Good morning, and welcome to the General Dynamics second quarter 2021 earnings conference call. All participants will be in listen-only mode. If you need assistance signal by pressing star zero. After the presentation, there will be an opportunity to ask questions to ask question press star and one on your phone to withdraw your question press star and two. Please note, this event is being recorded. I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to the General Dynamics second 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. With that completed, I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.
Thank you, Howard. Good morning, everyone, and thanks for being with us. Early this morning, we reported earnings of $2.61 per diluted share on revenue of $9.2 billion, operating earnings of $959 million, and net income of $737 million. Revenue is essentially flat against the second quarter last year, but operating earnings are up $125 million, and net earnings are up $112 million. Earnings per share are up $0.43. To be a little more granular, revenue on the defense side of the business is up against last year's second quarter by $308 million or 4.2%. Aerospace is down $352 million, pretty much as planned. Operating earnings on the defense side are up $98 million or 14.3%, and operating earnings in Aerospace are up $36 million on a 390 basis point improvement in operating margin.
The operating margin for the entire company was 10.4%, 140 basis points better than the year-ago quarter. From a slightly different perspective, we beat consensus by $0.07 per share on somewhat lower revenue than anticipated by the sell side. Operating margin is 20 basis points lower than anticipated, coupled with a somewhat lower share count. This led to the earnings beat. On a year-to-date basis, revenue is up $596 million or 3.3%, and operating earnings are up $129 million or 7.3%. Overall margins are up 40 basis points. The defense numbers are particularly good with revenue up $752 million or 5.2%, and operating earnings up $143 million or 10.3%. On the aerospace side of the business, revenue on a year-to-date basis is down $156 million or 4.3%, but earnings are up $16 million or 4% on a 90 basis point improvement in operating margin.
The quarter was also very strong from a cash perspective. Free cash flow of $943 million is 128% of net income. Cash flow from operating activities was 151% of net income. In summary, we enjoyed a very good growth in the defense businesses in the quarter and had a very solid quarter from an earnings perspective across the board. The year-to-date results give us a solid start to the year and enable us to raise our forecast for the full year, which I will share with you at the end of these remarks. Let me move right into some color around the performance of the business segments, have Jason add color around cash, backlog taxes, and deployment of cash, and then I will provide updated guidance and answer your questions. First, Aerospace.
Let me put the aerospace results in some recent historical context so as to put our performance into a perspective where it can be understood. As you recall, that in April of last year, we told you we were cutting production as the result of certain supply chain issues. It subsequently became clear that there was a reduction in demand related to COVID-19 that resulted in additional cuts to production. Those production cuts were implemented slowly over the ensuing months and reached their low point this quarter. You may also recall that I told you last quarter that the second quarter would be the most challenging for Gulfstream because of these pre-planned production cuts. On the good news side of the story, we had anticipated renewed post-COVID demand in the second half of this year and planned increased production for the second half.
In short, you will see more deliveries, revenue, and operating earnings in the second half as a result. With that, let me turn to the Aerospace results in the quarter. Aerospace had revenue of $1.6 billion and operating earnings of $195 million, with a 12% operating margin. Revenue is $352 million less than the year-ago quarter or 17.8% as a result of fewer planned aircraft deliveries. On the other hand, operating earnings are up $36 million or 22.6% on a 390 basis point improvement in margins. From a pure operating perspective, we did very well. From an order perspective, the quarter border long is spectacular. In dollar terms, Aerospace had a book-to-bill of 2:1 . Gulfstream alone had a book-to-bill of 2.1 :1 , even stronger if expressed in unit terms. This is the strongest order quarter in number of units in quite some time.
It was all the more remarkable in that it did not include any fleet sales. 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, as is obvious from these results. We continued to experience a high level of interest, activity, and a growing pipeline. From a new product perspective, the G500 and G600 continue to perform well. Margins are improving on a consistent basis and quality is superb. We have delivered 115 of these aircraft to customers as we speak. The G700 has approximately 1,600 test hours on the five-test aircraft. We remain on track for entry into service in the fourth quarter of 2022, but much remains to be accomplished, particularly with respect to the certification of the new Rolls-Royce engine.
