General Dynamics Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2025

Key Takeaways

  • Positive Sentiment: Earnings per share of $3.74 beat consensus by $0.19 on 8.9% revenue growth, with operating earnings up 13% and EPS up 14.7% year-over-year.
  • Positive Sentiment: Record-high Q2 orders of $28 billion drove a 2.2x book-to-bill ratio, boosting backlog to $103.7 billion (+14%) and total estimated contract value to $160 billion.
  • Positive Sentiment: Generated $1.4 billion of free cash flow (138% cash conversion) in Q2 and $1.1 billion in H1, with full-year cash conversion now expected around 90% and benefits from R&D tax capitalization reversal.
  • Negative Sentiment: Marine operations faced supply chain delays and a one-off EAC adjustment at NASCO, causing a sequential 10 basis-point margin decline at the segment despite 22.2% revenue growth.
  • Positive Sentiment: Raised full-year 2025 outlook with revenue up $0.9 billion to ~$51.2 billion, maintained 10.3% operating margin, and increased EPS guidance to $15.05–$15.15.
AI Generated. May Contain Errors.
Earnings Conference Call
General Dynamics Q2 2025
00:00 / 00:00

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Operator

Good morning, and welcome to the General Dynamics Second Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. After the speakers' remarks, there will be a question and answer session. Please note this event is being recorded. I would now like turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Nicole Shelton
Nicole Shelton
VP - IR at General Dynamics

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics second quarter twenty twenty five 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 ks, 10 Q and eight ks filings.

Nicole Shelton
Nicole Shelton
VP - IR at General Dynamics

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 Phoebe Novakovic, Chairman and Chief Executive Officer Kim Korea, Chief Financial Officer Danny Deep, executive vice president global operations Jason Aiken, executive vice president combat and mission systems and Amy Gilleland, executive vice president and president GDIT. I will now turn the call over to Phoebe.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier today, we reported earnings of $3.74 per diluted share on revenue of 13,000,000,000, operating earnings of 1,300,000,000.0, and net income slightly over a billion dollars. We enjoyed revenue increases at three of our four business segments compared to the year ago quarter. Across the company, revenue increased over a billion dollars, an 8.9% increase.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Importantly, operating earnings of 1,300,000,000.0 are up almost 13%, once again demonstrating strong operating leverage. Similarly, net earnings are up 12% and earnings per share up 14.7% over the year ago quarter. You will note we beat Street EPS consensus by 19¢. On a year to date basis, revenue of 25,300,000,000.0 is up 11.3%. Operating earnings of nearly 2,600,000,000.0 are up 17.4%, and earnings per share are up $1.26 or 20.5%.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

In my view, this was a wonderful quarter that exceeded our expectations and led to a very good first half of the year. Let me ask our CFO, Kim Korea, to provide detail on our strong order activity, growing backlog, and superb cash generation, as well as other relevant financial information.

Kimberly Kuryea
SVP & CFO at General Dynamics

Thank you, Phoebe, good morning. I'll start with orders. We had a huge quarter with over $28,000,000,000 of orders, yielding an overall book to bill ratio of 2.2 to one for the company.

Kimberly Kuryea
SVP & CFO at General Dynamics

The largest driver was the marine systems segment, which received several contracts for further construction of submarines. The large awards in marine almost overshadow the fact that aerospace had a tremendous quarter with a book to bill ratio of 1.3 times. This is the strongest first half for orders since 2022 and reflected strong demand across the entire Gulfstream product line. Combat Systems and Technologies also had solid quarters with book to bill ratios of respectively. Zero We ended the quarter with a record level of backlog of $103,700,000,000 up 14% from a year ago.

Kimberly Kuryea
SVP & CFO at General Dynamics

Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at over $160,000,000,000 also an all time high. Turning to our cash performance for the quarter, we generated $1,600,000,000 of operating cash flow with all four segments contributing to our efforts to drive cash earlier in the year. After capital expenditures, our free cash flow was $1,400,000,000 for the quarter yielding a cash conversion rate of 138%. Through the first half of twenty twenty five, we have free cash flow of 1,100,000,000 which is well ahead of what we had planned. However, there is still work to be done as we have working capital to unwind from the balance sheet.

Kimberly Kuryea
SVP & CFO at General Dynamics

We expect a strong second half with the majority of cash generated in the fourth quarter, which should push us towards a cash conversion rate around 90% for the year, an improvement from what we were originally forecasting. Our full year cash estimate excludes the impact of the recent tax legislation. As you know, reversing the prior law's requirement to capitalize r and d expenses will provide us a cash benefit. We are still working to develop an estimate of the exact timing and amounts associated with how that will all unfold. Now turning to capital deployment.

