Q4 2024 Earnings Call Transcript

Good morning, and welcome to the General Dynamics Fourth Quarter and Full Year 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Fourth Quarter and Full Year 2024 Earnings Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties.

Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the press release and slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phebe Novakovic, our Chairman and Chief Executive Officer; and Kimberly Kuryea, Chief Financial Officer.

I will now turn the call over to Phebe.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported fourth quarter earnings of $4.15 per diluted share on revenue of $13.338 billion, operating earnings of $1.423 billion and net earnings of $1.148 billion. As you will see, this performance and the resulting performance for the year compare quite favorably to all relevant prior periods.

To briefly summarize, on a quarter over year ago quarter basis, revenue is up 14.3%. Operating earnings are up 10.5%, net earnings are up 14.2%, and earnings per diluted share are up 14%. It is fair to say that the quarter-over-quarter results are quite strong. Sequential results are similar.

Here, we beat the prior quarter's revenue by 14.3%, operating earnings by 20.5%, net earnings by 23.9%, and fully diluted EPS by 23.4%. The full year is also up a common theme. Revenue is 12.9%. Operating earnings are up 13%.

Net earnings are up 14.1%, and fully diluted EPS is up 13.4%. Both revenue and operating earnings were up for each of the segments, led by aerospace, with revenue growth of 30.5%, and with operating earnings growth of 23.9%. While we beat consensus for the year by $0.05, we did not beat our own expectations and prior guidance for reasons largely beyond our control. This leads me to a discussion of the segments.

First, Aerospace. The real story in Aerospace is found in the continuing growth of both revenue and earnings. The continuing strong demand for Gulfstream aircraft, the overall strength of Gulfstream service business and the continuing growth and performance improvement at Jet Aviation. In the quarter, Aerospace had revenue of $3.7 billion and earnings of $585 million.

This represents a stunning 36.4% increase in revenue and a 30.3% increase in earnings on a quarter-over-quarter basis. The sequential numbers are even stronger. With a 51% increase in revenue, coupled with a staggering 92% increase in operating earnings. The important point here is the dramatic increase in deliveries of in-service airplanes in the quarter, 47 versus in the third quarter of 2024. For the year, Aerospace revenue of $11.25 billion is up 30.5% greater than 2023. The earnings of $1.5 billion are up 23.9% over '23. Revenue growth was driven by the delivery of 25 more aircraft than in '23. Earnings suffered a 70 basis point margin compression from the prior year, largely driven by all the costs associated with getting the G700 certified in the early part of the year, and the unexpected costs incurred getting the G700s out the door.

Nevertheless, Aerospace revenue and earnings are less than we anticipated for both the quarter and the year, because we did not deliver as many 700s as planned. We did, however, deliver 15 in the quarter and 30 for the year. You will recall that I told you that we expected to deliver 50 to 52 G700s this year, and the deliveries would be more or less evenly divided over the last 3 quarters of the year. While we planned 15 for Q2 and delivered 11, we planned 15 to 16 for Q3 and delivered 4. In the fourth quarter, we believe that we could deliver 27 but delivered 15. So what happened that caused us to fall short of plan?

Let me identify the most important and impactful reasons and then talk about the implications of all of this for '25. First, aircraft engines arrive significantly late to schedule. We painted the aircraft before the engines arrived. This led to a significant amount of repaint that resulted in increased cost and time spent. But more importantly, we elected to induct these aircraft into our completion centers before installing engines.

This represented a significant deviation from our process and proved to be detrimental to both cost and schedule. Normally, before a green aircraft is inducted into a completion center, we run the engines and test all the plan systems under power, which typically leads to additional actions to correct any issues that might arise. Once the aircraft begins at completion phase, these tests and follow-on corrections are substantially more cumbersome. So it seemed like a rational decision at the time, turned out to be quite troublesome.The good news is that most of the time-consuming aspects of this issue are behind us.

We are now largely receiving engines to schedule and quality escapes are more predictable and appropriate fix is well known. Second, many of the aircraft planned for delivery in the quarter had highly customized interiors, first-of-type intricacies. These intricacies are considered to be major changes for regulatory purposes. This resulted in longer-than-anticipated efforts to finalize and achieve supplemental-type certificates.

This problem is largely behind us. Third, and maybe most important. Late in the third quarter, a supplier quality escape on a specific component caused the replacement of several components on each planned aircraft delivery. The supplier was fully cooperative and is providing replacement components for all of our needs, but this rework has increased the number of test flights necessary to obtain the final certificate of airworthiness for each aircraft.

