GD
#Thanks, Bill, and good morning
I'd like to start by sharing with everyone that Phebe is not able to be here today as she was unfortunately hit with a bad case of the flu
She's asked me to cover today's call, and I've invited our Controller, Bill <UNK>, to join me
We all wish Phebe a full and speedy recovery
But for now, let's get on with the results
As is apparent from our press release, we enjoyed another strong quarter
We reported EPS from continuing operations of $2.52 per fully diluted share on revenue of $7.58 billion; operating earnings of $1.052 billion; and income from continuing operations of $764 million, a 10.1% return on sales
The EPS performance was $0.16 better than the year ago quarter and $0.09 better than consensus
Against the year ago quarter, revenue was down $77 million, or 1%, but operating earnings were up $37 million, a 3.6% increase; and income from continuing operations was up $33 million, a 4.5% increase
The quarter's operating margin at 13.9% is 60 basis points better than the third quarter of 2016. Once again, we enjoyed very positive operating leverage
Sequentially, revenue was down $95 million, or 1.2%, while operating earnings were down $4 million and operating margin was up 10 basis points
From an operating perspective, the second and third quarters look a lot alike as we said they would
The $0.07 EPS improvement was driven by a modestly lower share count and a 180-basis point lower effective tax rate in the third quarter
On a year-to-date basis, revenue was off $211 million, less than 1%
However, operating earnings are up $177 million, or 6%, and operating margins are up 90 basis points
Importantly, earnings from continuing operations are also up $177 million, or 8.4%; and earnings per share from continuing operations are up $0.71, 10.5% better year-to-date
With respect to cash, we had very efficient conversion in the quarter
We had net cash provided by operating activities of $871 million and free cash flow from operations of $751 million
For the year-to-date, we have cash flow from operations slightly in excess of $1.6 billion
As you can see from the charts attached to our press release, an important story in the quarter was the very healthy backlog increase
The total backlog of $63.9 billion is a $5.4 billion increase, in excess of 9% over the second quarter
There was very good contract activity in all of our groups, with particularly strong order intake in the Marine group
I should point out that each of our defense businesses enjoyed backlog growth, with the exception of NASSCO, and it didn't miss by much
Let me say a few words about each of our business groups, and I'll start with Aerospace
Aerospace had another solid quarter
Revenue was up $70 million, or 3.6%, compared to the third quarter of 2016; and operating earnings increased $8 million, or 2.1%, to $385 million on an operating margin of 19.3%
On a sequential basis, the group experienced $83 million less in revenue, about 4%, and a $40 million reduction in operating earnings attributable to a 120-basis point contraction in margins
On a year-to-date basis, revenue was up $157 million, or 2.6%; and operating earnings are up $120 million, or 10.6%, on a 150-basis point improvement in operating margin
We had good order intake in the quarter for the group of 0.8 to 1 book to bill measured on a dollar value of orders basis
But Gulfstream alone was a 0.9 to 1 book to bill on both a dollar value and a number of units basis
I can also tell you that our pipeline and active sale discussions are quite good
We're, again, reasonably optimistic about our order intake in the fourth quarter and I expect it to look much like the third quarter, if not somewhat better
Our certification flying continues to progress well, including the additional test points required to extend the G500 and G600 range
As we announced during the recent NBAA Air show, additional testing has enabled us to increase the G500 range by 200 nautical miles at 0.85 mach and 600 nautical miles at 0.90 mach
It's really quite remarkable that the G500, with a 5200-nautical mile range at 0.85 mach, can travel 4400 nautical miles at 0.90. This was the approximate range of the G450 at 0.80 mach
On the G600, our additional validation tests have proven an additional 300 nautical miles at 0.85 mach as well as 300 nautical miles at 0.90 mach
The additional testing required for the specific fuel consumption and center of gravity test points have ensured proper performance and safety margins in both aircraft
Although this lengthened the program schedule, we believe the resultant value to our customers was worth the effort
While flying has progressed on schedule, testing by one of our suppliers for component level qualification associated with the concurrent FAA and EASA certification has added a new complexity at the end of the program
While we accounted for this type of supplier impact in our plan, one of our suppliers apparently didn't anticipate the additional EASA test requirements and is somewhat behind
We expect to resolve this issue and deliver the G500 to our customers as planned
