General Dynamics Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• Howard Rubel, Vice President of Investor Relations
• Phebe Novakovic, Chairman and Chief Executive Officer
• Jason Aiken, Chief Financial Officer

Analysts

• Myles Walton, UBS Group AG
• David Strauss, Barclays PLC
• Robert Stallard, Vertical Research
• Cai von Rumohr, Cowen and Company
• Ron Epstein, Bank of America Co.
• Jason Howard, Seaport Research Partners
• Seth Seifman, J.P. Morgan
• Kristine Liwag, Morgan Stanley
• Peter Arment, Robert W. Baird & Co.
• Matt Akers, Wells Fargo Securities
• Pete Skibitski, Alembic Global Advisors
• Noah Poponak, The Goldman Sachs Group, Inc.

Presentation

[Operator]

Good morning and welcome to the General Dynamics Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Howard Ruble, Vice President of Investor Relations. Please go ahead.

[Howard Rubel, Vice President of Investor Relations at General Dynamics]

Thank you, operator and good morning everyone. Welcome to the General Dynamics Third Quarter 2021 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, our earnings press release and our filings with the SEC, all of these, which are available on the Investor Relations page of our website, investorrelations.gd.com.

With that completed, it's my pleasure to turn the call over to our Chairman and Chief Executive Officer Phebe Novakovic.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Thank you, Howard. Good morning everyone and thanks for being with us. Earlier this morning we reported earnings of $3.07 per diluted share on revenue of $9.6 billion, operating earnings of $1.08 billion and net earnings of $860 million. We beat consensus by $0.09 per share on somewhat lower revenue than anticipated by the sell side; however, operating margin is up about 40 basis points more than anticipated, this led to the earnings beat. Revenue was up 1% against the third quarter last year, operating earnings are up less than 1%, net earnings are up 3.1% and earnings per share are up 5.9%. This is all reasonably good, but the real story for us is the sequential results. Here we be last quarter revenue by 3.8%, operating earnings by 12.6%, net earnings by 16.7% and EPS by 17.6%. On year-to-date basis revenue is up $733 million or 2.7%, operating earnings are up $137 million or 4.8%, net earnings are up $140 million and earnings per share up $0.64, strong 8.5%. We had a powerful quarter from a cash perspective. Cash flow from operating activities was $1.47 billion, that is 171% of net earnings. Free cash flow was $1.275 billion, a 148% of net income. This follows a very strong cash quarter performance in the second quarter.

In summary, we enjoyed a good quarter in almost all important respects. So let me move right into some color around the performance of the business segments, have Jason give you additional color around cash, backlog, taxes and deployment of cash and then answer your question. First, Aerospace. At the outset, let me remind you that in April of last year, we announced that we were cutting production as a result of certain supply chain issues. Shortly thereafter became clear that there was a reduction in demand related to COVID. That resulted in additional cuts to production. Those production cuts for pre-planned and implemented slowly over the ensuing months and reach their low point in the second quarter of this year. We had anticipated renewed post-COVID demand in the second half of this year and planned increased production for the second half with 32 planned deliveries in the third quarter and 39 in the fourth quarter. In fact demand accelerated in mid-February, a full four months earlier than we had anticipated. This created opportunities, but also operations and supply chain challenges for us, particularly for 2022. On balance, it is a rich problem to have.

With that let me turn to the Aerospace results in the quarter. Aerospace had revenue of $2.07 billion and operating earnings of $262 million with a 12.7% operating margin. We manage delivery of 31 aircraft as opposed to 32 planned, one slipped into the fourth quarter on customer preference. Revenue was $91 million more than the year ago quarter, up 1.6% on one fewer aircraft delivered. On the other hand, operating earnings are down $21 million on a 160 basis point degradation in margins. This was the result of an additional $28 million in G&A expenses driven by higher R&D expense and around a $20 million settlement of a supplier claim related to the allocation of warranties after the end of G550 production. This was offset, but only in part by improved gross margins on delivered aircraft and better margins in the Gulfstream service centers. The real story here is the quarter-over-quarter sequential improvement. Sales, earnings and margins are ramping up as planned. I will not dwell on these numbers, they are available in the charts attached to the press release.