So the removal and replacement of these components has impacted labor costs and schedule adversely. While it had a significant impact in both the third and fourth quarters, we have largely worked our way through this problem with the cooperation of the vendor. Finally, many of the early deliveries were to buyers located in foreign countries where we were making first-time deliveries. While they recognize the FAA certification, they have a separate and sometimes extended inquiry before issuing the registration.

This is, in many respects, also behind us. The supply chain is now performing much better to schedule. And even though we continue to be surprised by some quality escapes the time it takes to identify and fix these faults has significantly improved. Turning to market demand.

We had a 1:1 book-to-bill in the quarter and for the year, even as aircraft deliveries increased. Orders were largely consistent with our internal plan. The delivery of the G700 and its performance in customer hands is driving increased demand for it, which we experienced in the quarter. After some slowing in the U.S. during the second and third quarters, we continue to see improved interest across all models in both the U.S. and Europe.

Middle East activity is quite strong and current activity in Southeast Asia and China has also improved. Interestingly, the overall number of prospects in all areas continues to increase. So let's move on to the defense businesses. Combat Systems had revenue of $2.4 billion for the quarter, moderately more than a year ago quarter.

Earnings of $356 million are also up modestly on a 10 basis point operating margin improvement. Operating margin of 14.9% is quite wholesome. The sequential growth in revenue and earnings at 8.3% and 9.5%, respectively, is stronger, particularly with strength at OTS. For the full year, revenue of $9 billion is up 8.8% and earnings of $1.3 billion are up 11.2%, resulting in a 30 basis point increase in operating margins as compared to a year ago.

All in all, very nice growth profile. Combat saw robust order intake over the course of the year, resulting in a book-to-bill of 1.3:1. Orders came from across the portfolio with notable awards in munitions and international vehicle programs. New capacity to meet demand for artillery is coming online in our munitions business, which will drive additional munitions growth. Demand remains strong in the U.S. and former allies, particularly in the combat, vehicle tracked and wheeled business.

This, coupled with Combat strong overall backlog of nearly $17 billion positions the group well for continued strong performance. In short, this group had a very solid year with strong revenue growth, expanded margins, durable order activity and a strong order pipeline as we go forward. Turning to Marine Systems. Once again, our shipbuilding Group had strong revenue growth.

Marine revenue of $4 billion is up 16.2% against the year ago quarter, Columbia class and Virginia class construction, and TAO volume drove the growth. DDG-51 revenue also increased measurably. In short impressive growth by any standard. Operating earnings of $200 million are down 7.8% in the quarter with a 130 basis point decrease in operating margin.

Margins continue to be adversely impacted by additional delays in quality issues from the submarine supply chain. Sequentially, revenue increased 10%, while earnings were down 22.5% for the reasons I just mentioned. For the full year, marine revenue of $14.3 billion is up 15.1% and earnings of $935 million are up 7%, certainly a better result than the fourth quarter taken alone. The operating metrics tell us that we have, in fact, increased our productivity to somewhat offset increased costs, but not enough.

So across the business, we have seen rapid growth of revenue and more modest growth in earnings. As I told you last quarter, although the submarine supply chain is improving in places, out of sequence work continues to increase our costs. In addition, we have seen increased quality problems from the supply chain that have further disrupted our build plan and driven increased costs for quality control and inspection at EB. That said, we continue to drive productivity improvements and are redoubling our cost cutting by reducing overhead and increasing our planning efficiency.

In addition, the Congress recently passed the continuing resolution that included nearly $9 billion for Columbia class construction and $5.7 billion for Virginia class programs. While the Columbia portion of the CR is primarily to maintain the funding plan impacted by the delay in the 2025 budget, the Virginia class funds provide the following. They allow the Navy to cover fact-of-life cost increases on the two FY '24 boats and one [ F '25 boat ]. They also provide funds for additional workforce development and allow us to target funding at specific productivity areas that we are working out with our customers.

We are working with our customer to get this under contract as soon as possible. In addition, the Navy is continuing to push funding into the industrial base to help improve their output timing and quality. This effort over time will help -- all of this tells us that we should see some improvement in the supply chain slowly, but surely. Until then, we continue to control what we can control by increasing our own productivity and cutting costs.