Kimberly Kuryea
SVP & CFO at General Dynamics

Capital expenditures were $198,000,000 or 1.5% of sales in the quarter. Similar to last year, you should expect capital expenditures to be somewhat higher in the second half of the year, spending a little over 2% of sales for the year. We paid $402,000,000 in dividends in the quarter, but we made no share repurchases largely due to our cash profile. Also in the quarter, we refinanced $750,000,000 of notes that matured in May. We have no further debt maturities until next year.

Kimberly Kuryea
SVP & CFO at General Dynamics

We ended the quarter with a cash balance of approximately $1,500,000,000 and a net debt position of $7,200,000,000 down $1,200,000,000 from last quarter. Our net interest expense in the quarter was $88,000,000 compared to $84,000,000 last year. That brings the interest expense for the first half of the year to $177,000,000 up from $166,000,000 for the same period in 2024 due to our utilization of commercial paper. At this point, our expectation for interest expense for the year is approximately $330,000,000. Finally, the effective tax rate in the quarter was 17.7%, bringing the tax rate for the first half to 17.4%.

Kimberly Kuryea
SVP & CFO at General Dynamics

This rate is a little lower than our outlook for the full year, which remains around 17.5%. Phoebe, that concludes my remarks. I'll turn it back over to you.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

I have asked some of our group executives to participate and provide color from their perspective as well. First, aerospace. Aerospace performed well in the quarter. It had a revenue of 3,060,000,000.00, a 4.1% increase. Operating earnings of 403,000,000 or 26.3% better than the year ago quarter.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Operating margin is 230 basis points better than the year ago quarter. To give you a little perspective here, Gulfstream had 38 deliveries in the quarter, including 15 g seven hundreds, which is four more than the year ago quarter and two more sequentially. This was offset in part by fewer g six fifties as we made the final deliveries of this high margin product. As I indicated previously, the supply chain continues to improve and is performing better to both schedule and quality. We are finding fewer faults, and those we are finding are becoming easier to fix.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

In short, I'm increasingly confident that we can meet this year's delivery plan. And in fact, we are delivering g seven hundreds on a much more predictable cadence. I am pleased that all of our g 700 retrofit airplanes have been delivered. Also, all of the g seven hundreds that were completed before engines were installed have also been delivered. You may recall that both of these things have negatively impacted cost and delayed deliveries.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

We are in the process of completing the g 700 flight test aircraft, and a number of them will be delivered in the second half. These are lower margin aircraft and will be dilutive to margin, but will reduce inventory and increase operating cash by a like amount. The initial deliveries of the g 800 will be made in the third quarter. We expect to deliver about 13 g eight hundreds for the year, which is about three less than the g six fifties we delivered in the second half of last year. The initial g eight hundreds will not carry the operating margins of the g six fifties.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

This will obviously put some pressure on operating margin in the second half, but we still expect the margins in the third quarter to be very similar to the second quarter coupled with a stronger fourth quarter. In summary, the aerospace team had a solid quarter. G 800 deliveries are about to commence and g 700 delivery cadence and operating margin are both improving. Anecdotally, as you may recall, the g 800 was designed to replace the g six fifty. Interestingly, the first 20 of the g eight hundreds will be the g six fifty owners.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

There is significant interest in this plane from Fortune 500 companies. Before I discuss demand, I am frequently asked questions about aerospace operating margin and when it will move into the high teens that is above 15%. The simple answer is maybe 2026, but for sure in 2027 with degradation again in 2028 with the delivery of a significant number of g four hundreds. The simple answer is made with some trepidation. Nothing is more complex to forecast than the operating margin for aerospace.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So first, let me focus on what you all think about operating margin on aircraft deliveries. This is almost always driven by mix. The g 700 has the highest margins. The g 800 should ultimately enjoy similar margins, but it's early in its delivery cycle. The g 600 enjoys the next highest margin followed by the g 500 and g two eighty.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

And let's not forget the very strong margin contribution earlier in the year from the sunset g six fifty program. But aircraft margins, while important because of their size, are only part of the story. Aerospace also has over 3,500,000,000.0 of sales in what we generally refer to as aircraft services business. At Gulfstream, we have a large maintenance business impacted by the amount of warranty work in a given period, over the counter part sales, and special mission aircraft, each with different operating margins and varying from quarter to quarter and impacted by both volume and mix. At Jet Aviation, we have a large MRO business impacted by mix, particularly the number of large maintenance checks in a given quarter.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

They also have an aircraft completions business that is influenced by the mix of aircraft in house, I. Narrow body, wide body, or completions for Gulfstream. Jet also has a high margin FBO business impacted by volume in any particular quarter. FBO volume happen to have been down in the second quarter. Finally, Jet has a significant aircraft management and service business that has over 300 aircraft under management.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

The mix of these things impacts margin quarter over quarter at Jet. Jet also has about 1,600,000,000.0 of annual revenue, and that is sufficient to impact margins in the group. I hope this, to some extent, helps you understand the mosaic that makes forecasts in this area so complex and the impact of both volume and mix on the result. However, do not let this discussion distract you from the main aerospace CEO, steady increasing sales and earnings. So turning to demand, aerospace enjoyed very strong market demand in the quarter.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

