通用動力 (GD) 2020 Q4 法說會逐字稿

Good morning, and welcome to the General Dynamics Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Howard Rubel, 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 2020 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 complete, it's my pleasure to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Good morning. Thank you, Howard. Earlier today, we reported fourth quarter revenue of $10.5 billion, net earnings of $1 billion and earnings per diluted share of $3.49. This is, in most respects, a very solid quarter even though we missed consensus by $0.05. I have more to say about that shortly.

Despite the adverse impact of the pandemic, we achieved most of our operational and financial goals, added dramatically to our backlog and had a very good cash quarter. The results and comparisons with prior periods are rather straightforward and set out in our press release. Because of the adverse impact to the economy caused by COVID-19, I'll devote less time to the quarter-over-quarter comparisons and spend more time on the sequential improvement that tells a compelling story of recovery. I'll go through that in some detail as I give you my thoughts on the business segments.

As we indicated that it would be, the final quarter is our strongest. It is quite remarkable that we came within $0.02 of the very strong pre-pandemic fourth quarter 2019. On a sequential basis, suffice it to say that revenue is up 11.1%, operating earnings are up 20.6%, net earnings are up 20.1% and earnings per share are up 20.3%. So all in all, a solid quarter with good performance even compared to the year-ago quarter, but really good sequentially.

For the full year, we had revenue of $37.9 billion, down from 3.6% from the prior year, net earnings of $3.17 billion and earnings per fully diluted shares of $11, once again, modestly below consensus.

Our business was strengthened by significant growth in the backlog to a year-end record high of $89.5 billion. The same is true of total estimated contract value at $134.7 billion. The total company book-to-bill was 1.1:1 for the year, led by the particularly strong order performance of Electric Boat. The strong order intake across the board positions the company well for 2021 and beyond. Our cash performance for the quarter and the year was stronger than expected with a conversion rate of 91% of net income for the year. Jason will have more fulsome comments on this subject in his remarks.

Let me review the quarter, paying particular attention to sequential comparisons and the full year in the context of each group and provide some color as appropriate.

First, Aerospace. Aerospace revenue of $2.4 billion is up 23.3% over the third quarter on the strength of the delivery of 40 aircraft, 34 of which were large cabin. While this was the strongest delivery quarter of the year, it fell short of our expectations by 3 aircraft, 2 of which delivered after the 1st of the year for reasons related to customer preference. The third aircraft had a willing customer but was not ready for delivery by year-end. That one is on us.

For the full year, revenue of $8.08 billion is off 17.6% from the prior year. Nevertheless, operating earnings are still over $1 billion, far away the industry leader. Fourth quarter operating earnings of $401 million is 41.7% better than the third quarter on the strength of higher revenue and a 220 basis point improvement in operating margin. However, the shortfall against consensus for the quarter and the year is found in the 3 anticipated deliveries that slipped into this year. This should not, in any respect, diminish the outstanding performance of Gulfstream in this environment. Furthermore, margins increased on a sequential basis throughout the year, ending at 16.5% in the fourth quarter.

At midyear last year, we told you to expect revenue of about $8.4 billion with earnings of $1.13 billion. We finished the year with revenue of $8.1 billion and earnings of $1.08 billion. The entire shortfall is attributable to 127 deliveries versus our expectation of 130. All in all, still within the 125 to 130 deliveries we gave you right after the initial shock to the economy caused by the pandemic became manifest.

On the order front, activity in the quarter was very good, and the pipeline remains quite active. The book-to-bill at Aerospace in the fourth quarter was 0.96:1 dollar-denominated. For the year, the book-to-bill was 0.88:1. This order activity was, in my view, quite good in the midst of a pandemic-induced depression. We are of the well-considered view that order activity will improve further as travel restrictions are lifted and the economy begins its recovery.

Let me give you some thoughts on our product portfolio. First, the G500 and G600 unit manufacturing costs continued to decline, and we are producing superb quality. We had 92 units of this family of aircraft in service at year-end. Anecdotally, the G500 led the order book in the fourth quarter.

Next, some in the analyst community have expressed concern about the continuing demand for the G650, which first entered into service 8 years ago. At the end of this year, we had 436 G650 in service, an average of 54 a year. The 650 continues to be in demand, but not at that level. I can add anecdotally that in the fourth quarter, it was a close second to the G500 demand. It remains a strong competitor to anything in the air and will remain a strong contributor to our revenue and earnings for the next several years.

Finally, on the new product development front, all 5 G700 flight test aircraft are flying and have over 1,000 hours of test flight. We appear to be on track for entry into service in the fourth quarter 2022. That will stimulate both revenue and earnings next year. If you've been following our Aerospace R&D spend, you know that there's more to come on this subject.