From an order perspective, the quarter boarded on a spectacular. In dollar terms Aerospace had a book to bill of 1.6:1. Gulfstream alone had a book to bill of 1.7:1. The second quarter was the strongest order quarter in the number of units that we have seen in quite some time, this quarter was slightly better. As previously discussed, sales activity truly accelerated in the middle of February and continued on through the remainder of the first quarter. The pipeline that developed in that quarter rolled over into the second quarter, and increased demand continue through the third quarter. We continue to experience a high level of interest, activity and a solid pipeline. As a result of the order activity Gulfstream backlog this quarter is the highest in the last 6 years.

From a new product perspective, the G500 and G600 continue to perform well. Margins are improving on a consistent basis and quality is excellent. We have delivered 131 of these aircraft customers through the end of the quarter with 20 scheduled for delivery in the fourth quarter. These are the metrics of a successful program building further momentum. The G700 has approximately 1800 test hours on the 5 test aircraft. The new Rolls-Royce engine is performing well, but much remains to be accomplished. We remain on track for entry into service in the fourth quarter of 2022 with the G800 to follow in 6 to 9 months. As I mentioned earlier, we had planned 32 deliveries in the third quarter and came up one short, the slip was attributable to customer preference. We have plan for 39 in the fourth and allowed one slipped into the quarter. If everything goes as planned we will deliver 40 aircraft in the fourth.

The story in combat Systems quarter-over-quarter sequential and year-to-date is all about operating excellence and continued strong margin performance. Combat Systems had revenue of $1.745 billion, down 3.1% from the year ago quarter; however, earnings are up 2.2% over the year ago quarter on the strength of an 80 basis point improvement in operating margin. Yet another example of strong operating leverage in Combat Systems. Further that theme on a year-to-date basis Combat System revenue was up to $101 million or 3.8% while operating earnings are up a significant 7.4% on a 50 basis point improvement in operating margin. Demand for our combat vehicles remained stable in the US with the Brigade of Abrams main battle tanks per year and a half of the Stryker's per year.

Domestic upside as possible from the MPF program where our vehicles is performing well. In the near term we are stable Internationally, but opportunity-rich in the intermediate period with order potential in Poland, the Czech Republic, Romania, Denmark, and Switzerland. You may have read in the press about some noise and vibration issues in AJAX that have emerged during the programs test phase. We are working very closely with both the British Army and the Ministry of Defense and are confident that both technical issues can be resolved. In summary, this quarter was an impressive operating performance once again by the Combat Systems group.

Turning to Marine Systems, revenue of $2.64 billion is up to #132 million dollars above 9.6% over the year ago quarter. The current quarter revenue growth was distributed fairly evenly across the three shipyards. It is also up sequentially and year-to-date. Year-to-date revenue is up 7.5%. This is a very impressive continued growth, in fact revenue in this group has been up for the last 16 quarters on a quarter-over-year ago quarter basis. Operating earnings are $229 million in the quarter, up $6 million or 2.7% and operating margin of 8.7%. On a sequential basis, operating earnings are up $19 million on a 40 basis point improvement in margins.

Electric boats performance remains strong and while still early in the Columbia first ship construction contract the program remains on cost and schedule. We had a particularly strong quarter in our ship repair business continuing to support our Navy customer. Throughout the Group we have a solid backlog of new construction and repair work and our programs are well supported in the FY22 budget. In summary, revenue growth is clearly visible, the real opportunity given this steady revenue visibility is margin improvement over time.

Moving to Technologies, the segment had revenue of $3.120 billion in the quarter, down $130 million from the year ago quarter or 4%. The revenue decrease was attributable to Mission Systems from timing on several programs in part driven by chip shortages. On the other hand, Information Technology grew revenue against the year ago quarter at a rate of 1.4%. Operating earnings of $327 million or up $13 million or 4.1% on a 10.5% operating margin. EBITDA margin is a truly impressive 14.4% including state and local taxes, which are at 50 basis point drag on that result. Most of our competitors carry state and local taxes below the line. This quarter revenues decrease will impact the year and we now expect revenue to be around $12.6 billion or $400 million less than our second quarter update, earnings will however remain the same on better margins. Total backlog remains relatively consistent overall comparator period. So good order activity in the quarter with a book to bill of 1:1 and good order prospects on the horizon. The book to bill at GDIT was a little better than 1:1 and somewhat less Mission Systems, the pipeline remains active at both businesses.