As Kim noted, we had a 1.3 book to bill in the quarter even as aircraft deliveries increase the denominator. As I said last quarter, we fully expect the certification of the g 800. It's better than planned performance characteristics, and early deliveries to customers will stimulate demand. We continue to see very strong interest across all models in The US, across Europe, The Middle East, and other parts of the world. So let's move on to the defense businesses.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

First, marine. The growth story of marine continues. Revenue of $4,220,000,000 is up 22.2% from the year ago quarter and 17.6% sequentially. Similarly, operating earnings of 291,000,000 are up 18.8% quarter over quarter and 16.4% sequentially. Operating margin of 6.9% leaves plenty of room for improvement, but let's not lose sight of the fact that operating earnings continue to grow along with sales.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

This particular quarter's growth was driven by Columbia class and Virginia class construction as well as a slight increase in DDG fifty one construction. On a sequential basis, the 10 decline in operating margin was driven by an unfavorable EAC adjustment at NASCO. Backlog increased in the quarter by $14,600,000,000 or 38% to almost 53,000,000,000, largely the result of a contract for two block five Virginia class ships, including a one of a kind special mission ship with considerable content. The contract also included important investment funds to support shipyard productivity, wage increases, and additional training programs. These funds complement the funding that the Navy and Congress have provided over the last several years to help stabilize and improve the submarine industrial base.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Taken together, these will help further improve EV throughput and productivity. As I said last quarter, electric boat, we continue to experience delays and quality problems in the supply chain. Material and parts are late and sometimes exhibited quality escapes. This obviously disrupts workflow, but we are developing good workarounds. We have more work to do here, but we are making progress.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

We are working closely with the Navy and the new administration to continue to address the problems in the supply chain and to work diligently to improve throughput and performance electric boat. Our job remains to continuously improve to help the industrial base get stronger and to improve the cadence of ship delivery to the navy. Next, combat systems. I'm gonna summarize the group's results for the quarter and first half of the year and then ask Jason, their new executive vice president, to give you some color on the quarter from his perspective. Revenue in the quarter of 2,280,000,000.00 is essentially flat versus the year ago quarter.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Operating earnings of 324,000,000 are up three and a half percent on a 50 basis point increase in operating margin to 14.2%. Year to date, the comparison is not dissimilar with modest revenue growth of 1.6% to 4,460,000,000 stronger earnings growth of 3.4% to 615,000,000 and a 20 basis point expansion of operating margin to 13.8%. And sequentially, even stronger revenue growth 4.9% to 2,280,000,000.00, an impressive increase of 11.3% in operating earnings to $324,000,000 on an 80 basis point improvement in operating margin. Order activity was solid with a book to bill of one times for the quarter. So solid performance all around for Combat Systems. Jason?

Jason Aiken
Jason Aiken
EVP - Combat & Mission Systems at General Dynamics

Thank you, Phoebe, and good morning. As you can see from the numbers Phoebe detailed for you, the group continues to demonstrate strong operating leverage irrespective of the top line trajectory, flat versus the prior year quarter, up modestly year to date and up more significantly on a sequential basis. And that's a testament to the operating discipline of this group. Growth in the quarter in Europe was offset by lower volume in our U. S.

Jason Aiken
Jason Aiken
EVP - Combat & Mission Systems at General Dynamics

Combat vehicle business, driven largely by the cancellation of the Booker program. While the Booker cancellation represents a headwind, we've stayed very close to the army and are supporting their efforts as they work through budget and program prioritization activities. To that point, we've invested ahead of need to make sure we're well positioned to support priorities such as the rapid development and fielding of the next generation main battle tank. The growth in Europe is particularly encouraging and is representative of significant potential in that business as defense spending in Europe is poised to accelerate. To that point, the book to bill in our European business was 1.5 times in the first half, and they've got solid opportunities as we look ahead.

Jason Aiken
Jason Aiken
EVP - Combat & Mission Systems at General Dynamics

Our munitions business continues to focus on facility expansion and increasing production rates in all areas related to artillery, including projectiles, load assembly and pack, and propellant. We're making progress and working closely with the army in support of their artillery production goals.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Thanks, Jason. And finally, technologies. As with combat, I'm gonna summarize the group's results for the quarter and first half of the year, and then ask Amy and Jason to give you some color on the quarter from the perspective of GDIT and Mission Systems respectively. The group had another strong quarter with revenue and earnings up quarter over quarter sequentially and year to date. At revenue of 3,500,000,000.0 was up five and a half percent from the year ago quarter, while earnings of 332,000,000 were up 3.8%.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Operating margin for the group was 9.6%, down 10 basis points from a year ago on a shift in mix as GDIT grew faster than Mission Systems in the quarter. On a sequential basis, revenue and earnings were up by 1.31.2% respectively on a steady margin rate of 9.6. And for the first half, revenue of 6,900,000,000.0 was up 6.1% and operating earnings of 660,000,000 were up 7.3% on a 20 basis point expansions in operating margins to 9.6%. The group continues to have solid order activity with a book to bill of just under one times for the quarter and just over one times for the first six months. As a result, the group's backlog is up seven and a half percent from this time a year ago, and their total estimated contract value is up more than 11% over the same period.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

With that, I'll turn it over to Amy first to talk about GDIT's quarter.