Next, Combat Systems. Revenue in the quarter of $1.96 billion is essentially the same as the year-ago quarter. Operating earnings of $309 million are $25 million or 8.8% ahead of the final quarter of 2019 on the strength of 140 basis point improvement in operating margin to 15.8%.

For the full year, revenue of $7.2 billion is up $216 million, a 3.1% increase after a 12.3% growth in 2019 despite a revenue decline at ELS, driven by COVID shutdowns in Spain earlier in 2020. Operating earnings of $1.04 billion are up $45 million, a 4.5% increase. By the way, this performance is consistent with the initial guidance we provided earlier in the year.

In the U.S., our Army customer is continuing its modernization, which provides steady demand for our combat vehicles and munitions businesses. The fourth quarter had some nice order activity, including a contract for Abrams version 3 with a ceiling of $4.3 billion and additional Stryker SHORAD orders with the ceiling of up to $1.2 billion.

Outside the U.S., we are beginning to see increased demand as our NATO allies start to emerge from COVID-constrained activity, including over $200 million of Canadian ammunition orders in the quarter. In short, this group has had quite positive revenue growth for several years now, continued its history of strong margin performance, had very good order activity and has a strong pipeline of opportunity as we go forward.

Next, Marine Systems. This is once again a good news story. Marine fourth quarter revenue of $2.9 billion is up $292 million, a compelling 11.4% increase over the year-ago quarter. Operating earnings of $247 million are up $48 million against a good fourth quarter in 2019. Importantly, there is an 80 basis point improvement in operating margins. The results are much the same sequentially. Revenue was up $452 million, and earnings are up $24 million or 10.8%.

For the full year, revenue was almost $10 billion, up $796 million or 8.7%. Operating earnings for the year of $854 million are up by $69 million or 8.8%. This is the highest quarterly and full year earnings ever for the Marine group. In our midyear guidance to you, we anticipated revenue of about $9.6 billion and operating earnings of $845 million. We came in above that for both revenue and earnings.

In response to significant increased demand from our Navy customer that you can see in these results, we continue to invest in each of our yards, particularly at Electric Boat to prepare for Block V and the new Columbia ballistic missile submarine. So suffice it to say that we're poised to support our Navy customer as they increase the size of their fleet and deliver value to our shareholders as we work through this very large backlog and improve our return on invested capital.

Finally, the Technologies group, which consists of GDIT and Mission Systems, is reported together for the first time in a while. You may recall, we used to report this group as then constituted as Information Systems and Technology. This new reporting reflects the way we manage these businesses with group Executive Vice President, Chris Marzilli, reporting to me.

We have also discovered that in this era of end-to-end solutions melding technology, hardware and software, these business units increasingly go to market together, seeking to provide end-to-end systems and support solutions. We will, however, continue to provide operating transparency by providing company-specific data where appropriate. Jason will have more to say about this in his remarks. This is, of course, the group in the defense segment that has had the most impact from COVID-19 with the most remote participation from employees and the most difficult to access in customer locations.

With all that said, let's turn to the results and commentary on the group and specific businesses. For the quarter, Technologies had revenue of $3.23 billion, off less than 1% sequentially. Operating earnings of $352 million are up $38 million or 12.1% on a 120 basis point improvement in margins.

As you would expect, given the environment, revenue for the first full year is off $711 million or 5.3%, and earnings are off $100 million or 7.6%. It is well to remember that these revenue and earnings numbers exclude the SATCOM business that we sold in the first half of last year. All considered, the group performance showed good strength, and earnings guidance from us was close.

Revenue came in at $350 million, below our guidance, $12.65 billion versus $13 billion, but margins, particularly at GDIT, were better, leading our earnings forecast to be on target. From a margin perspective, GDIT was at 7.9%, up 40 basis points sequentially. Mission Systems, at 16.2%, was up 290 basis points over the last quarter. For the full year, the group's free cash flow exceeded 150% of full year imputed net earnings, the strongest performance within General Dynamics.

GDIT's performance was even stronger. It was the best quarter cash performance in its history. The group enjoyed a tremendous order quarter with significant wins by GDIT in 4 major programs, all of which are IDIQ contracts. As a result, under our conservative accounting policy, these awards are found in total estimated contract value rather than in unfunded backlog. Jason will get into this more in his remarks as well.

Each quarter in the past, I've tried to give you some insight about GDIT. Once again, let me share some thoughts. The fourth quarter was an extension of the momentum GDIT built throughout the year despite COVID headwinds. They remained focused on what they could control in an otherwise turbulent year, supporting customers and their employees while controlling costs, converting cash and winning new business.

On the new business front, GDIT won several large deals in key technical focus areas, including cyber, cloud and artificial intelligence. These wins drove GDIT's total estimated contract value up $2 billion or 11% as compared to the third -- both the third quarter and year-end 2019. As you will see in our guidance, GDIT is poised for very nice growth in 2021.