From an opportunity perspective cyber security is a top priority throughout the government and the budget calls for tens of billions of dollars on unclassified spending in both the defense and civil spaces. This is a significant opportunity for which we are well positioned to support our customers' needs, particularly as more and more customers move toward a zero trust model.

So that concludes my remarks with respect to a very good quarter and first 9 months. As we look towards the end of the year we expect performance to be in line with the updated guidance that we gave you on the last call, except as I referenced in my remarks about Mission Systems. However, EPS guidance remains unchanged.

I will now turn the call over to our CFO, Jason Aiken for further remarks.

[Jason Aiken, Chief Financial Officer at General Dynamics]

Thank you Phebe and good morning.

I'll start with our cash performance in the quarter. Operating cash flow was $1.5 billion in the quarter, once again, on the strength of Gulfstream orders and from continued strong cash performance from our Technology segment. Including capital expenditures our free cash flow was $1.3 billion or 148% net earnings conversion. Through the first 9 months our conversion rate is 91% approaching our full year outlook for free cash flow conversion in the 95% to 100% range. For those of you who followed us for some time this performance through the first 9 months of the year is better than we've seen in the past several years and gives us good line of sight to achieving the upper end of our target cash range for the year. Looking at capital deployment, capital expenditures were $196 million in the quarter or 2% of sales. That puts us a little under the 2% of sales for the first 9 months, so trending somewhat below our forecast for the year. We're still projecting full year Capex in the range of 2.5% of sales, so that obviously implies an uptick in spending in the fourth quarter. We also paid $332 million in dividends and spent $117 million on the repurchase of 600,000 shares in the quarter. That brings year-to-date repurchases to 8.5 million shares at an average price of just under $174 per share. We repaid $500 million of notes that matured in July, and although there were no new issuances we ended the quarter with $2 billion of commercial paper outstanding. We expect to fully retire that balance before the end of the year. So we ended the third quarter with a cash balance of just over $3.1 billion and a net debt position of $10.5 billion dollars, down more than 800 million from last quarter and down $1.4 billion from this time last year. With the scheduled CP repayment in the fourth quarter, we expect to end the year with a net debt balance below $10 billion for the first time since 2018. As a result, net interest expense in the quarter was $99 million, down from $118 million in the third quarter of 2020. That brings the net interest expense for the first 9 months of the year to $331 million, down from $357 million for the same period in 2020.

The tax rate in the quarter was 15.3% bringing our rate to 15.9% for the first 9 months, consistent with our full-year outlook, which remains around 16%. Order activity and backlog were once again a strong story in the third quarter with a 0.9 times book-to-bill for the company as a whole, bringing us to a 1:1 ratio for the first 9 months and a 1.2 times ratio for the trailing 12 months. As Phebe mentioned the order activity in the Aerospace group led the way with a 1.6 times book-to-bill in the quarter while Technologies recorded a book to bill of 1:1. Foreign exchange rate fluctuation resulted in a $300 million reduction in backlog in the quarter with the majority of that impact in Combat Systems. We finished the quarter with a total backlog of $88.1 billion, that's up 8% over this time last year, and total potential contract value including options and IDIQ contracts was $129.6 billion.

That concludes my remarks and I'll turn it back over to Howard to start the Q&A.

[Howard Rubel, Vice President of Investor Relations at General Dynamics]

Thank you, Jason. 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.

Questions and Answers

[Operator]

Thank you. [Operator Instructions]

Our first question today comes from Myles Walton of UBS. Myles. Please go ahead.