M. Amy Gilliland
M. Amy Gilliland
EVP & President - GDIT at General Dynamics

Thank you, and good morning, everyone. As Stevie noted, GDIT delivered a solid quarter and first half with growth in all of our customer facing divisions. This performance highlights the discipline and agility of a business focused on mission execution and cost control in a particularly dynamic environment. The pace of contract award activity was slower than normal in the first half, albeit somewhat improved in the second quarter. Despite significantly lower first half customer adjudications, GDIT enjoyed six wins over a $100,000,000, including one over $1,000,000,000, and the business delivered a first half book to bill of essentially one times on a growing business.

M. Amy Gilliland
M. Amy Gilliland
EVP & President - GDIT at General Dynamics

First half book to bill would have been even stronger, but for the protest by a competitor of a significant new second quarter win in the defense business. We are pleased with the results we are seeing from the investments we've made in our portfolio of digital accelerators, capabilities that enable customers to quickly leverage AI, cyber, and mission software technologies, and our deepening relationships with strategic and emerging technology partners. We reliably deliver and integrate the best technology has to offer day in and day out, and that has helped us navigate the changes administration priorities throughout the first half. With that, I'll turn it over to Jason to talk about Mission Systems.

Jason Aiken
Jason Aiken
EVP - Combat & Mission Systems at General Dynamics

Thanks, Amy. Mission Systems also had a great quarter with revenue, earnings, and margins up on every comparator basis, quarter over quarter, sequentially, and year over year. As we've been discussing for some time, Mission Systems has been transitioning from legacy lower margin programs to new franchises for several years now. So the top line has been relatively flat even as the margin profile is improving steadily. We've said this is the final year of that transition, and so we're starting to see an inflection to growth.

Jason Aiken
Jason Aiken
EVP - Combat & Mission Systems at General Dynamics

So that's very encouraging. Like GDIT, Mission Systems has been investing ahead of need in areas like unmanned platforms, smart munitions, high speed encryption, strategic deterrence, and contested space. And as a result, they're seeing increasing opportunities across the portfolio. To that point, their total backlog is up 15% from a year ago, and total potential contract value is up 23% over the same period. All in all, a very strong first half of the year. I'll now turn it back over to Phoebe.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Before getting into guidance, I wanted you to hear from Danny Deep about his new responsibilities and what we are up to here with the new executive VP for operations.

Danny Deep
Danny Deep
EVP - Global Operations at General Dynamics

Thank you, Phoebe, and good morning. As you are all aware, General Dynamics takes great pride in being an outstanding operating company focused on cash generation, earnings, and dependable delivery of highly differentiated and critical capabilities to our customers. As the portfolio has grown, and in some cases quite rapidly, we see opportunity across each of our business units to further optimize our operating leverage. Along with the senior corporate leadership team and the operating unit presidents, we will focus on driving continuous improvement across the entire value chain. From competing to winning while maintaining discipline in our contracts, to ensuring a robust supply chain and efficient manufacturing footprint to execute on our commitments.

Danny Deep
Danny Deep
EVP - Global Operations at General Dynamics

We'll place particular attention on programs where we have challenges to ensure we get them up the learning curve and performing to the high standards that have been the hallmark of general dynamics. In summary, we see a wealth of value creation opportunities across the portfolio. With that, I'll turn it back to Phoebe.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So let me provide you our operating forecast for 2025 with some specifics around our outlook for each business group and then the company wide roll up. For 2025, we now expect aerospace revenue of around 12,900,000,000.0, up around 250,000,000 over prior estimate. Gulfstream deliveries will be $150 to $155 up a little over our previous estimate. We anticipate a 13.5% operating margin for the year, 20 basis points lower than our earlier estimate. The third quarter operating margin will be about the same as this quarter with a somewhat better fourth quarter.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

In short, revenue is up on more deliveries, margin is down a little due to mix in airplane deliveries and at the service businesses. In combat, we expect revenue about 9,200,000,000.0 coupled with a 14.5% operating margin. This should lead to somewhat improved earnings over our last estimate. As noted earlier, the marine group has been on a remarkable but difficult growth journey. It will continue during the rest of 2025, albeit at slightly lower growth rate.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Our outlook for this year now anticipates revenue around 15,600,000,000.0 with operating margin of 7%, which should provide better earnings than previously estimated. In technologies, we are making no change to the 2025 revenue and earnings estimate provided at the beginning of the year. So for 2025 company wide, we expect to see revenue of approximately 51,200,000,000.0 and operating margin of 10.3. The revenue estimate is increased by 900,000,000 and the overall operating margin held constant. You have already heard Kim's commentary about our estimate for increased cash for the year.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

All of this rolls up to an increased EPS forecast of $15.05 to $15.15. So to wrap up, as we go into the second half coming off a very strong first half, we feel very good about the potential for the year. Nicole, back to you.