If you recall, when we announced the G500 and G600 in 2014, our plan was to deliver in 2018 and 2019, respectively
So we're still on track and we continue to monitor the supplier closely as we near the end of the certification program
Turning to Combat Systems, the group had an excellent quarter with revenue of $1.5 billion, operating earnings of $247 million, and a really strong 16.5% operating margin
As you would expect, the quarter-over-quarter, sequential, and year-to-date comparisons are all quite favorable
Compared to third quarter of 2016, revenue was up $173 million, or 13%, and earnings were up $38 million, or 18.2%, on an 80-basis point improvement in margin
On a sequential basis, revenue was up $86 million, or 6.1%, and operating earnings were up $22 million, or 9.8%, on a 60-basis point improvement in operating margin
Year-to-date, revenue was up over 2016 by $332 million, or 8.6%
Operating earnings are up $76 million, or 12.6%, on a 60-basis point improvement in operating margin
Combat Systems remains on course for a very good year
We fully anticipate that the fourth quarter will see around a 15% increase in revenue over this quarter, but also some degradation in operating margin as a result of a mix shift to new programs, so that the increase in operating earnings will be more modest than the revenue increase
All of our major programs are performing very well
We continue to see opportunities for growth both internationally and domestically for the group
The Marine group reported revenue of $1.93 billion, a $144 million or 6.9% decrease compared to the year ago quarter
Similarly, revenue was down sequentially by $148 million, or 7.1%, and year-to-date revenue of $5.94 billion was lower by $231 million, or 3.7%
Revenue across the year has been down based on Virginia-class Block III timing, a slowdown in the Columbia program design work as a result of extended negotiations over the IPPD contract, and the wind down of some of the commercial work at NASSCO
These revenue headwinds are now largely behind us
Operating earnings for the third quarter, that's $179 million, were down by $18 million compared to last year's quarter
On a sequential basis, the group's operating margins improved 70 basis points, which led to a $1 million increase in operating earnings despite the $148 million decrease in revenue
It's very nice to have margins in the group north of 9% once again
While this is encouraging, we'll have to see whether it's sustainable
And finally, IS&T
While IS&T's revenue at $2.15 billion was down $176 million or 7.6% against last year's quarter, it was up $50 million sequentially
Year-to-date revenue of $6.4 billion is down $469 million or 6.8% over last year
However, we expect a strong fourth quarter and we'll be especially flat with 2016 for the year
Revenue has been lower during the year primarily on timing
Lower than expected army product sales impacted the third quarter and the Army had trouble executing after the six-month CR and, of course, the change in administration slowed some execution as well
We'll recover a lot of this revenue in the fourth quarter but don't have enough time to recover at all
Some anticipated revenue will slip into next year, but we're in a good position to hold 2017 revenue close to the 2016 level
In sharp contrast, operating earnings of $253 million were up $14 million, or 5.9%, compared to the third quarter of last year on the strength of a 140- basis point improvement in operating margins
Sequentially, the story is much the same
Operating earnings were up $13 million (sic) [$14 million] (10:43) or 11.7% operating margins, which is a 30-basis point improvement
Similarly, year-to-date operating earnings are up $19 million, a 2.7% increase, on a 110-basis point improvement in the operating margins
So IS&T has managed to overcome less than anticipated revenue with very strong operating performance
So what does all this mean as far as the next quarter and the year are concerned? We fully expect the fourth quarter to look much like the other three from an operating earnings perspective
However, we expect a higher effective tax rate in the quarter, leading to a lower reported EPS
For the year, stronger than expected operating results year-to-date, a lower than planned tax rate, and a modestly lower share count enable us to increase guidance for the year by $0.05. Our guidance for EPS from continuing operations now goes to a range from $9.75 to $9.80. This late in the year, we anticipate our end of year guidance to be pretty close to actual performance, so the range is narrow
And finally, in closing, as tempting as it is at this time of year to ask about next year, let me remind you that we have our planning process later this fall, when the businesses get better insight into the upcoming year
The guidance that we gave you last January was grounded in that process and, as a result, was full and thorough
So I don't want to prematurely piecemeal next year at this juncture
You'll hear from us in detail in January, as has been our custom for many years