Looking forward, we have planned 32 deliveries in the third quarter and 39 in the fourth. If all goes well, we may be able to bring in a few more forward from the first quarter of 2022 to meet current demand. Turning to Combat Systems. All of the comparisons, Combat Systems quarter-over-quarter sequentially and year-to-date are quite favorable. Combat Systems has revenue of $1.9 billion, up 8.3% over the year-ago quarter. While Ordnance and Tactical Systems did well, the primary source of growth was combat vehicles at both Land Systems and European Land Systems. All in all, very good growth. It is also interesting to observe that Combat Systems revenue has grown in 17 of the last 19 quarters on a quarter over the year-ago quarter basis.
For the first half of the year, Combat Systems revenue of $3.7 billion is $257 million, or 7.4% over the first half of last year. Operating earnings for the quarter at $266 million are up 11.3% on higher volume and a 40 basis point improvement in margin. For the first half, Combat Systems earnings of $510 million are up $48 million or 10.4% over last year's first half. The quarter was also good for Combat Systems from an order perspective, with a 1:1 book-to-bill leaving a modest increase in total backlog. Demand for our products, particularly our combat vehicles, remains strong, with Europe leading the way. Abrams main battle tank demand is also increasing, and the Stryker remains the combat vehicle of choice for multiple U.S. Army missions and operations. This was an impressive performance once again by Combat Systems. Marine Systems.
Revenue of $2.54 billion is up $65 million over the year-ago quarter. It is also up sequentially and year-to-date. In the quarter, the growth was led by the DDG 51 and T-AO volume. Submarine construction was stable with increases in Virginia Block V and Columbia offset by a decline in Block IV and engineering. For the first half, revenue is up $302 million or 6.4%. This is very impressive continued growth. In fact, revenue in this group has been up for the last 15 quarters on a quarter versus the year-ago quarter basis. Operating earnings are $210 million in the quarter, up $10 million or 5% on operating margins of 8.3%. You may recall that we experienced a strike at Bath last year. I am pleased to report that our relationship with the union is strong, and we are both committed to improving Bath performance.
NASSCO is coming down the learning curve on the ESB and is nearing completion on the first of the new oilers. Repair was also strong. Electric Boat's performance remains strong, and while early in the Columbia first ship construction contract, the program remains on cost and schedule. Finally, Technologies. The segment has revenues of $3.16 billion in the quarter, up $98 million from the year-ago quarter or 3.2%. The revenue increase supplied by information technology, mostly associated with the ramp-up of new programs, was almost 10%. Mission Systems experienced a modest decline in revenue driven by the sale of our space antenna business last year and a shortage of chips for certain products, which we are working to remedy in the second half. Operating earnings at $308 million are up $61 million or 24.7% on a 9.7% operating margin.
EBITDA margin is an impressive 13.7%, including state and local taxes, which are our 50 basis point drag on that result. Most of our competitors carry state and local taxes below the line. Total backlogs grew $95 million. 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 IT was a little better than 1:1 and somewhat less at Mission Systems. This is particularly good performance in light of the continued delays by the customer in making contract awards. In total, GDIT has nearly $34 billion in submittals awaiting customer decision, with most representing new work. In addition to these submittals, our first-half order book does not reflect approximately $4.6 billion of awards made to GDIT that are now in protest, including two sizable contracts challenged by a competitor.
These delays are pushing work we anticipated delivering in the second half of 2021 to 2022. While new award activity has generally been slower, new requests for proposals have remained robust. GDIT's hefty submittals in the first half reflect significant customer demand for modernization and securing IT infrastructure in the wake of COVID. The business has the opportunity to submit another nearly $20 billion in proposals through the end of the year. This concludes my remarks with respect to a very strong quarter and first half. I'll now turn the call over to our CFO, Jason Aiken, for further remarks, and then he'll provide you some guidance.
Thank you, Phebe, and good morning. I will start with our cash performance in the quarter. From an operating cash flow perspective, we generated over $1.1 billion on the strength of the Gulfstream order book and additional collections on our large international combat vehicle contract. Including capital expenditures, our free cash flow, as Phebe noted, was $943 million, or a 128% net earnings conversion you may recall for the past several years a free cash flow has been heavily weighted to the back half of the year. The strong quarter de-risks that profile somewhat and reinforces our outlook for the year of free cash flow conversion in the 95%-100% range. Looking at capital deployment, I mentioned capital expenditures, which were $172 million in the quarter, or 1.9% of sales. That is down from last year, but our full-year expectation remains in the range of 2.5% of sales.