Let me now turn the call over to Jason Aiken, our CFO, for additional commentary and then return with our guidance for next year. Jason?

Thank you, Phebe, and good morning. The first thing I'd like to address is our cash performance for the quarter and the year. As you can see from our press release exhibits, we generated just over $2.2 billion of free cash flow in the fourth quarter, approximately 220% of net income. That resulted in free cash flow for the year of $2.9 billion, a cash conversion rate of 91%, nicely ahead of our anticipated 80% to 85% of net income.

To put this in context, our cash from operations for the year of $3.9 billion was less than $20 million shy of the highest annual operating cash flow we've ever had, notwithstanding the impact of COVID on our operations in 2020. In fact, our free cash performance for the year was just short of achieving our original pre-COVID cash forecast, so really a remarkable outcome. This was the result of outstanding performance across the business to close out the year, most notably in the Aerospace group, which began to draw down its inventory that we've been discussing for some time; and the Technologies group, which continues to generate superb cash flows, as Phebe mentioned, in this case, in excess of 150% of imputed net income for the year.

And as you'll recall, at this time last year, we negotiated a path forward on our large international contract in Combat Systems, including a revised progress payment schedule that liquidates their receivables balance over the next 3 years. As part of that agreement, we received 2 payments of $500 million each last year, and we received the next progress payment earlier this month in accordance with the revised schedule. So that OWC will continue to unwind, as we've discussed on past calls.

Of course, Marine Systems continues with its significant facilities improvements in support of the unprecedented growth on the horizon. To that point, we had capital expenditures of $345 million in the fourth quarter for a full year total of nearly $1 billion or 2.5% of sales.

You may recall, we had expected our CapEx to peak in 2020 at roughly 3% of sales due to these shipyard investments. As you might expect, given the impact of the pandemic, we've managed the timing of this CapEx spend prudently, and the result is 3 years, '19, '20 and '21, at roughly 2.5% of sales. This timing fully supports our Columbia and Block V build plan at Electric Boat. We then expect to trend back down and return to the more typical 2% range by 2023, consistent with our previous expectations. The net result is that we expect cash performance to continue to improve in 2021 to the 95% to 100% conversion range with year-over-year growth in free cash flow in 2021 and beyond.

We ended the year with a cash balance of just over $2.8 billion and a net debt position of approximately $10.2 billion, reflecting a $1.7 billion reduction in the fourth quarter. Our net interest expense in the fourth quarter was $120 million, bringing interest expense for the full year to $477 million. That compares to $110 million and $460 million in the comparable 2019 periods.

Our next scheduled debt maturities are for $2.5 billion in the second quarter and $500 million in the third quarter of this year. Due to the timing of our cash flows, we may be in the commercial paper market for a transition period. But overall, we expect interest expense to drop to approximately $420 million in 2021.

We also paid $315 million in dividends in the fourth quarter, bringing the full year to $1.2 billion. And we repurchased 700,000 shares of stock in the quarter, bringing us to just over 4 million shares for the year for $600 million or $148 per share. With respect to our pension plans, we contributed $480 million in 2020, and we expect that to decrease to approximately $360 million in 2021, the majority of that in the second half.

Turning to income taxes. We had a 15.4% effective tax rate in the fourth quarter, resulting in a full year rate of 15.3%, consistent with our previous guidance. Looking ahead to 2021, we expect a full year effective tax rate of around 16%.

Next, I'd like to alert you to 2 accounting changes that we've made in the fourth quarter, one related to segment reporting and the other related to pensions. The segment change is the one that Phebe alluded to earlier and relates to our GDIT and Mission Systems businesses. As the federal IT services and defense electronics markets have evolved in recent years, we've seen a significant increase in the customers' prioritization of these capabilities and a shift to large-scale, end-to-end, highly engineered solutions that require critical mass and a broad array of technology services and hardware offerings to meet these customer demands. And more recently, the COVID-19 pandemic has only accelerated these trends with an expansion of remote connectivity and an added sense of urgency around required technology investments.

As you've seen, we've responded to these trends over the past several years to further solidify our position as a market leader in this space, including the combination of our C4 and ISR businesses to form Mission Systems and, of course, the acquisition of CSRA to reposition GDIT as a leader in this market. With these integrations now complete, along with some considerable portfolio shaping and realignment, we are seeing the market dynamics continue to evolve. The 2 businesses share the same defense, intelligence and federal civilian customer base and increasingly go to market together to meet these customers' needs.

In addition, we're seeing considerable commonality and a significant complementary pull-through in their core offerings. So we will now be reporting them as one technology segment to better reflect the way we're running the business as we position them to best compete in this robust market. To be clear, we'll continue to provide transparency into the individual revenues and associated programmatic detail for each business, but of course, that becomes somewhat of a mixed bag as they increasingly engage in joint pursuits.