I'd now like to turn the call back to Bill to cover some additional financial items
So first off, I'm really not at liberty to get into any specifics around the specific supplier
That's somewhat confidential information that Gulfstream needs to deal with
But I can tell you that this is not an issue that has to do with anything related to flight tests or the flying capabilities or the readiness of the airplane to go into service
This is strictly a paperwork exercise that we're going through and, really, it has to do with, as we've noted, the additional test points that have allowed the additional range as well as I mentioned the simultaneous – this is the first time we've done a simultaneous FAA and EASA – that's the European Aviation Authority (sic) [European Aviation Safety Agency] (16:19) – certification
And really, that is a benefit to our customers, to achieve those simultaneous certifications so that we can accommodate the deliveries to our international customers
But long story short, this is not any type of risk item to the program
It's strictly a matter of getting through paperwork through that certification process
As it relates to 2018, as I mentioned, deliveries are still on schedule with our original plan and our original contractual customer dates
You may recall that for a while there we were optimistically considering that there might be an opportunity to advance that entry into service by three or four months
We had this opportunity to go after additional capability in the aircraft, and we did that knowing that we would still be able to meet our original customer commitments while achieving that additional capability
So really, no impact there
And likewise to your question, no impact on our expected 2018 delivery
The production and the delivery schedule remain intact as we originally anticipated, and so we don't see any modification there
<UNK> - Credit Suisse Securities (USA) LLC So <UNK>, I wanted to ask you about Marine
You talked a little bit about the nice uptick in the backlog there
And at the very end of the quarter, I think you took in a big Columbia order and then two destroyers, one Flight II and one Flight III
I'm curious how much risk you see and the impact on margins from this AMDR Flight III Destroyer, and in the margin profile on Columbia as we go forward here
It may not matter that much this year
I know you don't want to get into 2018, but I'm interested in the margin progression given that these destroyers are fixed-price incentive fee contracts and that we're bringing in this Columbia work
So as we've talked about, and I think you hit on it, the Columbia I think is the primary driver that we'll see, if for no other reason, just the volume impact it has as we continue to grow in the Marine Systems group throughout the balance of the decade
And as we've talked about, it is a development cost-plus type contract, so it will come at relatively lower margins that will continue to have a modest dilutive effect for the group
So that's no different I think than what we've talked about up to this point
It's good to have that contract in place so we can keep moving forward, but the margin impact is consistent with what we've talked about historically
<UNK> - Credit Suisse Securities (USA) LLC <UNK>, is there a way to quantify the mix of Columbia as a percentage of Marine as we go forward here?
I don't have that in front of me
What I can tell you is that the growth profile that we laid out, which, really, we anticipated being off a little bit this year in volume and then picking up in 2018 and beyond until the end of the decade, the growth profile, if you follow that CAGR, is almost entirely attributable to Columbia
And it's essentially this design work
So you can put some orders of magnitude on it around there as it relates to the growth of the business and those relatively diluted margins
<UNK> M
<UNK> - Credit Suisse Securities (USA) LLC Okay
And then just Flight III versus II
It's something that we think about as being higher risk
So it's obviously a relatively significant change to the platform, with the additional radar capabilities
But we feel like we got to a place with the customer where we balanced the need to meet their requirements with the maturity of our design, and it's a balanced risk and opportunity situation
We feel very comfortable with the estimate we've put forth and we wouldn't have put a bid in if we didn't think we could do that
So we're still coming out of, as we've long talked about, some of the issues we had at Bath Iron Works with the four-year production break on the DDG-51 Destroyer line
So we feel very good about the progress they've made
We've got to keep watching that and making progress to see that it's sustainable, but we see this as fitting in very nicely to that book of business
I think we have seven destroyers in backlog at this point of the DDG-51 variety, and we think this is very wholesome for Bath Iron Works
<UNK> - Credit Suisse Securities (USA) LLC So you can hold margins as you transition on that program?