We also paid $336 million in dividends and spent approximately $600 million on the repurchase of 3.3 million shares. That brings year-to-date repurchases to 7.9 million shares at an average price of just under $173 per share. We have 279.5 million shares outstanding at the end of the quarter. We repaid $2.5 billion of notes that matured in May, in part with proceeds from $1.5 billion in notes we issued in May. We also issued $2 billion of commercial paper during the quarter to facilitate the repayment of those notes and for liquidity phasing purposes. We expect to fully retire that CP before the end of the year.
After all this, we ended the second quarter with a cash balance of just under $3 billion and a net debt position of $11.4 billion, consistent with the end of last quarter and down more than $900 million from this time last year. As a result, net interest expense in the quarter was $109 million, down from $132 million in the second quarter of 2020. That brings the interest expense for the first half of the year to $232 million, down slightly from $239 million for the same period in 2020. We repaid another $500 million of notes on July 15th as we continue to bring down our debt balance this year and beyond. At this point, we expect our interest expense for the year to be approximately $425 million.
The tax rate in the quarter and the first half at 16.3% is consistent with the full-year expectation, so no change to our outlook of 16% for the year. Order activity and backlog were once again a strong story in the second quarter with a 1:1 book-to-bill for the company as a whole. As Phebe mentioned, order activity in the aerospace group led the way with a 2 x book-to-bill, while Combat and Technologies each recorded a book-to-bill of 1:1 on solid year-over-year revenue growth. We finished the quarter with a total backlog of $89.2 billion. That's up over 8% over this time last year. Total potential contract value, including options and IDIQ contracts, was $130.3 billion. A quick note on the operating results in the Technologies group.
You'll recall in the second quarter of last year, we recognized a loss of approximately $40 million on an international contract that resulted from schedule delays caused by COVID-related travel restrictions. We formally closed out this matter with the customer this quarter, and despite the fact that our activity on the contract has been dormant for over a year, the accounting rules required us to reverse approximately $45 million of previously recognized revenue in the quarter. Without this reversal, the Technologies Group would have seen organic growth of 6.4% in the quarter. That concludes my remarks, and I'll turn it back over to Phebe to give you guidance for 2021 and wrap-up remarks.
Thank you, Jason. Let me do my best to give you an updated forecast. The figures I'm about to give you are all compared to our January forecast, which I will not repeat. In aerospace, we expect an additional $200 million of revenue with an operating margin of around 12.4%, which is 10 basis points below what we previously forecast. This will result in additional $10 million of operating earnings. There could be some upside here if we can squeeze out a few more planes in the year. With respect to the defense businesses, Combat Systems should have another $100 million of revenue and add another 10 basis points of operating margin. Total revenue of $7.4 billion and operating margin of around 14.6%. Marine Systems has an additional $300 million and 10 basis points of improved margin.
Annual revenue of $10.6 billion with an operating margin around 8.4%. Technology revenue will be down $200 million from our previous forecast, but adds 30 basis points of operating margin. Annual revenue of $13 billion with an operating margin of around 9.8%. On a company-wide basis, we see annual revenue of about $39.2 billion and an overall operating margin around 10.6%. This rolls up to EPS around $11.50, $0.45 to $0.50 better than our forecast going into the year. That concludes my remarks, and it'll be a pleasure to take your questions.
Thanks, Phebe. 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?
Absolutely, sir. If you would like to ask question press star and one If you would like to remove yourself from the queue press star and two. Today's first question comes from Peter Arment with Baird. Please go ahead.
Yes. Good morning, Phebe and Jason.
Hi, Peter.
Nice results.
Thank you.
Hey, Phebe, maybe just to start with Combat. My follow-up will be related to that. Could you just talk about, I think, the really strong performance that you're seeing. Also, we're seeing a lot of activity in the international market for some of your key platforms. How you think about Combat growing in what is a domestically flatter budget environment, based on how you're doing in terms of a lot of your awards. Thanks.