And lastly, technologies. It was another strong quarter with revenue of $3.24 billion, up 2.8% over the prior year. Operating earnings in the quarter are $319 million, up 4.6% on a margin of 9.8%, a 10 basis point improvement over the fourth quarter a year ago. The full year comparisons are similar.

Revenue at $13.1 billion is up 1.6%. Earnings of $1.26 billion are up 4.8% on a 30 basis point improvement in operating margin. Both businesses finished a really good year with a strong fourth quarter. In particular, GDIT delivered their fourth consecutive year of revenue and earnings growth, resulting in their highest ever revenue and earnings and their strongest operating margin over this period.

Mission Systems had a good year as well. Their focus has been on margin expansion as they transition from sunsetting legacy programs to new program wins. So while their revenue was down about 2% year-over-year, earnings were up 5.5% on a 90 basis point improvement in margin. We expect 2025 to be the final year of the program transition at Mission Systems with growth on both the top line and bottom line thereafter.

Turning to orders. The group had very nice order activity for the year. Total orders for the group reached a record level of $14.7 billion, resulting in a book-to-bill of 1.1 for the year. Similarly, the total awards, including options and IDIQ value were $21.8 billion.

That led to an 18% increase in total potential contract value to $48.1 billion, which positions them nicely to continue on their growth trajectory. The group's win rates remain very strong in the low 80% range for the year, and their capture rate remains in the mid-60% range, both very strong for this industry. GDIT's digital accelerated investments are yielding very good results driving almost $7.5 billion in award value in 2024 alone and a total of $10 billion in awards since they launched the program 2 years ago. Likewise, Mission Systems secured a number of marquee wins last year as a result of their investments in innovative technology, including space ground systems, strategic recapitalization programs and Canadian land C4ISR systems.

All in all, a strong year for the Technologies group. This concludes my comments about the defense businesses. Let me ask Kim to provide detail on our cash performance for the quarter and the year, overall order activity and backlog, share repurchase activity and other items. I will then come back to discuss our thoughts on 2025.

Thank you, Phebe, and good morning. Let me first start with orders and backlog. Our order activity and backlog continued to be a strong story for us in 2024. We achieved an overall book-to-bill ratio for the year of 1:1, while revenue grew 13%. Combat Systems and Technologies led the way with book-to-bill of 1.3x and 1.1x, respectively.

Aerospace finished strong, resulting in a dollar-based book-to-bill for the year of 1x, even as Gulfstream aircraft deliveries increased over 20% and their revenue grew about 31% from the prior year. We finished 2024 with total backlog of $90.6 billion, the seventh consecutive quarter that backlog remained above $90 billion, demonstrating its durability during a period of robust growth. Total estimated contract value, which includes options and IDIQ contracts, ended the year at another record level of $144 billion, a 9% increase from last year. This increase was driven by our Technology segment as it continued to capture major opportunities including record awards at GDIT.

Turning now to our cash performance. As expected, the fourth quarter was a strong cash quarter with operating cash flow of $2.2 billion, which brings us to $4.1 billion of operating cash flow for the year. In the quarter, Combat Systems had particularly strong cash generation, while Aerospace and Technologies had solid quarters as well. We have said repeatedly that we strive for a cash conversion at or around 100%.

For 2024, our free cash flow was $3.2 billion, a cash conversion rate of 85%. Recall that 2023's free cash flow was 115% and that the 2022 through 2024 average was 100%. We experienced working capital growth in inventories at Gulfstream due to delayed deliveries and as production continued to ramp up. Another reason for working capital growth is that two of our fastest-growing defense businesses, EB and OTS had customer-funded material purchases on undefinitized contracts.

The cash associated with the unbilled profit is not collected until the contract is definitized. We expect working capital will continue to build in 2025 and unwind in '26, although it could be earlier. Looking next to capital deployment. Capital expenditures in the fourth quarter were $355 million, which adds up to $916 million for the full year.

At 1.9% of sales, full year capital expenditures were in line with our expectations. We paid $389 million in dividends in the fourth quarter, bringing the full year to $1.5 billion. We also repurchased 4.8 million shares of our stock in the quarter, for $1.3 billion. So we finished the year with 5.4 million shares repurchased for $1.5 billion, at an average price of $277 per share.

In total, for the year, it is important to note that approximately 95% of our free cash flow was returned to shareholders in the form of dividends and share repurchases. We repaid $500 million of maturing notes in the fourth quarter and ended the year with a cash balance of $1.7 billion. That brings us to a net debt position of $7.1 billion, down approximately $300 million from last year. We also contributed $73 million to our pension plans.