[Myles Walton, Analyst at UBS Group]

Great thanks Phebe I wonder, could you talk a bit about the transition, potential margin impact of the new generation of the 400 and the 800 coming online. It seems like the 800s are pretty evident, it just move for the 650 as you with the 700 engines and are usually would expect some level of reset of margins, but I'm curious if that reset will be materially lighter than we'd normally expect with the new entry into service? Thanks.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

So we get a fair number of questions on this. So I think it's worthwhile walking through each element here. And first, let's take a look at margins. I'll make some comments that I'd like Jason to may be a elicitate a couple of points and then we'll get into a little bit of earnings. So, when you think about margins in the new product development, at present we have about three models in production seem to be joined by the 700, the 800 replaces 650 and 400 comes later. Importantly, we have all the modern plant, property and equipment to do everything we need to do. We need to add more Capex to undergird the increase in lean production, remember we're doing on all of our wings. But here's the important part, and it goes to the designed for producibility that we built into these airplanes and the implied productivity that's embedded in that design for producibility, and remember too, we are seeing margin improvement in every single one of our airplanes in services. This now tells you and again I think shines a spotlight on the operating leverage of Gulfstream, but to amplify all of that and really give it additional uplift, remember all of these aircraft are related. They all have the Symmetry flight deck, the G700 and 800 have the same engine and wings and the same basic fuselage, the G400 and G500, G600 had the same engines or similar engines from the same family from one supplier and the same basic fuselage. So this commonality allowed us to designed for producibility which is going to be an uplift to our margins.

Now if we, if we unpack that a little bit, we get an awful lot of questions about R&D and I'd like Jason to talk a little bit more and perhaps not for all but for some, a bit of a tutorial on R&D accounting.

[Jason Aiken, Chief Financial Officer at General Dynamics]

Yeah so to Phebe's point, we get a lot of questions around, will this new product investment have any impact on the overall R&D spend and what does that do to margins over time, and as a reminder, we have a long-term steady commitment and demonstrated performance of investing in Gulfstream's product development and new technologies over time. So I think if you look over a multi-year period, we've averaged company-sponsored R&D, call it roughly 1% of sales range and we don't expect that to change. Largely the 800 I would say is behind us, but it's been part and parcel to that spend over time, R&D is spent as a period expense over time. As Phebe mentioned the G400 while a clean sheet airplane is part of the G500 and G600 development and so the commonality among those helps keep that spend down and so both of those airplanes are right within that profile of R&D spend. I think to the extent you see any lumpiness in R&D as we did this quarter and we'll expect to see a little bit next quarter that has more to do with supplier offsets that we receive, you're probably familiar with those were suppliers contribute to the program development efforts and those come in lumps and chunk, so that tends to create the quarterly perturbations in R&D spend, but overall in the period expense for these programs, including the two that were announced this month are right inside that line of company-sponsored R&D. So we don't expect that, or the frankly the introduction once they come to have an overall impact in the margin improvement trajectory that we see for Gulfstream over time.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

So what does all that mean if you step back so margins this year are at their low point in Aerospace. Next year margins will improve and 23 margins will improve. Earnings or better in 2021 than they were last year, they're going to be better in 2022 and 2023 and by the way, when we give you guidance on the next call we're going to give you some color and some insight into both of those years to help explain and amplify again what we're looking at Gulfstream. So I hope that helps answer your question Myles.

[Myles Walton, Analyst at UBS Group]

No, that's great. Thanks Phebe. I'll stick to one.

[Operator]

Thank you Myles. We will now move on to our next question, which will be coming from David Strauss, David. Please go ahead.

[David Strauss, Analyst at Barclays]

Thanks, good morning. Phebe wanted to ask you, you highlight that the Gulfstream backlog is the highest it's been in about 6 years. I think if I just take kind of the aircraft revenue you've got something like 2.5 years in backlog based on today. In the same time you also comment on supply chain challenges. So how do you balance all of that as you think about where production rates go at Gulfstream?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

So the increased demand supports increased production. We will get into all that specificity on the next call. But as I noted, after we reduced production last year in response to COVID, supply chain challenges that were in large part driven by COVID and COVID demand, the supply chain needs to gear back up. So that's a little bit of a headwind, but that's why I wanted to give you the color around the margin and earnings performance.