Nicole Shelton
Nicole Shelton
VP - IR at General Dynamics

Thank you, Phoebe. As a reminder, we ask

Operator

Your first question comes from the line of Gautam Khanna with TD Cowen. You may go ahead.

Gautam Khanna
Managing Director at TD Cowen

Thanks. Good morning and nice results.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Good morning. Thank you.

Gautam Khanna
Managing Director at TD Cowen

Phoebe, I was wondering if you could elaborate on the G800 delivery cadence. You mentioned 13 in the second half. Do you have a sense for when the first one might deliver and what the SKU will be Q3 to Q4? And relatedly, you've given color on prior the lots on the g 700 margins, if you will. Any any sort of guidance you can give us on how to think about g 800 profitability by lots over time? Thanks.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So, the first c 800 should deliver very soon. And I actually am not I don't really know the distribution of each by quarter, but we'll be pretty much on what we enter what I noted in my remarks. As you know, as we talked about before, the g 700, lot one, carried lower margins for all the developmental cost reasons. Lot two is better. Lot three is gonna be better yet or is better yet, and I expect the same from lot four.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

The g 800 comes out of the box at a higher lot one at a higher incremental margin than the 700 that didn't bear as much of the developmental cost. And it will too have margin expansion as we come, both down our learning curves and move from one lot to the next.

Gautam Khanna
Managing Director at TD Cowen

Thank you.

Operator

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

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

I wanted to ask, first of all,

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

I thought it was helpful to have the breakdown of of aerospace and, you know, thinking about the different ingredients in in margin. It seems like in in services after a strong couple of years, things seem to have slowed down a little bit here in the first half. And so maybe if you could talk a little bit about kind of why that's happening. And while I realize that there's a lot of unpredictability around the different dynamics there in terms of the contributors and the mix, What sort of a good algorithm for services going forward? Does it, you know, grow at kind of a a pace with with flight hours or, I guess, or deliveries or, you know, kinda how to think about it and and how it fits into the margin mix going forward as well.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Sure. So the theory of the case behind our services was that if we build additional service centers and at or near, location of Gulfstream airplanes, and in fact, that would drive additional incremental revenue. And in fact, that's been the case. And as I tried to walk you through, in my remarks, the margins are vary by principally by mix, but also by volume. And so on any given quarter, it depends heavily both at Jet Aviation and Gulfstream on what the, on what the mix is of, both MRO and then in the case of Jet, a lot of, their other services lines of business that also accrue to the margin story.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So I don't know that there's a given algorithm for thinking about margin in the service world, but we expect it to continue to grow with the fleet, and and we're very pleased with how we have done there.

Seth Seifman
Seth Seifman
Executive Director at JP Morgan

Okay. Great. And then, just as a follow-up, it seems like, based on the new guidance with technologies unchanged, there's a step down in terms of both margin and sales in the second half. And so maybe if you could talk a little bit about what what's driving that and then, kinda where it goes from here.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Yeah. So we were given the fluidity in that market, so far this year. We thought it prudent to keep our earnings and our revenue estimates about where they are. But I'll ask both, first, Amy and then Jason to give you a little bit of color.

M. Amy Gilliland
M. Amy Gilliland
EVP & President - GDIT at General Dynamics

Good morning. So from a GDIT perspective, we did navigate the first half very well. That was not without some impact from contract scope changes, from cancellations, of, some of our contracts. And so as we look at the second half, the thing that will most impact, our positioning is really the cadence of award activity. And as commented in my remarks, the adjudications were down significantly in the 2025 compared to the first half of twenty twenty four.

M. Amy Gilliland
M. Amy Gilliland
EVP & President - GDIT at General Dynamics

And so we're running out of days of the year to be able to to win that work and deliver on it. And so, really, from a revenue expectation, it is the pace of adjudications that we're watching for the second half of the year, but feel very good about where we are from an earnings perspective. Jason?

Jason Aiken
Jason Aiken
EVP - Combat & Mission Systems at General Dynamics

Yeah. So from Mission Systems perspective, a good bit of the strength that we saw in the first half came from activity in their high speed encryption product business, which is a it's really a transactional business. And so while we still see incredible demand on that side of the business, the timing of that is somewhat less predictable given the transactional nature. So I would tell you there's opportunity for them in the second half depending on how that demand goes. But as Phoebe said, just given the uncertainty overall in the market for the group as a whole, that's the reason we're holding to the full year guidance.