I have every reason to believe that, yes
<UNK> M
<UNK> - Credit Suisse Securities (USA) LLC Great
Thank you very much
Nothing has come off that
And so recall, there's been a lot of discussion around, is EIS going to be at the end of 2017, beginning of 2018 – we were talking about EIS as a demonstrator model because of the demand requirements that our sales organization was having
And so there's been a lot of back-and-forth over when is the first unit going to be there and what's that going to look like
But fundamentally, two things
With the new revenue recognition protocol, that was never going to be a big impact on 2017, hence the more significant impact in 2018 that we described
And as I said at the outset in the earlier question, the production and delivery schedule we're still adhering to and are on track for
So continue to see 500 ramp-up in 2018 as having a meaningful impact as we draw down
We'll deliver the last 450 in January of next year
We'll continue to draw down the 550 and we'll start to feather out a couple of 650s
So the 500 is a major contributor among those factors
So we've had a number over the year
They've been mostly small in nature
The more recent one was a business in our IS&T group, really out of our IT services business
And it specializes in mission support for the intelligence community, so it fits right in our core as it relates to the GDIT services and a growth market for us
It closed right near the end of the third quarter, in mid to late September, so not really much of an impact
In fact, no really impact at all in the third quarter but we'll expect to see that to start to contribute in the fourth quarter and beyond
The other acquisitions were a couple of small aerospace services business and another mission computing business that we acquired earlier in the year at smaller amounts
We've spoken for some time about the fact that, A, we don't have a target balance sheet leverage position; we really are more focused on a couple of things
Number one is maintaining the balance sheet firepower that we have for strategic opportunities that will enable long-term growth
So with the free cash flow we have and the balance sheet capacity that we've had, we've been able to do things like invest in capital facilities, invest in product development across the portfolio, Gulfstream, now Electric Boat in the facility
As well as of course deploy meaningful amounts of capital; in this case, primarily to shareholders in the form of dividends and the share repurchase
I think as we look forward, a couple of things
We like our credit rating, where we stand today, and we don't look to modify that
But certainly, we see the balance sheet as an opportunity for when and if strategic opportunities come up, that we are ready to be agile and move quickly with those opportunities
You saw that in a small dose here in the first nine months
That's a little bit more of a toe in the water compared to where we've been for the past few years
Where that leads us, we'll see
It really is all about continuing to find accretive opportunities that are in our core, and that's really never changed
That's always been the case and that really is what we hold that balance sheet firepower for
So we'll continue to evaluate that on an annual basis
Right now, that continues to be our cadence through the balance of the year
I'm sure you've heard Phebe talk about priorities on capital deployment, that the dividend should be predictable and repeatable and sustainable, so we'll look to continue that
And share repurchase, of course, as always, we do not view that as a strategy
It's been a tactical approach to how we deploy capital, and we'll continue to frankly take it that way
So I think no real change that I foresee in that regard
So I don't know of anything about the 500 delay until midyear
Like I said, we remain on track for deliveries in the early part of 2018. So rumors are rumors
I don't necessarily want to speak to that kind of speculation but we remain on track with our contractual delivery timing
And so as it relates to further delays, it would also be, I think, somewhat speculative
I don't know what that would look like, and frankly don't anticipate them, so I don't see an impact to cash or otherwise associated
We are on track and feel good about our ability to close on the certification and get the airplane into service in accordance with our original contractual commitments
As it relates to competition, we tend not to speculate about them or gauge our performance based on what others are doing
It's fair to say over the past couple of years that we have been the beneficiary of taking some share in this market
It's not something we focus on; it's just a fact
But obviously, if they continue to have issues, if others continue to have issues, we'll continue to do our best to perform and be as competitive as we can be in this market
Good morning, <UNK>
So on the first question, you read that correctly