With respect to pensions, we've adopted an accelerated method for amortizing actuarial losses for our government pension plans to better align the timing under GAAP with when the costs are allocated to contracts. Because these costs are recovered on our contracts, this change had no impact on our net income or cash flow. However, you'll note some differences between captions on the balance sheet and income statement as this accounting change has flowed through the financial statement.

In particular, this reduces our corporate operating earnings, which we expect to be a negative $85 million in 2021 and increases our other income, which is below the line, which we expect to be approximately $90 million in 2021. The impact of these 2 income statement line items is equal and offsetting, so no impact to net income.

And lastly, a little color on backlog. As of the end of the year, our funded backlog, total backlog and total estimated contract value are all up compared to a year ago and, as Phebe mentioned, at record highs. As an indication of the steady improvement since the peak of the disruption from the pandemic, Aerospace book-to-bill returned to 1x in the quarter, consistent with Phebe's remarks on what we're seeing in terms of Gulfstream demand. Marine Systems had an outstanding quarter with a book-to-bill of over 4x due to the exercise of the $9.5 billion option for the Columbia construction contract, providing opportunity for further long-term top and bottom line growth for Marine Systems.

And a little bit of color on order activity for the Technologies group for the quarter. They had a very nice quarter with some notable awards, including the final resolution on the DEOS program with a potential value of $4.4 billion; the EMITS contract in support of the U.S. Army in Europe; the State Department's GSS 2.0 contract with a potential value of $3.3 billion; and a contract with the Air Force to develop a digital engineering environment. Importantly, given the conservative approach we take to reporting backlog, the preponderance of the value associated with these contracts doesn't show up in orders or backlog at the time of award. In fact, only a portion of the awards shows up even in our IDIQ potential contract value. This is quite different from the way most of the peer group approaches this, so worth spending a moment on it.

The way we book these awards is to conservatively estimate initial near-term value in the IDIQ category. Then as the program progresses and the customer exercises orders, that value moves into the backlog and ultimately gets reported as revenue. And over time, incremental amounts of IDIQ value are added to that bucket as our visibility into the program evolves. As a result, over half of the group's annual orders and revenue come out of this potential contract value category. So the headline numbers you see in the firm backlog belie the outstanding performance in the quarter, as reflected in the total estimated contract value for the group of just over $41 billion.

That concludes my remarks. I'll turn it back over to Phebe to give you guidance for 2021 and wrap-up remarks.

With that, I'll turn to our expectations for 2021. So let me provide our operating forecast initially by business group and then on a company-wide roll-up.

In Aerospace, we expect revenue to be about $8 billion, essentially flat with 2020. Operating margins will be about 12.5%, leading to operating earnings of $1 billion, maybe slightly more. So what is driving this forecast and, in particular, the lower margins in 2021 when revenue is similar to 2020? You will recall that I told you last quarter, we will deliver 13 fewer G550s as that airplane is no longer in production. This leaves us with 13 fewer aircraft, not including the 3 slips from 2020. So all up, 10 fewer aircraft.

This reduction in revenue will be made up by a roughly $500 million increase in services across Jet Aviation and Gulfstream at about 10% lower operating margin. There are a lot of other puts and takes, but this gives you the big picture for the lower anticipated margins. By the way, our forecasted production delivery considers our backlog, our fourth quarter orders and our take on current demand. I fully expect 2022 will have better revenue and earnings, stimulated by the entry into service of the G700 in the fourth quarter and improving demand across the product lines as the economy recovers.

In Combat Systems, we expect revenue of about $7.3 billion, an increase of approximately $100 million over 2020. We expect the operating margin to be about 14.5% and operating earnings to exceed last year by $20 million or 2%. We look for revenue, earnings and margin rate to grow quarter-over-quarter during the year with a particularly strong fourth quarter. After several years of good revenue growth, 2021 and 2022 will have modest growth. Growth should resume in 2023 and beyond as several developmental programs move into production.

The Marine group is expected to have revenue of approximately $10.3 billion, an increase of over $300 million. Operating margin in 2021 is anticipated to be around 8.3%, driven in large part by increased work on the first 2 cost-plus Columbia submarines, which have conservative initial booking rates. We anticipate growth at each of the yards. The long-term driver of growth here is the submarine work, which will expand significantly. Our biggest upside opportunity in this group is to outperform the forecasted revenue line.

We expect revenue in the Technologies group of $13.2 billion, $580 million more than 2020. This is a growth of 4.5% with GDIT growing at a rate of 7.1%. Mission Systems will be essentially flat with organic growth of 3%, offset by the SATCOM divestiture. We expect earnings of $1.25 billion, about $50 million more than 2020. This implies an overall margin of 9.5% with GDIT returning to 7% or more.

So for 2021, company-wide, we expect to see approximately $39 billion of revenue, up over $1 billion from 2020, and operating margin at 10.5%. This all rolls up to a forecast range of $11 to $11.05 per fully diluted share. On a quarterly basis, we expect EPS to play out much like it has in prior years with Q1 about $2.20 and progressively stronger quarters thereafter.