Operator

Your next question comes from the line of Doug Harned with Bernstein. You may go ahead.

Douglas Harned
Managing Director at AB Bernstein

Good morning. Thank you.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Good morning.

Douglas Harned
Managing Director at AB Bernstein

On

Douglas Harned
Managing Director at AB Bernstein

Marine, the big increase you saw in revenues in Q2, that's unusual to see that large of a jump there. Can you talk about what happened specifically related to Virginia class, Columbia class that really took it up so much?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So Virginia was about 60% of the volume, Columbia about 40%, and it it it really just was the construction volume. And I'd say to give you a little bit of perspective here, we've been growing on average at about 9%, year over year for the last couple of years. And, some quarters, we've hit high teens, but I'd say 20 the 22% growth in this quarter is is really just a question of of largely both timing, but also continued increasing performance at the shipyard.

Douglas Harned
Managing Director at AB Bernstein

Well and then you've you've gotten this early in the quarter, you got the award for the two last two block five boats, which was certainly very good news with support for labor. Can you talk about the increased funding both that and what we may see in the '26 budget and how you can get that to translate into higher throughput, which it looks like you're already getting some of, and ultimately higher margin as well.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Okay. Let me answer that kind of in the inverse order. As we've been telling you for some time, the margin improvement at the marine group and particularly within the submarine industrial base improves at elect when we get additional stabilization in that industrial base and in our supply chain. So that has been a a a key, driver of really the productivity at the shipyard. And as you know, part of our our our strategy is really dependent on controlling what we can control And on the deck plates, getting better and better and better, maximizing or optimizing the work we have in house, with workarounds on, you know, late, deliveries of major supply from major suppliers as well as any quality escapes.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So, you know, that's sort of if you think about the our our big strategy, it's that and we are seeing productivity improvements at, in a number of key places in our in on the deck plates and and that electric boat, frankly, in our other businesses as well across the board. I would say that in with respect to the supply chain, we've seen some stabilization and improvement in some important areas. The navy and the congress have been allocating funding for the industrial base to undergird their performance, and some of that is beginning to improve, but we've got a ways to go there. With respect to the f the fiscal year twenty six funding levels, we are still working out with our navy customer what the exact funding levels are by program. There's a fair amount of complexity as we as we unpack the '26 budget and the and the reconciliation bill, but our our programs are fully supported.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

And then with respect to the anomaly, we were we were glad to get that under contract. One of those boats is a particularly complicated boat, and as we, you know, gear up on that. And I think that this is an important that that contract was important and that it provided the type of of funding for the shipyards, that we've seen going into the supply chain, so over the last few years. So that kind of funding support on training and and wage increases as well as productivity, maybe funding productivity improvements, at each one of those at each of the yards. That'll be very, very helpful as we go forward.

Operator

Your next question comes from the line of Scott Duschla with Deutsche Bank.

Scott Deuschle
Scott Deuschle
Director - Aerospace & Defense Equity Research at Deutsche Bank

Phebe, does getting to high teens margins at aerospace require meaningfully higher Gulfstream deliveries than the hundred and fifty to hundred fifty five you're planning for 2025? Or is that bridge to high teens primarily driven by coming down the learning curve and optimizing the next?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Oh, I think it's a combination of all of that. You know, I I tried to spend some considerable time in my remarks dragging you all through the notholes that is aerospace margin. So I I think I'm not quite sure what other, you know, clarification I can give you. But it it's it'll a lot it'll be mix, and it'll be volume, you know, in in simple terms.

Scott Deuschle
Scott Deuschle
Director - Aerospace & Defense Equity Research at Deutsche Bank

Okay. That's fair. And sorry if I missed this, but was the order strength at Gulfstream this quarter pretty well spread across aircraft types? Or was it concentrated in any particular pockets of the Gulfstream portfolio, particularly in the context of the g 800?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

It was across all of our airplanes. First was the 700, 600 right behind it. And we had nice geographic distribution as well. So it was it was good solid demand, and we continue to see that in the third quarter with particular interest in the 800, I might add.

Operator

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

Robert Stallard
Partner at Vertical Research Partners

Thanks so much. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Good morning.

Robert Stallard
Partner at Vertical Research Partners

Phoebe, was wondering if you could comment on the management reorganization that you announced this quarter and how this could affect the way that the business is run going forward? Thank you.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Well, was one of the reasons I asked Danny to give you some clarity on on on on how we see his role in particular playing out. We'll continue to manage the business as we have been managing it and and and really driving for value creation across each and every one of our portfolios. But as we grow, I we have believed as a leadership team, and we've talked on this call, and and I've talked with many of you individually and in groups about our our our desire to increase our operating leverage, and you'll note in almost every single one of our calls will stress and or point out and then stress where we are on our operating leverage. So one of Danny's missions is to really focus on the operating performance of each and every one of our businesses. But we will manage the business in in the in in the same way.