Domestically, both of our large platform programs, Stryker and Abrams, are continuing to grow, particularly Stryker, as the Army assigns new missions and capabilities to that platform. There are also, as you well know, a number of developmental programs that factor into our longer-term thinking. Externally, outside the U.S., demand is increasing, primarily driven by Europe. Again, that is focused and centered on our combat vehicles, both our wheeled vehicles as well as our tracked vehicles, most specifically the Abrams main battle tank.
Just as a follow-up, just as you talked about the, I guess, some of that international activity, do you expect that the discussions around recent comments around Poland, that would be closing this year potentially?
Poland's in a very dangerous neighborhood, and I think there's no stronger deterrent than the Abrams main battle tank. I think press reports have suggested that they want 250 tanks. We're working very closely with the U.S. government to ensure we meet whatever ultimately the U.S. and Poland determine that they want. I think our initial estimate to close is probably a good solid one year plus out. Again, more to come, we'll keep you informed as that program unfolds.
Appreciate it. Thanks for all the color.
Our next question today comes from Seth Seifman with JPMorgan. Please go ahead.
Thanks very much, and good morning.
Hi, Seth.
Hi. I wanted to follow up on something you mentioned in the remarks, Phebe, about what needs to be done on the engine for the G700. I wonder if you could tell us, specifically, what milestones we should be looking for and what risk that the engine poses to the schedule for the program.
As I noted, we continue to make progress on both the airplane and the engine development. As I'm sure you know, being a student of new engine development programs, they are always difficult to get through certification. While there's no particular issue at the time, we still have a ways to go with respect to that certification process. At the moment, we don't have any particular issues that would impact our overall estimation of timing.
Okay, great. Thanks very much. Just as a follow-up, there's been a lot of discussion in the press about the Ajax program. Maybe if you can update us on how that's going, and it doesn't really seem to be having too much of a negative impact on the segment's financial results, but the way that it's playing into financial performance at Combat.
Our U.K. customer is constructively and actively engaged in this program, and we're working very closely with them on two issues that were identified during customer tests. One is noise and one is vibration. Given our decades-long history of combat vehicles design and production, we're quite confident that both of those issues can be satisfactorily resolved. Interestingly enough, this is a transformational vehicle for the British Army, and with many transformational programs, testing issues emerge during the testing process. We are dealing with both of those issues quite closely with our U.K. government customer.
Okay, great. Thanks very much.
Our next question today comes from Kristine Liwag with Morgan Stanley. Please go.
Hi, Phebe and Jason. Phebe, can you provide more color on the general customer profile at Gulfstream? Are the demands from corporates or individuals, U.S. versus international?
Sure. All in all, we see a reasonable balance across a broad cross-section of buyers. The U.S. had a particularly strong quarter, generating over more than half of this quarter's orders. Saw some new customers and a broadening of the market. Importantly, our core Fortune 500 customers have re-engaged. In all, the market we are looking at at the moment is robust.
Thanks. My follow-up is on pricing. Since there doesn't seem to be too many used jets in inventory, are you getting more pricing power for new orders?
Well, let's just say, as a matter of course, we never talk about pricing. I'm not about to break my discipline, but let me give you a little context here. Gulfstream has always been extremely disciplined about its pricing, and that long history of disciplined control around pricing will continue. Price is precious, and once you relax on your discipline around pricing, it's a long way back up the hill.
Great. Thank you, Phebe.
Our next question today comes from Robert Stallard with Vertical Research. Please go ahead.
Thanks so much. Good morning.
Morning.
Phebe, just to follow up on that topic and the strength of the demand environment and the order intake at Aerospace, at what point would you feel comfortable raising business jet production?
Well, we're increasing our business jet Gulfstream production rates throughout the remainder of this year. We've got 71 deliveries to go, and we will, as you well know, set production for next year in the fall of this year, and then report fully to you on those production levels in next year.
Okay, just to follow up on the pricing issue, are you seeing any of your competitors doing anything, what you might call maybe irrational on the new pricing front?
Well, that's your word, not mine. Hey, look, First of all, we don't compete on price, most importantly, and I never comment on other people's behavior. I find that's a wise and judicious stance to adhere to.
Okay, fair enough. Thanks so much.
Our next question today comes from Sheila Kahyaoglu with Jefferies. Please go ahead.