Let me emphasize that this plan is purely from operations. It assumes a 16% tax provision and assumes we buy only enough shares to hold the share count steady with year-end figures so as to avoid dilution from option exercises. So much like last year, beating our EPS guidance must come from outperforming the operating plan, achieving a lower effective tax rate and the effective deployment of capital.

I should leave you with this one final thought. Our strong cash flow in 2020 and our anticipation of a 95% to 100% conversion rate in 2021 leaves us with the ability to engage in a share repurchase program this year to enhance the EPS figures I have just given you. We will see how that plays out. I'll be more specific about this after the end of the first quarter.

Back to you, Howard.

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

(Operator Instructions) Today's first question comes from Jon Raviv with Citi.

Phebe, if you could just sort of talk -- I know you mentioned that you want to have this for the end of the first quarter, but starting repo again in 4Q, looking at a much better conversion rate this year. Just sort of big picture on where free cash flow conversion goes this year and ahead, especially if you see a big recovery -- a bigger recovery in 2022 and then kind of what the levers are for capital allocation as the year progresses with those debt repayments, but also saying that you might have some excess as well.

Let me ask Jason to give you a little specificity there.

Yes. So Jon, I think at a macro level, the best way to think about this is we have every expectation that we will see year-over-year increases in our free cash flow. As you saw, we had a nice outperformance of our expectation in the fourth quarter to wrap up a pretty strong 2020. That set us off on this course a little quicker than we expected. A lot of that was Gulfstream doing a great job getting some of that inventory to start to turn, and so working some of that operating working capital. As Phebe alluded to, GDIT also had an outstanding performance in the fourth quarter.

I think we expect to see those trends really continue, I mean, basically, the core fundamental underlying performance of each of the businesses, but then buoyed by the further improvement in OWC. The one we talked about or I alluded to briefly on the call is the continued unwinding of the unbilled receivables balance in Combat Systems. I mentioned we did receive the third major progress payment here earlier this month of January. That's encouraging to see that, that program continues at pace.

And so between that program unwinding, the working down of the working capital over the next couple of years at Gulfstream and, of course, the winding down of the CapEx at Marine Systems, we expect to see that year-on-year growth in free cash flow, obviously, to support further capital deployment, which I'll turn back over to Phebe to address.

So look, we've been real clear over the years that we invest in our business depending on the need and the expected return on that invested capital. The one element of capital deployment that should be repeatable, achievable each and every -- and sustainable each and every year are dividends. We'll be discussing that with our Board. Obviously, debt repayment and then share repurchase. And let me just leave it at that. We have more work to do with our Board, but you can expect us to be good stewards of capital.

And our next question today comes from Seth Seifman with JPMorgan.

I ask this question a little sheepishly, but I wanted to go back to something you said about Aerospace. And you said, if you've been following our R&D spending, you know there's more to come on this subject. I'd like to think that I'm following it, but maybe if you could speak to that in a little more detail and what that means.

So as you and I agree that I gave you as much detail as I intend to here, so why don't we find another question to discuss together?

Okay. Maybe on the cash flow then. Jason, it looks like we're moving from $2.9 billion in 2020 to maybe about $3.1 billion in 2021. Can you talk about the key moving pieces there, especially working capital? And they ended the year with a very low receivables balance. And sort of, is working capital overall going to be a contributor and so to the extent it can continue to decline?

Yes. I think to cut to the chase, I think you put your finger on it. It is the continued working of that OWC. It's partially receivables. You saw some good movement there in the fourth quarter of last year, but that should continue, as well as the inventory side of things. We'll get to unloading these test articles at Gulfstream over the balance of this year and into early next year. So that will be a big help as well. And that will continue in terms of the OWC turn, not just through the balance of this year, but it will be a big mover in 2022 and 2023 as well.

And our next question today comes from Cai von Rumohr with Cowen.

So Phebe, you mentioned Q4 initial deliveries of the G700. I think at one point, it looked like G700 was going to be early in the year. I know a lot has happened obviously with MAX and COVID. How confident are you that you can really hit that delivery bogey? And what does that assume in terms of certification?

So Cai, I think if we go back and look at the record, we've been pretty consistent that it would be toward the end of 2022. And the test program, all the test points, the expectation of the airplane throughout its test program has met all of our design specification. So the program is going very, very well. And we will work with the FAA on certification prior to the entry into service. But the progress of the test program supports that end of year 2022.

When I mean you said you're going to expect an up year in '22, how many G700s? What if the G700 slips into '23, is it an up year or a down year?