[David Strauss, Analyst at Barclays]

Okay. But all that being said, we should see higher production in 2022 and 2023?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

We're anticipating that to drive a higher revenue.

[David Strauss, Analyst at Barclays]

All right. So, thank you.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

You know what I said in my remarks, this is the risk they have. I wanted to be as transparent with you as possible to tell you. Hey look we've got this nice strong backlog, we've got very good demand, continuing demand, but as we ramp up and we will be ramping up, there are some challenges we can manage those challenges and manage through them, but I thought it was important that you guys understand that.

[David Strauss, Analyst at Barclays]

Very helpful, thank you.

[Operator]

Thank you, David. We're now going to move over to Robert Stallard of Vertical Research. Hey Robert. Your line is now open.

[Robert Stallard, Analyst at Vertical Research]

Thanks so much. Good morning.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Good morning.

[Robert Stallard, Analyst at Vertical Research]

Phebe I wonder if you could elaborate on these challenges you'll see, face some chip issues in Mission Systems, it seems you're also conscious of some potential headwinds in the Aerospace division that ramps up. And one of your peers has also talked about broader supply chain challenges in its defense business. I was wondering if you could comment on this topic generally and what you could be seeing in the future. Thank you.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

So I'll try to give you some measure, look at the Aerospace issues but on supply chain the chip shortage impacted Mission Systems, and we do expect that to go into next year somewhere. I would note, however, even since the close of the quarter they have begun to significantly mitigate some of those chip impacts, but across the portfolio of our of our defense businesses we are not seeing significant or even material supply chain challenges. So we've been able to manage through that pretty well. So for us, and I can only speak for us, that hasn't been a significant issue other than and its impact at Technologies driven by Mission Systems.

[Robert Stallard, Analyst at Vertical Research]

Yeah. And in Aerospace, the challenges there. Is that just a lead-time issue with suppliers or is it specific parts that you're finding particularly tight?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

It's primarily a lead time. You know it's the fact that we spooled down last year as a little bit of headwind to the increase in production that we see on a going forward basis, but I don't see any particular problems at the moment impacting that. This is really just a timing issue and getting folks back up to speed.

[Operator]

Yeah, that makes sense. Thank you very much. Thank you Robert. We're now going to move over to Cai von Rumohr of Cowen. Cai, over to you.

[Cai von Rumohr, Analyst at Cowen and Company]

Yes, thank you so much. So Phebe, could you give us some color on demand at Gulfstream, specifically high net worth versus corporate versus fractional, and most importantly, are you seeing any opportunity for improved pricing in this sector?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Let me answer those in the inverse order. We have seen some upward pressure on pricing and then let me unpack your demand. So, look our view of our increased demand is a combination of factors: one, the very attractive product mix, a strong economy, the return of the Fortune 1,000, increase high net worth individuals and in fact COVID did create and pockets some wealth creation and the pent-up demand that built up during the pandemic. The demand is, and I think importantly spread evenly, pretty much across our product line and there is nothing unusual to report on customer mix or geographic distribution other than the North America was quite, quite strong.

[Cai von Rumohr, Analyst at Cowen and Company]

Excellent. That's all I have. Thanks so much.

[Operator]

Thank you, Cai. I will now going to move to Ron Epstein of Bank of America run the line is yours.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Hey Rom.

[Ron Epstein, Analyst at Bank of America]

Hey good morning Phebe. Just maybe changing gears a little bit, I think everybody's going to focus on these jets, I'm going to maybe not do that. A while back there is some discussion in the press the Polish defense ministry purchasing some Abrams tanks and one Abrams, I think maybe 250 of them, if I remember right, and where you guys stand and if you can give some color on that and maybe some of the other international business going on in the Land Systems business.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Yeah so we were working very closely with our customer, as well as the Department of Defense to support a potential order of 250 tanks out of Poland. And frankly, this is a powerful system for the Poles to have given their geographic location and and their historical experience, particularly with folks stream and West. So if we think through again the FMS process and this is an FMS sale we're looking at somewhere between, maybe in the two-year period, but just to give you a little bit of additional color we see increased demand signals coming out of Czech Republic, Romania, Denmark, Switzerland, Spain and of course the Middle East. In other word, I haven't got safer.