Our net interest expense in the fourth quarter was $76 million, bringing interest expense for the full year to $324 million. That compares to $78 million and $343 million in the respective 2023 period. Turning to 2025. While 100% of on average cash conversion has been our goal, we may come in lighter between 80% and 85% for several reasons. While we expect CapEx and interest expense to be relatively flat, we have a 27th pay period at a couple of our businesses, which requires an additional $175 million this year.

And as I noted earlier, working capital will continue to build at least through part of the year. As far as capital deployment goes, we will continue to fund the dividend and buy shares when appropriate. We also have $1.5 billion of debt maturing in the second quarter, the disposition of which we will address them. Finally, our cash taxes and pension contributions are expected to increase.

Turning now to income taxes. Our 2024 full year rate ended up at 16.7%. Looking ahead to 2025, we expect the full year effective tax rate to increase to around 17.5%. Phebe, that concludes my remarks.

I'll turn it back over to you.

Thank you, Kim. So let me provide our operating forecast for 2025 with some color around our outlook for each business group and then the company-wide roll-up. In 2025, we expect aerospace revenue around $12.650 billion , up around $1.4 billion over 2024. Operating margin is expected to be up 70 basis points to 13.7%. This should result in an 18.5% increase in earnings, up between $270 million to $275 million.

Gulfstream deliveries will be 150, materially over the 136 delivered in 2024. As I just noted, we anticipate a 13.7% operating margin for the year, quite a bit stronger in the first quarter, but weaker in the second and third quarters, followed by a strong fourth quarter. Given the delivery challenges we have had with the G700s in 2024, we have taken a less aggressive planning posture in 2025. In Combat Systems, we expect revenue to be up slightly to about $9.1 billion, coupled with a 30 basis point improvement in operating margin of 14.5%. This should lead to improved earnings 3.5% to 4% better than in 2024. As I noted earlier, the Marine Group has been on a remarkable growth journey.

It will continue in 2025, albeit at a slightly lower rate. Our outlook for this year anticipates revenue of around $15 billion with operating margin improvement to 6.8%, which should result in 10% or better improvement in earnings in 2025. In Technologies, 2025 revenue is expected to be $13.5 billion. Within the group, GDIT will be up low single digits and Mission Systems will be slightly down less than 0.5%. Operating margins are expected to decrease about 40 basis points to about 9.2%.

We continue to see long-term single-digit growth from the group and continued industry-leading margins. So for 2025 company-wide, we expect to see revenue of approximately $50.3 billion, an increase of around 5.5%. We anticipate margin of 10.3%, up 20 basis points from 2024. All of this rolls up to a EPS forecast around $14.80 with a reasonable range of $14.75 to $14.85. None of this contemplates or includes the use of capital for share repurchases. On a quarter basis, if one were to assume an average of $3.70 per quarter, the first quarter would be off $0.20, the second quarter of $0.40, the third quarter right on the number and the fourth, up $0.60. To wrap up, as we go into 2025, we feel very good about our business and the prospects for the year.

We also have some very good opportunities across the business to improve operating margins that experienced some additional growth. Simply, we need to execute, and we will be laser-focused on operations. Nicole, back to you.

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

[Operator Instructions] Our first question comes from Ronald Epstein from Bank of America.

You can you hear me okay. Yes, perfect. So just maybe following up on the G700 stuff, I would imagine I get a bunch of questions on this. Is there any impact on the CERT and delivery of G800? And do you get any compensation from the suppliers on the delay because I would imagine it frustrated some customers?

So taking the inverse order, some of -- we have worked out with our suppliers some consideration and -- but not anything that I think is too material. But let's talk about the 800. So we expect the 800 certification sometime in the first half. And -- and we think we have worked our way through the most significant problems on the 7 -- that we experienced on the 700. Remember the commonality of part almost identical between the 800 and the 700. So we think the learning that we achieved on the 700 will be very advantageous on the 800. And our objective here is to deliver a fewer -- have expectations to deliver fewer 800s.

So think of -- than we did 700. So think about it this way. For 2025, we're thinking about a combination of G650s and 800s. It's about equal to give or take, a few airplanes, the number of G650s we delivered. So we think a lot of the challenges are behind us.