Well, look, our expectations are predicated on a recovery in the market that will drive fundamentally all of Gulfstream's performance. But we're pretty much counting on the 700. And if it looks -- it would be by a quarter or so, but I don't believe that that's the case at the moment. And so what we do is work with our FAA teammate and made the best estimates that we can for one, we believe this is going to enter into service. We're not going to get into the number of production and deliveries by model, we never have or not going to. But that airplane is coming, and it comes with nice margin performance and good cash. So our expectation, I think, is reasonable given all of the fact patterns we have and evidence at the moment. And if it changes, of course, we'll let you know, but we have nothing to believe at the moment that it will change.

And our next question today comes from Robert Stallard with Vertical Research.

Phebe, you mentioned that there's been some commentary around the G650 and the market demand for this aircraft. I was wondering if you could give us some idea of what the sort of slot availability is for this plane, looking out over the next 12 months or 2 years, and whether you're seeing any sign of the G700 cannibalizing the market.

So the 650, as I've noted, continued to be in demand. It is a powerful airplane. There's nothing close to it in its market. We are not going to get into open slots. We've never really done that with any specificity, and we're not going to start now. Just suffice it to say, we don't build strings and white tails.

But look, we've talked about this a couple of times. And just to refresh, the 700 and the 650 have materially different missions and they're at different price points, and the customers well understand the distinction. And I think the parable to think about to amplify that point is that when we announced the 700, 650 demand increased because of the clarity provided in that market space. So that was a -- it was additive, not subtractive. So we believe that, that pattern will continue given the differentiation between the 2 airplanes. Does that help you?

Yes. And just as a follow-up, on the G650, you did bring the rate down there modestly. Do you see that now as a sustainable rate over the next few years? Or could it actually head higher again?

We're comfortable with the rate that we're looking at, at the moment. But look, you've seen us sufficiently agile to adjust. I don't -- on the up, I don't expect that at the moment. We still have very good demand. Our rate supports that demand, and the demand supports that rate. And we anticipate a nice, steady order book and production schedule for the time to come. So we're really pleased with that airplane.

And our next question today comes from David Strauss with Barclays.

Phebe, I just wanted to touch on the -- on Marine and the growth that you're forecasting there. I think you said there's potential upside, but looks like you're forecasting about 3% top line growth. I know it's on a tough comp. Can you just talk about where the potential upside could come from? How much Columbia is accounting for of that growth? And would you expect Marine's growth rate to reaccelerate once we get beyond 2021?

So the growth is -- can be, on any given year, a bit lumpy, but the trajectory is there, supported by that backlog. I think this year, in 2020, I think Columbia accounted for 50% of that growth. But the way to think about this, and crudely approximately from a trajectory perspective, is we're looking between $400 million to $500 million of growth a year, and then that will continue to accelerate as we pull through more production.

So in the moment, for 2021, as I alluded to in my remarks, the opportunity there is for increased revenue, and that happens in these shipyards by increased throughput. We pull work in, depending on the work cadence, the schedule, the planning, the availability. So that is in the moment. If any upside comes to growth in 2021, it will be based on that. But you are quite right, I mean, we -- that comparison base is off, for this year, is off a very, very strong growth. But there's nothing to suggest that there's any particular issue here. It's simply just the timing and the mix.

Right. The $400 million to $500 million that you just referenced, is that the annual revenue increase that you're expecting out of Columbia per year for the next couple of years?

No, the whole group.

Okay. Got it. And then on Combat, can you maybe split it out kind of what you're seeing on the U.S. side versus Europe? And are you having any issues in Europe given some of the shutdowns that we've seen over there?

Well, let's talk about the U.S. Our -- as we've talked about, we are the premier systems integrator for combat systems platforms in the United States. And all of our key franchise programs are in the process of modernization, upgrading, and we anticipate that to go forward. If you think about army modernization, it comes in 2 flavors. One is upgrading a critical or fighting vehicles and equipment to meet the modern battlefield. And if you think about that, the Stryker of today and the Abrams of today are in all respects different than their predecessors. They look the same, but in all other respects, these are increasingly lethal, increasingly capable, agile platforms. And that gives them relevance to the war fight today and the war fight envisioned in the joint forces combat scenarios of the U.S. military. So those modernization upgrades will continue.

And then the second category of army modernization is in their new start programs. And they've got a number of them as we look out into the horizon. Again, given our capability set, given our proven long-term delivery, I mean we deliver things on time, at cost, that puts us in very good stead, along with the technologies investments we've been making over the last 4, 5, 6 years. We are producing some really powerful platforms that will be critical to the future fight.

So I feel good about that on top of, in the U.S., our ordinance and armaments business continues to grow. They are critical subcomponents on almost every major weapons missile system in the U.S. So these are very, very strong, high leverage, deep backlog, deep customer intimacy programs in the United States.