[Ron Epstein, Analyst at Bank of America]

Great thank you. Thank you.

[Operator]

We'll now move over to our next question from Richard Safran of Seaport Research Partner.

[Jason Howard, Analyst at Seaport Research Partners]

Phebe, Jason Howard. Good morning, how are you?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Good.

[Jason Howard, Analyst at Seaport Research Partners]

Well that's good to hear. With such great cash flow performance, I wanted to get an update on how you're thinking about capital deployment, invest in the business, dividends, repurchases, commercial paper. Now, Jason I heard your remarks about retiring commercial paper, but as we look ahead, are you thinking about maintaining your current strategy, are you considering any changes? I think in the past you've stated you invest in the business depending on need and that dividend should be repeatable, but it's just curious if there is any update here on how you're thinking about it?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

So let me give you the strategic framework and then Jason can fill in any specifics, but essentially our capital deployment strategy remains unchanged. We invest opportunistically and all acquisitions or investments in the business where we can get a good capital return, return on our capital, dividends and opportunistic share repurchase. This has been our strategy from the day one and the advent of this management team. Jason?

[Jason Aiken, Chief Financial Officer at General Dynamics]

Yeah, I think the only thing I'd add is to your point on the commercial paper repayment and future priorities around debt is that commercial paper will mature here in the fourth quarter. We've got more than sufficient cash on hand, so we'll just repay that in normal course as it comes due. The next debt maturity isn't late next year, I think it's around $1 billion that will come due. So, no real imminent issues there so we can focus on the priorities Phebe mentioned in then as those elements of the debt ladder do mature, we will pay those down in due course up to a point until we get to a comfortable place that we think long-term continues to support our target mid-A credit rating for the company.

[Jason Howard, Analyst at Seaport Research Partners]

Well, thanks very much.

[Operator]

Thank you. Richard will now be taking our next question from Seth Seifman of JP Morgan. Seth, your line is now open.

[Seth Seifman, Analyst at J.P. Morgan]

Hey, thanks very much and good morning everyone. Phebe when you think about the certification timeline for the 700 and the 800, I guess is there anything you can point out to you as a long pole in the tent and thinking specifically about the engine certification, which you mentioned today, and then also the changes in ODA that Steve Dixon outlined last week testifying before Congress.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Yeah. So our estimate at the moment still remains late next year for the 700 with the 800 to follow 6 to 9 months later. For those of you who have followed engine certification for years and decades, some of you, you'll know that they are always challenging. This engine is performing extremely well in terms of its capability and either meeting or outperforming its design specification was that a lot of test to both on a going forward basis to get through. So we don't see any particular issues at the moment, but we are mindful that these are always complex and challenging processes to work through. And, look we've adapted to changes in our and our regulators and the FAA's game both before and at the moment we don't see any reason to adjust our estimates, but if we do, we will let you know.

[Seth Seifman, Analyst at J.P. Morgan]

Okay, thanks. And then maybe just as a follow-up for Jason, if you could update us on where you expect to be our working capital at the end of this year and then kind of maybe without specific guidance, just what the opportunity buckets are in working capital for 2002.

[Jason Aiken, Chief Financial Officer at General Dynamics]

Sure. I think as you can see from the exhibits this morning. Working capital was a benefit, call it in the couple of $300 or $400 million in the quarter that is largely from the performance at Gulfstream, the significant order activity that we've seen throughout the year in the quarter as well as the continued sell of the last of the test articles from 500 and 600 program. So that really is the big benefit in the quarter. Working capital is still a bit of a headwind year-to-date, just as the business grows and we worked through some of that but. But I think as you look ahead, we would expect to see working capital to continue to be a benefit in the fourth quarter and beyond as we get back to that 100% conversion level this year. We're approaching that level this year and certainly expect to get above 100% conversion next year. So, part of that is the continued demand cadence at Gulfstream. Once we get through 700 program, we would look to sell off those test articles as well. And then of course, you've got the ongoing benefits and Combat Systems, you've seen the achieve a regular order on the large international program there in Combat Systems and that will continue to be a tailwind really even more of a tailwind I think into 2002 as well as in the 2023. So some of the major movers. The other side of it of course is where we should be peaking this year in terms of the capital expenditure investment profile in Marine Systems. So, that will start to come down next year and return more to the normal historical level we see by 2023. So those are really the big movers there and should give you a sense of where we ought to see that working capital moving over the next two to three years.