Hi. Good morning, and thank you for the time, Phebe, Jason, and Howard. Maybe on Mission, if we could just talk about what's going on there for a second. I appreciate the divestiture and the semiconductor chip issue, but it seems like it was flat year-over-year organically, and then the book-to-bill is slightly below one. Maybe, Phebe, can you talk about what the drivers in that business are and what you're seeing?
Well, I think you need to look at, as you well noted, our divestiture of our SATCOM business. But I believe, absent that, and given the chip issue that we and others have had, and that we are working assiduously to address, we've seen some growth, and we anticipate some additional growth going forward. But it'll be best measured.
I think to add onto that, to Phebe's point, assuming that business can overcome some of the supply chain issues that they've seen, which at this point they're getting good signals that they'll be able to in the second half, we ought to see some modest organic growth out of that business for the full year.
Okay. Maybe just one on Combat. That was also a really good quarter there. The first half is up, I think 7%. It implies a deceleration into the second half. What's maybe falling off there?
Well, I think it's only slightly in percentage terms. I think we had originally guided to an increase in revenue of about $100 million, and now we're looking at $200 million. A fair amount of that came in the first half, but we'll see a little bit of that in the second half. As I said, the primary drivers of what was the impetus behind growth in the first half will repeat in the second half, and that's largely, again, vehicle production deliveries in both the U.S. and outside the U.S.
Okay. Thank you so much.
Our next question today comes from George Shapiro with Shapiro Research. Please go ahead.
Yes, Phebe.
I'm sorry.
comment on what services did in the quarter? I imagine it was up, and what you expect for the rest of the year?
You mean in Aerospace services?
Yeah, in Gulfstream.
Yeah. Well, our services includes both Jet Aviation services as well as Gulfstream. We saw some nice recovery in the U.S., Europe, Mideast, and Asia are recovering a little more slowly. I think we had anticipated about a $500 million increase in revenue. I think that's a bridge too far in the moment, and I think we're looking more along the lines of.
Call it $375-ish million.
Yeah
for the year at this point.
Not tremendously off our original estimate, but as I said, it's the international recovery that's been just a touch slower than we anticipated, but the U.S. has been very strong, Jason.
George, on to that point, I think it's driven a nice rebound this year, I think to the tune of around 25% growth over last year. Importantly, I think as some people are watching, the levels we've seen through the first half of this year are within call it 95%-ish of where we were at this time in 2019. I think that's a good initial indication of the strength of the recovery in that business, here in 2021.
Okay. I'll stick with my one. Thank you.
Thanks, George.
Our next question today comes from Doug Harned with Bernstein. Please go ahead.
Good morning. Thank you.
Good morning.
I wanted to go back to Gulfstream because when you talk about the demand and the order's obviously very good. You talked a little bit about where they're coming from, but can you give us the sense of the psychology of your customers? By that I mean, are you seeing these orders come in really as kind of pent-up demand that's been slowed recently? Are you seeing people actually think about the use of business jets differently coming out of, as we hopefully soon come out of this COVID period?
We have no evidence that there's been any fundamental shift in thinking about the use of business aviation. I think it would be way too premature to get real clarity about that. You're kind of getting at a question that we've received a number of times, and that goes to kind of, is there a structural change as a result of this pandemic in business aviation? If you think critically about change, what we know is that structural change is almost never apparent prospectively. It almost always is apparent retrospectively. I have believed that it is premature to assume any pronouncements about structural change. Now that said, we've seen our customers are the same kinds of customers that we've had historically I think there was some slowing, obviously, there was some slowing of demand last year.
A number of our customers, particularly in the Fortune 500, are on their aircraft replacement cycle, and that remains unchanged. We did see some new entrants into the market as some industries have expanded in the COVID environment, creating opportunities for those companies. Yeah, I think psychology is an interesting word, but I think I've gotten to the essence of your question.
Well, a little bit related to that, you described the unit book-to-bill as higher than the revenue book-to-bill. Have you seen a mix shift toward, say, smaller aircraft? What do you see driving that difference in unit versus revenue book-to-bill right now?
Well, we have not seen a movement particularly into the smaller jets. I think the G280 was maybe about less than about 20% of the order book. Really, it's demand for both the in-service airplanes, the 500, 600, 650, and, of course, some 700s. Really a strong demand pull across all of our airplanes. I don't think there's anything in particular to discern from that. These are our regular customers backline to replace airplanes and the missions that they need and they have, and the airplanes that they buy then meets each one of those missions. That's the way we think about it.