Got it. Got it. And if I can, just one quick follow-on. Yesterday, there was a lot of turbulence in terms of army contracts. I mean just contracts were turned off, they were turned back on at the end of the day. How do you guys think about running your business in an environment where it's kind of this volatile?

Well, I think it's a good lesson not to react to rumors and to react to implemented reality when it happens. So there's a lot [ swirling, ] and we have to see how all of that plays out and manifest itself in defense actions and defense program. But I think that was a good teaching example for those outside the typical kind of Washington [ swirl. ]

Our next question comes from Doug Harned from Bernstein.

On Combat. It's been -- the demand has been very strong and particularly on the munitions side. Can you comment a little bit about how you're seeing the trajectory ahead on vehicles, both U.S. and international?

So our vehicle demand continues pretty strongly, both internationally and within the U.S. We're executing on new programs. We're continuing to execute on our existing programs. That's true for both wheeled and tracked vehicles internationally and again, in the U.S.

And FMS continues to be a fairly significant driver of demand, again, both on the wheeled and the tracked combat vehicle side. So I will note that the Stryker program in '25 was underfunded, and we're working with -- we'll work with the customer and the Hill to get a more rational funding profile. But all in all, pretty Go ahead.

Yes. And then on Marine, you talked about some additional funding, certainly for Columbia-class, there's been money coming in for infrastructure. But when trying to resolve the issues there that you face around supply chain, inflation costs, when the Navy provides more money, does the responsibility then go to you to resolve a very complex infrastructure problem? Or are there things that the Navy should be doing more to address both the -- I would say, both the inflation issues and the whole broad supply chain?

So let's first get a predicate correct. Our infrastructure is not the issue. We have a very robust, mature and advanced infrastructure. The issue has been within the industrial supply chain.

And as you quite rightly note, inflation has been a major determinant of some of these fact of life changes that impacted the entirety of the industrial base and driven price increases. We also had demographic changes. We had generation of workers retire at greater numbers and sooner than we had anticipated being replaced by a demographic age cohort that is a little less and significantly less in terms of numbers. That said, we've worked through that.

About a decade ago, we started training programs within the Marine group and 12 years ago. And those programs are increasingly mature, and we've been able to get the workers that we've needed. So the Navy has been -- and the Congress have been quite proactive in getting funding out to the industrial base to help stabilize. And in fact, we've seen some improvement in some areas.

In missile tubes and castings, you've seen a nice improvement in their ability to deliver on time and quality products. That still needs to permeate the entirety of the industrial base, where we have continued to see delays and quality escapes, all of which cost and drive cost GD. So I think the Navy has done quite a bit in addressing the industrial base challenges. The CR funding helps address the cost challenges on the FY '24 boats and it funds the FY '25 boat as well as some selected productivity improvements.

So that's a help. There still remains a hole in the budget driven by the fact of life changes that was not addressed and needs to be addressed going forward. So I hope that helps you.

Our next question comes from Gautam Khanna from TD Cowen.

I was wondering if you could talk about the mechanics of how the [indiscernible] funding actually gets to General Dynamics? Does it I'm just like is it applied to the boats that are under negotiation now?

Well, let's back up a minute. I don't mean to interrupt you, but there are no specific contracting actions in a -- and what you referred to was one of those under consideration by the previous administration. It is not in effect. What you see now are 2 things.

One, the CR funding that, as I noted in my remarks, addresses the Virginia class and Columbia. And then you have industrial base funding that's been going on for some time that goes right into the industrial base. So those are 2 different elements. Does that help?

It does. And on the latter, I'm curious, how does that actually flow to General Dynamics. What is the mechanism for that money...

Industrial-based funding goes into the industrial base, not into GD other than we may execute contracts with respect to that for the Navy. So there's a distinction between the shipyard and the industrial base, if that helps.

Our next question comes from Scott Deuschle from Deutsche Bank.

Phebe I assume the margins on Lot 1 and 2 for G700 were quite a bit lower than what you had originally expected given everything you...

Yes, we've been pretty clear about that.

Right. And so in that context, I was wondering if you could perhaps update us on the margin step-ups for lots 3 and 4 and whether it's still the 600 basis points? I think you talked about a few quarters ago.

Yes, it is. and there's room for improvement beyond Lot 3.

Okay. And then can you go into a bit more detail on what drove the margin strength at Aerospace this quarter, particularly given the challenges you outlined in your prepared remarks?