When you look outside the United States, we are continuing to see growth. We've got the AJAX program that has just begun its testing, so we've got quite a bit of ways to go there. And when you think about our European land system, just to give you a little perspective, there are over 7,000 in-service, LAV-type vehicles that come out of -- has come out of our European business. That installed base is enormous, and it's an enormous competitive advantage. Some of those systems are older and they need to be upgraded. And we continue to see demand out of multiple parts of Europe. So we expect ELS to grow. And the world hasn't gotten any safer and that the reality of the threat environment drives the demand. So I hope that gives you a little bit of color here.

Yes, absolutely.

And our next question today comes from George Shapiro with Shapiro Research.

Phebe, I noticed when you call out 0.96 book-to-bill, that's a gross number. So it looks like there were like $244 million of cancellations in the quarter, if you could specify what they actually were.

So look, we still have a very low default rate that's really not meaningful either in the moment for us or going forward. So we're not going to give you a model by model. I can tell you, nothing particularly surprised us. And it signifies for us at the moment really nothing on a going-forward basis. Does that help?

Not as much as I'd like.

I'm sure. Do you think I want to start to process backlog? You and I have known each other way too long. That ain't happening.

I did figure, but I figured I'd ask anyway. And then my other question is the sequential backlog at Technologies dropped like 6%, and this sector continued to disappoint again in revenues, as you mentioned. So what's really going on there? I mean we've seen this for quite a while at this time.

So look, we had anticipated going into 2020 that we would see the growth that we had expected. COVID derailed that a bit. But as we do our planning and think through how we are going to manage COVID going forward and the advance of COVID, at some point in the year, we see that growth and supported by that backlog. And again, I think Jason gave you a very fulsome explanation of how we treat our backlog, and we do that differently than anybody else. And I think we sometimes get penalized for it. But we have the backlog to support growth that we are anticipating.

George, just to add another fine point, and I alluded to this a little earlier, but I want to make sure it's clear. This business, in particular, I think, is the most relevant to pay attention to that total potential contract value versus the strictly the traditional firm-funded backlog. And the reason is, I think I mentioned this earlier, this business year in and year out, 50% or more, and in fact, I think in 2020, it was 60% of their annual orders and revenue value, comes out of that bucket of value that we articulate as IDIQ/options potential contract value.

So that's very different than the pure-play platform businesses that have the traditional contracting firm backlog and so on. And so I don't think it can be overlooked. And in fact, it should be emphasized and should be the focal point of analysis on where that value is coming from and, to Phebe's point, what's supportive of our expectations of growth for that business.

But even, Jason, on that basis, it was still down somewhat sequentially if I looked at the total number that you gave.

So there's pieces of that. There's Mission Systems and GDIT in there. GDIT was actually up, I believe, like 10% or 11%, between you and me. And again, to reiterate what I discussed earlier, when we get these large programs, think of DEOS as an example, it's a potential $4.4 billion program, not even a small fraction of that went into even that IDIQ bucket. So major resolution of a significant headline award, so you're not yet seeing manifest in the backlog or even in the IDIQ bucket, but will, over time, support the fundamental underpinnings of the growth that we're alluding to. So a pretty conservative approach to it, but we think appropriate and you'll see measured out over time as those programs progress.

Our next question today comes from Doug Harned at Bernstein.

In the GDIT and Mission Systems, I mean, once upon a time, they were together, and you split them up. And now they're coming back again. Could you talk a little bit about the evolution of your thinking about these businesses? And I know earlier, you talked about these integrated systems where they can work together. And perhaps you could highlight some of the programs that are opportunities for you in that kind of work.

So we have -- look, you would expect us to remain agile to changing trends in the marketplace. And what we were observing is that while our services business and even the older incarnation of Mission Systems work closely together across a number of programs, increasingly, in the last 3 years, we're seeing more and more of that. They're working together on bids. They're submitting bids together. And that -- what I've liked about that, these are 2 separate businesses managed separately, they understand each other.

The guys who -- at Mission Systems know how to run their product portfolio, and the guys at GDIT know how to manage their IT services business. And I think those areas of expertise, it's very important to keep them separate from a management point of view. But to have them come together to work more seamlessly, we believe this reporting structure helped, but in no other respects are we changing anything. So we have a -- Howard can give you a pretty definitive list, but Jason could give you a few of just the indicative kinds of programs we're looking at.

Doug, it's going to come across if we get into this in too much detail, sounding like a bunch of alphabet soup just based on the nature of these businesses. But suffice it to say, it is an increasing portfolio of opportunities where they're going to market together, including work on areas like supercomputing, which they're doing for NOAA; broader-based end-to-end enterprise network services, for example, like what they're working on for the FAA; work on ground-based strategic deterrent, so on and so forth, as well as a number of items for classified customers, NSA. They've got work for the Air Force. Again, the list could go on and on. If I named the programs, it wouldn't necessarily mean anything because they're all code names, but it is an increasing portfolio where they are getting pull-through overlap and commonality in these offerings.