It may be a subtlety that we're articulating because it's relevant in the moment, but it's always been our approach that, with respect to capital deployment, I mentioned a minute ago the dividend approach, that steady and repeatable M&A is there if and when we find accretive and core acquisitions, and then the residual from a tactical standpoint is share repurchase
So I don't think that's any different than what we've talked about; it's just that they've become relevant as you've seen it here in the third quarter of this year
So that is absolutely the case
As it relates to pension, we did make our scheduled pension contribution so no change to the outlook
With respect to that, for the year I believe the number was somewhere in the ballpark of $200 million
I don't think that's changed
And as it relates to closing out the year, we've got a big fourth quarter lined up but frankly that's not unusual for us
It's a pretty typical pattern for us
And one of the things we, I think, would look to as the biggest driver behind the ramp there in the fourth quarter is the transition to billing and delivery and collection on these major international programs is starting to unwind a good bit of that working capital in the fourth quarter
That's the single biggest driver that brings us down that curve
I don't want to speak to long-term leverage
We'll get into that depending on the deals that may be out there
I think as it relates to the impact on share repurchase, as I've said, that's always tactical
And while we targeted a 100% return between dividends and share repurchase modified by the acquisition activity, that's a rough number because it's tactical; it's something we shoot for
If it were a penpoint, sort of bullet point at the target, then it wouldn't be tactical; we'd be driving toward a fixed answer
And if you look back over the past couple years, we've in fact well exceeded the 100% return benchmark, and this year we're on target to meet that
So I don't know that it has any direct implication
We'll just have to assess each of those opportunities when they come up and see what they do with respect to the implications on the long-term leverage
Good morning, Sam
So I'd have to check, and we can go back offline and discuss the math, but the 15-ish percent increase sequentially is entirely consistent with our original forecast of the Combat Systems group being up 7%, maybe a touch higher, approximately 7% full year over 2016. So we're very comfortable with that and that's in the backlog
As a relates to IS&T, as I've said, it is a steep curve in the quarter but we feel very good about it
The pieces are in place to achieve that growth
There are a lot of moving parts but it's in the backlog
We had a good September which leads us to feel like we're very well-positioned to close out the year in a strong fashion
Most of that growth is coming out of the products business, and the order cadence is there to support that
So again, while there's a lot of moving parts, we feel very good about where we are and the pieces are in place to get there
In terms of the impact of the acquisition, I would say that's not the big driver
It has an impact, but to be honest with you I don't actually have that number in front of me
The big driver is the catch up from the timing we've seen throughout the year and its impact that it's had on our Mission Systems product business
We've talked a good bit about those timing effects of the Army procurement and some of the civil agencies and so on that we've seen delayed by the six-month-plus CR and so on
But we feel good about that timing starting to catch back up this year
If we don't get fully back to the 2016 level, it'll be close and that timing will just spill over a little bit into 2018.
Good morning, Doug
So look, I think bottom line, when you think about this tactical network backbone for the Army, that is absolutely as square in our core as anything else that's out there, and so we feel very good about the fact that we will continue to be a player from a systems integration role moving forward
Obviously, the Army is yet to define what its revised tactical networking baseline is going to be, so we don't want to get out ahead of that
But as we see it right now, the decisions that have been made to-date and what's on the table at this point has a minimal revenue impact, if any, to 2018. So we feel very comfortable with where we're headed for 2018. And frankly, beyond that, the impact will depend on future Army decisions, so it probably wouldn't be appropriate to speculate and get out ahead of them at this point
What I can tell you, as you are well aware, IS&T is a makeup of a vast portfolio of lots of different opportunities and programs
And so even this one, if it has some impact, is not going to be one that changes our overall long-term outlook for the group
So we feel comfortable that our multi-year CAGR for the group, which I think we gave you at 4.5% or so, remains intact at this point
We do feel good
Good morning, <UNK>
How are you?