Well, the Aerospace group is quite a large group. And there are always, in any given quarter, a lot of moving parts. The extent to which service, the mix of service and timing on service, special missions, how much gasoline we pump. And these are -- this is a very large group. So there's lots of margins -- margin issue -- or margin factors and drivers in any given quarter.

Our next question comes from Sheila Kahyaoglu from Jefferies.

Maybe a big picture question, just given the new administration, and we touched upon it a little bit, but all your segments hit on it with Marine and DOGE within technology and even tariffs within aerospace. I was wondering if you could just maybe touch upon each of it and how you think about the trajectory and any changes in profitability in your franchises?

So I think with any change in administration, there is always new direction, and we will address the changes here at this time in the same way that we have in other instances, and that's to maintain our agility. And what does agility really mean? It means accurate and quick decision-making in the moment. With respect to the DOGE, I think any actions that improve the efficiency and cost structure of organizations is a good thing, and we would embrace that.

And I think as we think through the threat, as you all know, I've argued for a long time that defense spending is threat-driven and the threat has, if anything, increased. And so we will work with our customer on a going-forward basis and ensure that we're meeting their demand for goods and material and services in those areas where they think it's the greatest threat. I think that most of our programs are very well positioned for the modern fight. So we look forward to the -- going forward and think we're in a pretty good position.

Maybe if I could just follow up on marine profitability. Any sort of quantification you could provide on just the floor, just given the supply chain has consistently lagged even though you've been up to par?

I think that we've seen, as I said, some stabilization. We need a ways to go. The money that the Navy has been pumping into the industrial base will help over time. I think the CR will certainly help in the moment, but we need additional funding to -- in order to execute the program of record.

That's been pretty well documented by the Navy and the Congress, frankly. So we'll continue to manage our margin performance as best we can. We have a number of -- as you well know, we've talked about before, a number of issues that drive our costs and drive them up. And to the extent that we have reduced costs and improved productivity will continue to do so.

We've done a pretty good job there, but not enough to offset the cost impact. We're going to continue to manage those costs and drive them down and improve our productivity as well. So all of that, again, will go help offset and cover some of the cost increases that may yet occur. We've factored into the -- into our thinking, known risks, but it's the unknown unknowns that are always out there.

And as I say, over time, we should see some real stabilization within the supply chain, but it's going to take a bit of time.

Our next question comes from Myles Walton from Wolfe Research.

Thanks for the color on the deliveries on the 700. I'm curious, though, it seems like those causes are the same as what we talked about in the third quarter. So just from a trajectory perspective, what was evolving in the fourth quarter that you're now feeling much more comfortable just progressing?

Yes. I think one of the things that we did in the -- that we didn't identify in the third quarter was the induction of the airplanes into delivery or into completions without the engines. That was a significant factor. And the implications of that didn't become clear until a bit later.

But some of this is learning. In retrospect, you might have done something a little different. But on a going-forward basis, we've got a lot of that behind us. And we'll -- from a production point of view or in regular order on the completion side, we're getting there, but we're just not there yet.

But we're getting there. And by the way, we factored all that thinking into our '25 guidance.

Yes. I was going to have a follow-up there. So I think originally, you intended 50 deliveries of the 700 in 2025. And obviously, it doesn't sound like you've changed -- excuse me, in 2024. It doesn't sound like you changed the manufacturing side of the house. And so I guess talking to Nicole's comment on working capital per share, I was expecting a little bit of working capital relief at Aerospace.

I guess I should take it that there was a buildup of EB and OTS that more than offset it. Is that correct, Nicole?

So we had some -- and not to pick nits, but Kim is our CFO, but I'm sure she takes no offense on that. In fact I can't call any of us any of our names and we'll respond accordingly. But yes, we'll continue to have a little bit of working capital buildup at Gulfstream. As remember, we've got the 800 and the 400 in their certification process and then that will begin to unwind at the end of '25, maybe a little bit earlier.

And then a little bit of working capital increases, as Kim noted in Combat and at Electric Boat. But again, definitize some of those contracts, and that will begin to unwind.

Our next question comes from Scott Mikus from Melius Research.

Phebe a quick question on the inflation pressures, particularly at Marine. Of the bids that you've submitted for fixed price contracts at all your defense businesses over the past couple of years, what percentage of those included EPA clauses or some sort of language to protect you from future inflationary pressures?

Well, all of our -- just with respect to the Marine Group, all of our contracts have always included EPA clauses. It's just that the level of inflation was not contemplated, the growth in inflation was not contemplated at the time these contracts were signed. And frankly, I think when you fund defense at a 1% increase and inflation is considerably higher than that, that's a real decrease. So you're likely to see some of those pressures.