[Seth Seifman, Analyst at J.P. Morgan]

Great, thanks. Thanks very much.

[Operator]

Thank you, Seth. Our next question will be from Kristine Liwag from Morgan Stanley. Kristine over to you.

[Kristine Liwag, Analyst at Morgan Stanley]

Good morning Phebe and Howard and Jason. Phebe, how do you anticipate the Vaccine Executive Order will affect of labor and production and also do you have a sense of the percentage of GD employees that are currently vaccinated?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Yeah, before I get into the mandate I'd like to take the opportunity to reiterate again our acknowledgment of our workforce. I think it's important to remember that we were declared a critical national infrastructure business early in the onset of pandemic and as a result of that our workers stayed on the factory floor, in the shipyards, and in places where they were needed, frankly throughout the pandemic. They stood their watch and from my point of perspective with courage and fortitude to produce the goods and services that are necessary for our national security. I personally and fully cognizant of the sacrifices they made and I'm proud of that courage they showed.

Now let me turn to the mandate. As you all know as a federal contractor we are covered by the executive order on the mandates. The corporate office mandate has been fully executed, two of our largest businesses are in the process of executing the mandate and many others are set to implement accordingly. And, because of our customer operational and geographic diversity of many businesses we are working with our customers as contract modifications are received that could trigger an implementation. So we keep a pretty running tally. We're at, we believe in some form of either full or partial vaccination in the 75% range or so and so we understand the mandate.

[Kristine Liwag, Analyst at Morgan Stanley]

Thanks and then maybe if I could add one on supply chain and Aerospace. We're seeing that some of the suppliers also have to comply with the mandate. How are you mitigating potential supply chain issues in Aerospace, if you're not able to get parts and how do you think about that with regards to your production rate plans for Gulfstream.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Well, frankly, to the extent that there is an impact in the supply chain of this mandated it will affect of lot of lines of business throughout the defense aerospace world. So I don't see a particular challenge at Gulfstream or in the moment at any of our other large lines of business, but we will certainly be mindful, and deal with any work flow perturbation should they emerge. Look, we have a history of dealing with challenges methodically, systematically and thoroughly. So you'd expect us to approach that operating discipline and apply that operating disciplines to any emerging issues that may or may not arise.

[Kristine Liwag, Analyst at Morgan Stanley]

Thank you very much Phebe.

[Operator]

Thank you, Kristine. We'll now move to our next question from Peter Arment of Baird. Peter, please proceed with your question.

[Peter Arment, Analyst at Robert W. Baird & Co.]

Yes, thanks. Yeah, good morning Phebe. Good morning, everyone. Phebe maybe just ask on the Technologies segment just given the strong operating performance there, is there any, just clarification, is there any one-timers in the 10.5%.that you had this quarter and now just and if not, do you view this segment being able to sustain it's kind of 10% or a double-digit margin going forward or just any color around that.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Yeah, double-digit margin going forward.

[Peter Arment, Analyst at Robert W. Baird & Co.]

Okay. Yeah, no, are you seeing any changes there, or your ability to kind of manage that, in terms of, I know it's a very price competitive environment.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

No, not at the moment. We've been pretty consistent and our margin performance across this entity. So I don't see any systemic change that should impact that.

[Peter Arment, Analyst at Robert W. Baird & Co.]

Great. I'll leave with that one. Thanks.

[Operator]

Thank you. Your next question comes from Matt Akers of Wells Fargo. Matt, over to you.