Okay. Very good. Thank you.
Our next question today comes from David Strauss with Barclays. Please go ahead.
Thanks. Good morning.
Morning.
Phebe, on Gulfstream production, just to kind of level set us, you talked about it coming down in front of buyer issues in COVID. I guess just looking at it holistically on the large cabin side and adjusting for the G550, are you taking large cabin production back to where we were prior to all this or above that?
Well, look, we are increasing on a reasonable basis our production of all of our existing now airplanes. We are not back at the 2019 production levels. On a to-go basis, we're looking at second half orders of 71. That in and of itself suggests that we've got solid production. I will tell you, and that production plan contemplates increased production in each and every one of our in-service large cabin fleet.
Okay. All right. Jason, quick follow-up. Just given the strength of Gulfstream order activity and advances you're seeing there, could you be looking at closer to kind of the 100% or maybe even a little bit above that free cash flow conversion this year?
I think, David, as I alluded to in the remarks, I think the way to think about the strength of the first half and the strength of the activity at Gulfstream is it somewhat de-risks the profile for the second half in getting to that 95%-100% range. You'll recall over the past several years, we've had a pretty steep slope in the second half on our free cash flow generation with, frankly, at times, most, if not all of our free cash flow for the year coming in the second half, if not even in most in the fourth quarter. That's not anything I would put together by design, and I'm really encouraged by the shift in that slope that we've seen this year. It does give us, I think, even reinforced confidence to getting to that 95%-100% range.
I think if you think about that range as a % in net income and combine that with Phebe Novakovic's guidance on increasing net income, you can imply increasing free cash flow to support that number. Frankly, if I'm going to lean a little forward, I think it could possibly put us toward the top end of that range, of the 95%-100% range. I don't know that I'd want to get out above 100% this year. I think we still look to next year and beyond to be nicely above 100%. Bottom line, I think this reinforces improvement in overall free cash flow and maybe pushes us up toward the higher end of that 95%-100% range.
Great. Thanks very much.
Our next question today comes from Myles Walton with UBS. Please go ahead.
Thanks. Good morning. Phebe, you talked about the 12.4% margins in aerospace, and obviously in the first half, you're slightly under that, but the first quarter included a charge, and the second quarter I'm sure had production inefficiencies because of the manufacturing being at the lowest point. I'm just curious, it would look like there's more upside in the second half barring some pickup in R&D or other expenses. Is that an area of conservatism that we should be-
When we think about the second half margins, they will be better than our first half margins. Our first half margins were our low point. We will see some negative impact from two factors. One is the absence of the G550 deliveries, as that airplane is now out of service, and higher R&D as we move toward G700 certification.
Okay. All right. Maybe just give us some color if you can or if you want to, on the first availability of delivery spots, particularly on the 500, 600 at this point?
We got out of the practice of doing that because it became a lot less meaningless with new airplane deliveries. We're not going to, with new airplanes, I think, reinstitute that.
Go back to there?
Yeah, go back to there. I think if you think about the environment that we're looking at now, and I think we've been very clear and consistent about this, starting really it was in mid-February, we saw an increase in demand, and it was consistent and steady throughout that first quarter. That led to the order quarter you saw this quarter, in the second quarter. Then, as we look at both the pipeline and the market at the moment, it is robust. We're seeing a return, as I said, of our Fortune 500 customers as well as some new entrants. North America was quite strong. All in all, I think we're looking at a pretty good market.
Thank you.
Our next question today comes from Matthew Akers at Wells Fargo. Please go ahead.
Yeah. Hi, good morning. Thanks for the question. A couple on the IT business, I guess. Is there anything in particular you can point to that kind of drove the strength this quarter by either by customer or product? I guess, I think you said you were seeing some delayed awards. Is that comment limited to the protest that you mentioned, or is that kind of a broader statement about the market? Anything you can elaborate on there?
Yeah, sure. Our growth in the quarter was fueled across many of our 7,000 contracts, but notably, proportionally a bit more from our new contract awards, so contract awards for new work, I think, which is significant. We have seen a delay in contract awards from two fundamental factors. One, there has been an increase in elongation in the customer decision cycle. Two, we've seen an increased propensity of many in the IT industry to protest repeatedly. Early and often seems to be the mantra. Both of those have increased our expectations for when we can see that growth coming. I think I mentioned that we've got about $34 billion already in customer hands, awaiting some sort of decision. We've got about $20 billion in the pipeline. All of that drives growth.
