. And we think that's a very, very good and has been a successful business model for us as demonstrated by we've got the largest installed fleet in Europe. So we're pretty comfortable with the competitive positioning of that business.

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

So as you know, we phased out the 650, and you're quite right, replaced by the 800. The 800 has had an awful lot of customer interest. It led the orders demand in the quarter. And we have a pretty robust pipeline. So we -- that transition from the 650 to the 800 went very, very smoothly. The introduction of the 800 and has gone well and deliveries are increasing. I mean, this week, we just delivered our sixth G800. By the way, we also, this week, delivered our 72nd G700. So I think that's an indication of more regular cadence in the delivery profile as the supply chain has stabilized.

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

Maybe if I could ask a follow-up on that topic, Phebe. Just how do we think about -- you have so many development programs, and you've done a great job with the shift from the 650 to the 800 and yet the margins are going to be stable even with the 650 going away. So how are you thinking about the G800 learning curve, the 700 as well? If you could provide us an update on those blocks and how we should be thinking about that?

Well, we're coming down the learning curve on both of those airplanes. 650 was a mature high-margin airplane. So it will take a while for the 800 to reach those similar gross margins. But we like the prospects on both of the -- on all of our airplanes, frankly. And the keys are getting the increasing stabilization of the supply chain, and they've gotten much, much better. I'd say the introduction of the 800 demonstrated the strength of the supply chain as they become more reliable and are better able to keep up with demand as compared to the 700. That supply chain, too, has stabilized. So we'll continue to see gross margin improvement as we come down our learning curve.

Can I ask a follow-up again on Aerospace, if it's okay, on deliveries and just R&D. On the delivery profile for the 700, 800, do we think about that cumulative being the 650? Or is it plus that? And then R&D, how much of a tailwind do we see from R&D as you've certified some of these major programs?

Our R&D will be about the same for a while. We've got developmental programs, and we still have airplanes to get through certification. The 800 is really the replacement for the 650. And that is what we are seeing as the 650 customers are buying the 800 as a replacement. The 700, I think, is a market expander. It is a new offering in an element of the market that we didn't have before. So I think net-net, that's a positive growth profile going forward.

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

On -- going back to Combat, you talked about the value of having the indigenous operations in country in Europe. When you look forward, given the growth potential in Europe, do you expect to be doing more investment there? And could this be beyond just ground vehicles into other areas?

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

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

So I'd say the single largest impact on the cadence of manufacturing and delivering -- ultimate delivery of the first Columbia has been the supply chain, the fragility of the supply chain as it's tried to ramp up from very low rate production, which has been in for the last 25, 30 years and quintupling that production. That has been the single largest challenge. And the government has recognized that and for the last several years has provided some nice robust funding to mature that supply chain and to expand it. And we're beginning to see some of the fruits of that effort pay off. We also, as you know, and this happened through most of U.S. industrials had a significant demographic shift as experienced workers retired, and we had a generational change with younger workers coming on board. I would say that we've -- we had invested in our training programs and with the government's help are continuing to invest in our training programs. So that we -- when the new shipbuilders come out of the training program, there are a higher level of proficiency than they had been in the past. That's all good. With the government -- working with the government, we've also been able to increase wages in a wage competitive environment. So -- and we're very comfortable that we've got the manpower and the facilities. We've continued to invest in facilities. And as Danny was alluding to, particularly on the productivity side. So I think there is a lot that's beginning to coalesce and come together to reduce risk in this program and bring it to the left, and that is our objective, working very closely with our customer.

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

If it's okay, I just have a -- I'm going to ask one 2-part question on contracting. And right off the bat, I'm not asking for anything on specific contracts. Generally speaking, could you comment on changes to the contracting environment you're seeing with the new administration? There was some chatter about award fees and incentive fees. And I'm just wondering what you're seeing in new contracts. And then second, just with respect to international, are you seeing more of an influx of direct commercial awards versus FMS? I was just kind of curious as to what the mix is given all the new awards you've been getting.

So I don't know that I've seen wholesale change in contracting other than there's been an emphasis on speed. And in some customers, we've seen faster contracting and in others, a little bit more prolonged. So I can't say that across the entire portfolio that we've seen any wholesale changes. I think that we've got a sophisticated buyer, and we are working with them right now on several large contracts. So I don't know that I can offer any holistic or observations on that front. We have seen, again, if you step back and look at the entirety of the federal workplace, we've seen the retirement of -- at least in the markets that we play in, retirement of experienced contracting personnel with an increase in newer contracting folks. They'll have to come down their learning curves. But I suspect that will -- they will do so in time. With respect to international orders, there is quite a robust pipeline for FMS, but it is slow to materialize. We know the demand is out there. When it comes through the FMS process is always a question. In Europe, we have direct commercial sales and sometimes -- ex U.S. and other places in Mid East. And we'll see as the munitions demand ramps up. That could be a combination of both direct commercial sales and foreign military sales.

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

I wanted to follow up on Rich's question actually with respect to Marine. And I know you guys are in talks for 5 Columbia class and the next Virginia-class block. I wanted to get your expectations around timing and the form of that contract. Do you think you'll get all of them ordered at once? Or is it going to be incremental? -- maybe when? And if the contract terms might actually be a little more favorable with the government taking on a little more risk than they were willing to in the prior administration.

Well, the operating assumption is that those contracts are executed this year. We're certainly not going to get into any particulars of those contracts. They'll be very large, highly complex contracts. And once we sign them, we can and will be a little bit as we have been in the past, transparent about what the incentives and obligations are in those contracts. But we've had and we'll continue to have and see even more working -- close working relationship between the government and us as we try to solve mutual problems, how do we get shipbuilding throughput increased and while maintaining the quality. So we remain optimistic that together as partners will drive a lot of that change and move these deliveries to the left.

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

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

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

So I think the way to think about this is that we anticipate similar growth that we've seen over the last few years. And when you think about -- so I don't see that at least in the near term changing, but it's been very robust growth. But when you think about margins, I think Danny walked you through kind of what are the main drivers. And it's primarily stabilizing that supply chain and increasing our throughput so that we can both offset any supply chain perturbations. And I think that's the best way to margin improvement, and it is very importantly, the best way to accelerate the throughput. I don't know if you want to add anything on that, Danny.

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

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

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