But we had contract protection, not just sufficient to cover the significant cost increases, which on some material was 37%. So these are real fact of life changes that have challenged the out years and they need to be addressed.

Okay. And then thinking about aerospace, I think in August, there was an announcement that Gulfstream is going to spend $370 million for a new plant in Mexicali. So I'm just wondering, are you considering ramping up some of your material purchases or production that happens in Mexico or Canada to preempt any potential tariffs?

So look, we'll deal with that when it comes and how it comes. But we have long-term plans in place. We're heavily in the United States, as you well know, in our manufacturing facilities. But we will deal with any of the impacts of governmental policy as they occur as we always have.

Our next question comes from Seth Seifman from JPMorgan.

I wanted to ask about aerospace. The prior sort of long-term outlook was for up to about 170 deliveries. Do we think about the 150 this year, how much of that is sort of due to supply constraint and the waiting for certification of the G800? And how do you think about the path from here?

And kind of likewise, on margins, there was an expectation to be at least in the mid-teens or higher. Is there any way to kind of quantify the extra cost, the supply chain challenges that are dragging on this year and kind of how those can go away?

Well, we could certainly quantify the costs, and I think those have been reflected in our margin performance. We have the capacity to build more, but our planning needs to be prudent and needs to reflect the reality of the supply chain. And we've taken, as I noted in my remarks, a bit more of a conservative approach this year to deliveries so that we better match supply chain cadence, which the cadence is pretty good. We just need to continue to monitor for quality escapes, which drives both time and cost at Gulfstream as we have more inspectors and more QA inspectors and more tests folks on the floor as well as fly away teams.

So until we get improvement in that area, I think we have planned accordingly. Margins will build and build nicely at Aerospace. We've talked about that over the years and all the reasons for that, the commonality of parts, the new manufacturing facilities, our use of AI and digital engineering in our manufacturing and production facilities. So I'm very confident that we will drive margin performance going forward.

Okay. And then just in technologies, the year -- what's driving the year-on-year margin pressure?

So two things. The growth -- so think about it this way. Mission Systems is going to stay relatively flat this year as it finishes its transition from legacy programs to new programs and the growth will be at GDIT. So GDIT's businesses tend to carry a little lower margins.

Plus we have a mix shift at GDIT with some mature programs retiring and some newer programs coming online. So it's nothing really about a timing and mix issue. It signifies nothing other than that.

Our next question comes from David Strauss from Barclays.

What is the book-to-bill assumption for embedded within your comments around working capital for the year?

We have a 1:1 book-to-bill, is our assumption going forward.

Okay. And then if you could just clarify the comment on the 650 versus the 800. I wasn't exactly clear what you were seeing there in terms of deliveries. Do you -- how many 650 do you actually have left to deliver at this point?

I don't have the exact number, but we're done by midyear. So the comment, what I was trying to say is the combination of the 800 and the 650, you remember the 800 is a replacement for the 650, the combination of those two platforms will equal about the 650 deliveries this year, give or take, a few airplanes.

And then last one, the 400 time line on CERT Air and are you including any 400 deliveries in your 150 forecast for this year?

No, we're not. And the 400 will come, obviously, after the 800 as you well know, as I said before, I'm not sticking my finger into the light socket. And with any detail on when we're getting -- when we're getting certification that's beyond our control. But both programs are going very nicely.

So Julian, I think we have time for one more question.

Certainly. Our last question will come from Robert Stallard from Vertical Research.

Phebe, a couple of quick ones on Combat. First of all, with the new U.S. administration, do you think there are going to be some more flexibility on allowing exports to various parts of the world? And then secondly, with regard to Europe, are you seeing any impact from the local political desire to buy more equipment locally?

Well remember, our business is domiciled in Europe. So we haven't really seen any changes in European buying habits. We have, over the last few years, as you all know, an increase in spending. And I think the -- certainly, our expectations are that increases. And your first question was about exports. Can you -- your line is a little rough. Can you say that -- repeat that first part again?

Yes, sure. It's with regard to other parts of the world, if this new U.S. administration may be more flexible in allowing or even encouraging exports to other parts of the world?

Well, I think that this income -- this administration has been quite clear that it intends to export, and we're certainly able and willing to support that and have in the past. So we'll look forward to that.

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

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