It's just given this elongated cycle and given this increased propensity to protest, it's going to make the recognition of that revenue a little bit lumpier.
Got it. Okay. Thank you.
Our next question today comes from Robert Spingarn with Credit Suisse. Please go ahead.
Hi. Good morning.
Good morning.
Phebe, just maybe one on shipbuilding. A little bit strategic, but one of your peers in shipbuilding stated that the future of the Navy's going to be Platform+, where shipbuilding platforms will be tailored around capabilities and technologies that are key differentiators. Would you agree with this? I'm not sure it applies to submarines as much as surface ships, but would you agree with this, and would GD need to make any additional investments, either organically or inorganically, to position-
Yourself for this?
Well, I'm not sure I can give you any real insightful color around that. I will tell you how we see our ships. Let's talk about the surface combatants first, the DDGs. That is an extraordinarily versatile ship that has, over the years, had multiple instantiations of improvements and remains a very agile ship in terms of its ability to upgrade. We're already on the block, or Flight III upgrades, which give it additional capability. I suspect that that ship, and others like it, can be the type of platform that evolves over time to address different kinds of missions. I think that that's pretty much regular order. I don't know that that's a systemic change in the way the Navy has ever looked at its combatant fleet.
With respect to our auxiliary ships, I think those tend to be, and those come out of NAVSEA, and I'm thinking the oilers, ESB, those tend to be purpose-built ships for a particular mission. Submarines. Submarines remain a pivotal competitive advantage for the United States. What we have historically focused on, and will continue to focus on, is integrating any new technologies or capabilities on that submarine. I think it's very important when you're in a complex business like shipbuilding, and particularly submarine design and construction, that you focus on the business of designing and building those ships and ensuring that you can successfully integrate any new capabilities that your customer wants. We have a long history of that, and I suspect us to continue that for some time to come.
Rocco.
Thank you.
Rocco, after, we'll just take one more call, please.
Yes, sir. Our final question today will come from Cai von Rumohr with Cowen. Please go ahead.
Yes. Thanks so much. GDIT, when do you expect those two protests to be adjudicated? Secondly, you have an above-average exposure to fed civil, where the funding is strong. Q3 normally is the strongest booking quarter for the sector, book-to-bill quarter. Give us some color on what we should expect this quarter to the extent you can.
Cai, you got a glass a judge . We have very little insight, like none, into the timing of protest resolution. That really is up to the reviewing authority. With respect to federal civilian, we've been with many of those customers for 30 years, and we have a lot of customer intimacy across several, many key federal civilian agencies. I would imagine that as they receive more funding and the ubiquitousness of IT infrastructure to all of their missions, I would see that as some additional upside and potential for us. When that comes, again, will depend on a whole series of issues around timing. You can rest assured that in that pipeline, on a going-forward basis that we're looking at, we've got some good civ work in there.
Great. A follow-up on the Ajax. You mentioned you're confident you can resolve all the issues.
Two issues. I believe I said two issues.
No. Right.
Yeah.
Right.
All those issues was declared two issues.
Oh, okay. Two issues. Good point. I believe it's a fixed price contract, and there's been call there that basically you pay for all the additional expenses. Do you see that jeopardizing profitability on that contract?
We have been able to make any changes heretofore in a very cost-effective and time-efficient manner to meet the needs of our customer for the testing program. I do not see, at the moment, any impact on our EACs or frankly, on our ability to produce this vehicle efficiently. The kinds of changes we're likely to see and that we could anticipate typically are cut into the production line. I don't see a whole lot of perturbations from a cost or schedule impact from the changes that we can envision resulting from the resolution that we come to our customer with on these particular issues.
Terrific. Thanks so much.
Thank you for joining our call today. As a reminder, please refer to the General Dynamics website, the second quarter earnings release, and of course, the highlight presentation, which includes our revised guidance. If you have any additional questions, I can be reached at 703-876-3117. Thank you, Rocco. Thank you, everybody.
Yes, sir. Thank you as well. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.