I don't have it by segment in front of me
I know the number in aggregate for the quarter was right around $100 million, which was off a little bit from the second quarter but higher than the first quarter, and that's, of course, right in line with the increased variability we anticipated seeing with these changes under the new revenue recognition model
It did have a good favorable effect on IS&T
I think we had 11.7% margins in the quarter for IS&T
That's not likely to be sustained in the fourth quarter, albeit the margins will continue to be strong for the group in the fourth quarter, but we'll see that come back down a little bit
A little bit of an impact in Combat Systems but not too, too much with respect to changes in estimates or true ups
And in Marine Systems, we did see a couple of modest, albeit a handful of booking rate changes on some of those programs which, in this case, all just happen to line up positively, and so you saw the strong margin in Marine Systems in the quarter
So I would frankly expect to see the Marine Systems margin tick back down a little bit in the fourth quarter but still to show good progress in those yards
So bottom line, it had an effect
It was favorable to the quarter but not in an outsized way compared to where we've been in the past
And again, barring a similar trend in the fourth quarter, we expect to see some of those margins notch back down just a little bit to a range that we consider to be more normal
Good morning, Rob
Yeah
I really don't think this signals any difference in our perspective or our approach to the market
While we've been fairly quiet on this front for the past few years, it doesn't mean that there hasn't been sort of activity under the surface in terms of looking and evaluating things that are out there
As I've said before, we will continue and will always look at deals that are accretive and are in our core, whether they're large or small
And in this case, a couple of them happen to come in
To speculate about what the future would look like would probably be getting a little bit out ahead of ourselves because I really just don't see what that is
But this will always be our approach until I'm told that it's not
And it's just, again, a focus on accretive core deals and we'll announce them as they come
So specifically, earnings accretive in the first full year
Obviously, if you bring it in late in the year it's going to have a hard time overcoming that geometry
But, yeah, accretive in the first full year and that's earnings accretive and, of course, the cash to follow
Yeah
No change from what we've talked about earlier
We're still looking to be right at about 120 deliveries for the year
I think if I recall, I don't have it right in front of me, but that's 89 or 90 large cabin and 30 or 31 mid cabin, so that remains unchanged
Obviously, as you get toward the end of the year, you could see a unit flip back or forth, so we'll manage that
But right in line at this point as we look at the balance of the year
The markets continue to be solid for us
We've sort of hit a familiar drumbeat, right, throughout the past several quarters and even the past couple years
Emerging markets are showing signs of activity
Our core continues to be North America, and that's where over half of our order activity and backlog is centered
But we're seeing, I'd say, probably another quarter of the activity associated with Asia, Asia Pacific
And then if you take other regions notching down, I'd say Europe, then Latin America, then Mideast Africa, sort of in that order in decreasing amounts
But we are seeing decent order uptick activity and customer interest around the globe
Sure
So the growth in the group so far this year has really largely been attributable to the ramp in the international programs that we've discussed
We've started the delivery process for those programs
And in fact, we're now up at full rate production for the large Middle East program coming out of Canada
We've started to make initial deliveries on – I think we've made the first handful of deliveries on the UK AJAX program
That will start to build rate and come up to full rate throughout and toward the end of next year, so you'll see some ramp next year attributable to that, and that'll sustain out through the next couple of years and beyond
The Middle East international program, as I've said, is at full rate and will be pretty steady state for the next couple of years
And now we're starting to see the startup of US domestic ground forces recap, and we'll see that more of an influence in the fourth quarter
So I would expect more of the growth that we see in the fourth quarter to be about those programs
And really, that dovetails into your margin question because we'll start to see those coming in at traditional sort of US Defense entry-level program margins, and so that'll have somewhat of a dilutive effect on the Combat Systems group margins in the fourth quarter as we start up those programs
So a really nice layering of the international programs, the Middle East having a big effect this year, Army recap starting this year and moving into next year, and then the UK program ramping next year and beyond
So I think it's a wholesome position for Combat to be in and supported by the tremendous backlog that they see in that group
Denise, we have time for one more question
Well I think your comments taken in reverse order
Number one is if the money is there to support it, absolutely
I would tell you that we have the capacity to move the rate up, so we're at a steady two per year now in the foreseeable future
There is conversation around what to do in years when a Columbia submarine is delivered, and so we'll have to see if there's opportunity from a budget standpoint to add Virginia-class there
But bottom line, we stand ready to do that
We have the capacity to do it and it frankly comes at a relatively minimal investment
The investments at this point moving forward that we're evaluating for Electric Boat really have to do with the Block V module – for the Virginia Payload Module on the next Virginia-class contract – and, of course, the Columbia investments, all of which we're in the process of discussing with the Navy
Sure