Robert Stallard
Partner at Vertical Research Partners

Okay. The quick follow-up. Are you also looking to combine Combat and Mission going forward? Or is they going to remain stand alone businesses?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

No. We'll keep them as they are.

Robert Stallard
Partner at Vertical Research Partners

Okay. Thanks so much.

Operator

Your next question comes from the line of David Strauss with Barclays. You may go ahead.

David Strauss
David Strauss
MD - Equity Research at Barclays

Thanks. Good morning.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Good morning, David.

David Strauss
David Strauss
MD - Equity Research at Barclays

Phoebe, following up on Rob's question. So the portfolio as a whole, I think, used to run-twelve percent in the range of 12% to 13% margins more recently running in the low tens. I know there are a lot of moving pieces. But any any thoughts you might have in in in terms of where, the margin potential is for the portfolio as as we move forward?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So look. We as Danny noted, we pride ourselves on our operating performance, and I think we can improve and particularly need to sort of the one that jumps out at you is in the marine group. So those margins over time need to improve, but I'll ask Danny if he has any, you know, particular insights. It's not that far into his his new position, but he's been a senior operating executive with the company for some time.

Danny Deep
Danny Deep
EVP - Global Operations at General Dynamics

Okay. Well, thank you. Yeah. I mean, I think Phoebe hit it. We're gonna look across each of the operating units and program by program and and where where we've had some challenges in getting up the learning curve, I think that's where our focus is going to be.

Danny Deep
Danny Deep
EVP - Global Operations at General Dynamics

And not to point any one particular operating unit out, but if you look at where the largest operating pieces of the business are and where we've historically had our margins, that's where we see our best opportunities. But this company has been focused on on operations and and has been very disciplined from an operating perspective for a long time, and we're just gonna put a finer point on that.

Operator

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

Myles Walton
Managing Director at Wolfe Research LLC

Phoebe, the strength of bookings at aerospace in the first half, are you feeling more confident in seeing a book to bill at or above one for 2025 at this point?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

We're keeping it at that one. That's sort of been our our our cadence and our thought pattern and our observations, frankly. But the demand has been quite good, as I noted in one of the previous answers to one of the questions, we see that demand carrying through into the third quarter.

Myles Walton
Managing Director at Wolfe Research LLC

Okay. And then I think in your prepared remarks, you mentioned margin pressure in 2028 from the g February. If I had my notes of certification in 2026. Sorry. Sorry.

Myles Walton
Managing Director at Wolfe Research LLC

The g 400. I had in my notes that that certification was in 2026. Has that slipped to the right?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

I don't think so. Uh-uh. I will tell you we slowed down the 400 a bit because we've got our our handful. That's not about the FA. It's simply it's got an awful lot as we continue to grow and and really work on our operating leverage at at Gulfstream, but four hundred is doing quite well.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

But I think we've I don't know that we've ever actually given you I don't recall that we've given you a a entry into service estimate, and the word is estimate. But I was just trying to give you some some, you know, kind of color about, you know, year over year progression without getting into next year's guidance, which, of course, you know, we won't do. Mhmm.

Myles Walton
Managing Director at Wolfe Research LLC

Okay. Very good. Thank you.

Operator

Your next question comes from the line of Sheila Kahyaoglu with Jefferies. You may go ahead.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense & Airlines Equity Research at Jefferies Financial Group

Good morning, everyone, and thank you, Phebe. I really appreciate the color on Aero. And I might follow-up a little bit on Myles' question. Just I think the point on aerospace is it's a stable growing business both on revenues and operating profit. So maybe if you could talk about just the capacity of volume Gulfstream could produce.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense & Airlines Equity Research at Jefferies Financial Group

Is it growing off this one fifty base annually? And to Miles' question, why the dip in '28, if g 400 comes in there? I I thought it would be maybe a year after the August. So if you could just provide that dip timing.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

As 400 comes on, it'll it'll be a lower lower margin airplane than, than the very large cabin. And I think, remind me what the first part of your question was.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense & Airlines Equity Research at Jefferies Financial Group

Just on the capacity production capacity.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Yeah. So on the capacity question, we've got the plant and equipment jigs and fixtures as well as the workforce to support a capacity of 200 airplanes. But we'll continue to work to increase our our production according to the market.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense & Airlines Equity Research at Jefferies Financial Group

Maybe one more if I could ask. Was services down in the quarter?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Yes.

Operator

Your next question comes from the line of Jason Gersky with Citi. You may go ahead.