Okay. And then also one more thing that gets into the details here on programs, if we go back to Combat, Phebe, you talked about the trajectory here and flattening period, probably growth in 2023. Where do you see that growth coming from? You mentioned some things, but if you had to say, this is why I'm confident in 2023 growth, would it be from some specific U.S. programs? Would it be ELS? Could it be other international? What are the things that get you most confident on that longer-term trajectory?

So look, we've got -- I think longer term, we're looking at additional Stryker configurations. If you think about the Stryker, it is a very versatile platform. And we've seen the Army, in working with us, find innovative and increasingly war fight critical variance of Stryker. So we have the SHORAD and like -- so we have the SHORAD system coming. We are looking at electronic warfare, medical, and there's a whole series of other increasingly, some of them sensitive, Stryker missions.

The other thing, too, is the Strykers have -- their brigades have increased their numbers by about maybe 4% or 5%. So each brigade is going to get over time more Strykers in these various configurations. So that's important to that program. We also see the Abrams continuing its modernization. And then we believe we have additional out-year international opportunities, largely through FMS. So we see some growth in Canada, Morocco, Poland, Czech Republic. So all of that contributes -- that's all within the U.S. All of that contributes to our assumptions about growth in this portfolio.

Outside the United States, I tried to give you some context about the large embedded fleet and the need to upgrade that fleet. And that, along with the Spanish program, we may see some additional vehicles under that Spanish program. It's too soon to call that. So we are really assuming that. But those are the elements that we are -- and by the way, there are new programs, developmental programs that are out for competition, and we like where we stand in those. I'm able to say one thing about MPF. We developed all 12 prototypes for the testing and evaluation, and I believe we were the only ones to do so even within the COVID environment. That's what discipline will do for you, discipline, product excellence and manufacturing operating excellence. So that is the pipeline that we see in our future.

Operator, this is Mr. Rubel. We have time for one last question, and I'll turn it back to you to do that and then give us final instructions.

Absolutely, sir. Today's final question comes from Ron Epstein with BofA.

So just maybe a bigger-picture question. When we listen to the earnings calls of the group, every company tells us that they're well positioned relative to the defense budget. And I'm not saying you're not. But my question is this, if the budget flattens with the change in administration and the deficit and so on and so forth, where do you expect to see some pressure in the budget? How do you dodge that? I mean it seems like you are, but like where would you not want to be? Does that make sense?

Well, let me tell you, I never speak to anybody else's portfolio, but a couple of observations. It's been my experience that the best antidote for budget reductions are well-performing, well-supported programs of record. We have all of those. Almost every single one of our programs are on schedule at or below cost. That is when the budgeteers get their knives out. Those are almost always the last to fall. So that's, I think, a long-term perspective to look at.

But look, if you look at the U.S. Navy, submarines are its top priority and the Columbia, in particular. And why is that? It's because submarines remain a singular competitive advantage, a critical competitive advantage for the United States with near-peer competitors and peer competitors. So I am quite confident that given my belief that the defense budget is driven by the threat that are key elements of the -- of our Marine group, growth will be nicely supported.

We believe that the Navy will continue to need destroyers. The DDG-51 is proving to be a very versatile program, a platform that can take additional missions. And then with our auxiliary yard out at NASSCO, with the exception of the nuclear-powered carriers and nuclear submarines, all these Navy fleets need gas and the gas needs to get there safely, fastly and pumped efficiently, and that's our new oiler program.

So with respect to the Army, I gave you a little bit -- I gave, call it, a little bit of color before, but the Army has been quite clear. Even in a constrained budget, they will maintain their modernization priorities. They have been both privately and publicly quite articulate about that.

And then in terms of the shorter-cycle businesses, in the old days, when you were dialing for dollars as a budgeteer, you go to the O&M accounts and start cutting the IT budgets, that's not possible anymore. These IT systems are critical to the mission of these agencies, whether that's within DoD or outside DoD. So that as a source of funds is increasingly less likely and I think, frankly, insulated given the criticality of IT. And then within -- to the war fight and DoD and to other missions.

And then within our Mission Systems, there's a beauty to having a diverse portfolio of long franchise programs. And I will tell you that we're quite secure in many of those franchise programs because they are, in some cases, unique and, in some cases, tied to high-growth nationally critical areas, just think again submarines. So I think it's the height of hubris to assume that any organization is immune from constraints in budget. But performance matters, criticality to the war fight matters. And when I look across our portfolio, I'm pretty comfortable that we are in very good stead.

I'd like to turn the call back over to Mr. Rubel for final remarks.

Thank you, everybody, for joining us today. And as a reminder, on our website, gd.com, you'll find the deck and our press release. And with that deck, you'll also find the data for the -- our outlook for 2021. If you have any additional questions, I can be reached at (703) 876-3117. Thank you again.

And thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines, and have a wonderful day.