[Matt Akers, Analyst at Wells Fargo Securities]

Hi, good morning. Thanks. I don't know if you could talk about for the G400 and G800, just kind of early feedback and how much I guess the demand you're seeing there sort of customers that are sort of incremental that wouldn't have but some of your other platforms versus potentially kind of cannibalizing some of the other aircraft.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

We have no instances of cannibalization to date, the 800 is ultimately a replacement for 650, but 650 demand remains pretty steady. And the customer base is pretty much our typical customer base. There may be incremental adds here and there, but I would argue that we see that in both the 700 and 800 and frankly, the rest of that portfolio to the extent that there are incremental here and there and this to be high net worth individuals or some new Fortune 1000 or 500 companies, but I think there is nothing particularly notable here, and in terms of being exceptional outside the norm, other than there is a lot of good interest here we've taken a good number of orders.

[Matt Akers, Analyst at Wells Fargo Securities]

Great. Thanks Phebe.

[Operator]

Thank you, Matt. Our next question comes from Pete Skibitski of Alembic Global. Pete, over to you.

[Pete Skibitski, Analyst at Alembic Global Advisors]

Hey, good morning everyone. Phebe I was wondering if you could share your thoughts on the fiscal 2022 defense budget. There seems to be a lot of tailwind to the presence request in Congress, and I'm wondering if you could share with us if you see some of the incremental support occurring to GD programs, and maybe you raise your eyes on if that budget could be signed into law by the end of the calendar year or not.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

So I think you know as much as I do given the fulsome and in-depth reporting on Congressional budget processes, about the likelihood of signing. So I'm not going to go speculate on hypothetical of the timing, but I think importantly, all of our major and frankly all of our programs were well supported and some are beneficiaries of increased spending on the part of the Congress. So all in all, we had no particular surprises by the way, up or down. So, we were quite comfortable on how this budget is being played out.

[Pete Skibitski, Analyst at Alembic Global Advisors]

I'll leave it at that. Thank you.

[Howard Rubel, Vice President of Investor Relations at General Dynamics]

Operator, we'll just take one more question. Thank you.

[Operator]

Of course. Our next question will be coming from Noah Poponak of Goldman Sachs, Noah, over to you.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Thanks, good morning everybody. Phebe in the business jet market at large, the end market and investors keep debating the sustainability of this recent uptick in demand and some people feel

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

I have heard a lot of that.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Exactly, well you've made I guess the pragmatic decision to kind of not wait in there, and I guess I just wonder if you've had enough time, or you speak to so many customers, if you've heard enough from real deal new customers to perhaps have more of a view on the sustainability of what we're seeing.

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

Well, I wouldn't be taking little about this nor should anybody. I think the demand that we're seeing as I tried to reiterate before is across our existing customer base, the Fortune 1000 back in force. There are, as I noted, new entrants into that market as some companies have increased their profitability over the last two years, and there are additional high net worth individuals who have entered into the market. So, I think that I can only speak for Gulfstream. The data would suggest that given our attractive product mix, as I noted earlier, strong economy and the fact that our customers are back and broad base demand I'm not worried at the moment about sustainability. These are Gulfstream business jet market is in a is in a cyclical market driven in part and no small measured by the economy, but we have been the most resilient in terms of demand through most economic cycles. So again, we've got a good pipeline going forward.

[Noah Poponak, Analyst at The Goldman Sachs Group]

That's helpful. Do you have a sense even if directionally how many of your customers in the last 18 months our truly brand new?

[Phebe Novakovic, Chairman and Chief Executive Officer at General Dynamics]

We're not going to parse it, we've gotten a fair number of new folks, but also our regular and historic customers are back and some new customers, market share increases, So as far as I'm concerned, we had very, very good demand and the pipeline remains robust.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Great. Okay, thanks a lot.

[Operator]

Thank you, Noah. As that was our final question, I would like to hand back to Howard Ruble for any closing remarks.

[Howard Rubel, Vice President of Investor Relations at General Dynamics]

Thank you, Melissa. Thank you all for joining us on our call today. As a reminder, please refer to the General Dynamics website for the third quarter earnings release and highlights presentation. If you have any other questions. I can be reached 7038763117. That will now end our call. [Operator Closing Remarks]