Jason Gursky
Jason Gursky
Equity Research Analyst at Citigroup

Hey, good morning, everybody. T. V, you mentioned you made some comments about NASCO, maybe a small negative EAC there. Was wondering if you can just talk a little bit generally about what's going on out at NASCO and the priorities of the new administration and the impact that that might have on that yard out there and then just provide both color on that EAC.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

Yeah. So let me talk about sort of what we see as the market environment, and then I'll turn it over to Danny to talk a little bit about, this particular, EAC impact, which, by the way, at NASCO is extremely unusual. So, let's let's just set the table here and remind ourselves that that NASCO produces primarily auxiliary ships, for the US Navy. And and the demand has been for those has been increasing over the last few years, and we continue to see that need as warships all need support ships in order to function at sea. So we have we've seen nice, increases in demand, and we expect that to continue.

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

We're working on the oiler program, and we've got several other programs, you know, in in place as well. But I'll I'll turn it over to Danny to talk about this quarter's AAC.

Danny Deep
Danny Deep
EVP - Global Operations at General Dynamics

Okay. Yeah. So at NASCO, they really started with the flood and the impact the flood had on our prime line. It took us down from two two lines to one, and then we had a a subsequent issue. And and after that issue, it created a fair bit of rework in the system.

Danny Deep
Danny Deep
EVP - Global Operations at General Dynamics

And so that's what's reflected in the EAC as we speak. And we think we'll largely be through that by the end of the year and have, both of those prime lines up and running, and and this issue will be behind us.

Nicole Shelton
Nicole Shelton
VP - IR at General Dynamics

Okay. Lacey, I think we have time for just one more question.

Operator

Final question comes from the line of Scott Meakus with Melius Research. You may go ahead.

Scott Mikus
Director - Aerospace, Defense & Space Research at Melius Research LLC

Good morning. Phoebe, the secretary of the navy commented that it might be preferable to have Huntington Ingalls and electric boat each build Virginia class submarine separately rather than in a teaming arrangement. So if the navy were to actually pursue that route, how much capital would you need to invest to make that happen? And is there enough skilled labor for electric boat to handle one Virginia by itself while also continuing the work on Columbia?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

So skilled labor has not been an issue for electric boat, for some time now. I and we do not see a capacity problem, in in the region with the availability of of our touch labor. So we we can support additional growth. We would need some additional capital if in fact the Navy opts on that strategy, but not an enormous amount. But I'll defer to the Navy on any future discussions about that.

Scott Mikus
Director - Aerospace, Defense & Space Research at Melius Research LLC

Okay. And then a quick question on aerospace. The book to bill in the quarter was very good despite the stock market's perturbations around Liberation Day. Have you seen any uptick in the pipeline pipeline since the One Big Beautiful Bill Act was signed into law and reinstated bonus depreciation?

Phebe Novakovic
Phebe Novakovic
Chairman & CEO at General Dynamics

I wouldn't I wouldn't cite one macroeconomic factor. I think that there were a lot of them here. There wasn't one in particular from my perspective that that that drove the demand. Bonus depreciation helps quite a bit. Always has.

Nicole Shelton
Nicole Shelton
VP - IR at General Dynamics

Okay. Thank you everyone for joining our call today. As a reminder, please refer to the General Dynamics website for the second quarter earnings release and highlights presentation. Finally, we want to let you know that we expect to hold our Q3 earnings call on Friday, October 24 at 9AM. That's a slight change from our normal practice of announcing earnings on Wednesday, so we want to advise you of that early for planning purposes.

Nicole Shelton
Nicole Shelton
VP - IR at General Dynamics

We will resume our normal schedule for the fourth quarter call. If you have additional questions, I can be reached at (703) 876-3152.

Operator

This concludes today's conference call. You may now disconnect.

Executives
    • Nicole Shelton
      Nicole Shelton
      VP - IR
    • Phebe Novakovic
      Phebe Novakovic
      Chairman & CEO
    • Jason Aiken
      Jason Aiken
      EVP - Combat & Mission Systems
    • M. Amy Gilliland
      M. Amy Gilliland
      EVP & President - GDIT
    • Danny Deep
      Danny Deep
      EVP - Global Operations
Analysts
    • Kimberly Kuryea
      SVP & CFO at General Dynamics
    • Gautam Khanna
      Managing Director at TD Cowen
    • Seth Seifman
      Executive Director at JP Morgan
    • Douglas Harned
      Managing Director at AB Bernstein
    • Scott Deuschle
      Director - Aerospace & Defense Equity Research at Deutsche Bank
    • Robert Stallard
      Partner at Vertical Research Partners
    • David Strauss
      MD - Equity Research at Barclays
    • Myles Walton
      Managing Director at Wolfe Research LLC
    • Sheila Kahyaoglu
      Aerospace & Defense & Airlines Equity Research at Jefferies Financial Group
    • Jason Gursky
      Equity Research Analyst at Citigroup
    • Scott Mikus
      Director - Aerospace, Defense & Space Research at Melius Research LLC
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